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Electricity liberalization in Britain: The quest for a satisfactory wholesale market design

Abstract:
Britain was the exemplar of electricity market reform, demonstrating the importance of ownership unbundling and workable competition in generation and supply. Privatisation created de facto duopolies that supported increasing price-cost margins and induced excessive (English) entry. Concentration was ended by trading horizontal for vertical integration in subsequent mergers. Competition arrived just as the Pool was replaced by New Electricity Trading Arrangements (NETA) intended to address its claimed shortcomings. NETA cost over £700 million, and had ambiguous market impacts. Prices fell dramatically as a result of (pre-NETA) competition, generating companies withdrew plant, causing fears about security of supply and a subsequent widening of price-cost margins.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q40: Energy: General, Q41: Energy: Demand and Supply; Prices, D44: Auctions, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, D47: Market Design, L13: Oligopoly and Other Imperfect Markets, C72: Noncooperative Games

Keywords: Electricity, liberalization, maket design, market power, UK

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-NoSI-3

Published in Volume 26, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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