back to menuEvery member of the nationalised Electricity Supply Industry had a plaque on the bedroom wall reading "The lights must not go out". Couple that with the fact that, on a minute-to-minute basis, you can’t use price to match supply with demand and you have a unique market for electricity. As a result the wholesale price for electricity has been determined since privatisation as a marginal price after the event. When suppliers were monopolies they had no problem passing on those prices to their customers. Result: delightful dividends and splendid share options.
RETA is intended to move as nearly as possible to a genuine market for the wholesale supply of electricity. If it works, it should bring down prices in the domestic market better than the recent deregulation. A recent DTI/OFFER seminar set out to give over 300 representatives of interested bodies (including NfCG) a progress report.
Electricity is a unique market not only because variable demand must be met immediately and without limit, but also because it is not feasible to duplicate most parts of the supply chain. The question is: how far down the free market road can you go? The process can be divided into four parts:
It was accepted early on that a Forward Market was possible and must be unregulated (at least by OFFER). Generators would contract to supply in half-hour sectors at some time (perhaps several years) in the future. Their customers could be ultimate suppliers to commercial and domestic users, or they could be market traders. Parties to these contracts would have to book space on the distribution network, and be licensed to trade.
A Power Exchange will be needed to make last-minute adjustments to previously agreed trading positions. The original view was that this would have to be set up as a screen-based system, and regulated. The RETA Programme will not now take this on, but it will help the industry to set one up, unregulated, if that is what the market wants.
A Balancing Mechanism, to match actual supply and demand in real-time, is the tricky bit. It must happen, or the lights could go out. What is proposed is that the National Grid Company (acting as the System Operator) will effectively control a separate company, the Balancing and Settlement Company (the BSCCo). This company will take the decisions to ensure a balance of supply and demand in real time, and will meet its costs by making charges to users of the system. It will have above it a Supervisory/Advisory Panel selected for its technical and commercial expertise. Three of the seven Panel members will have consumer experience but (like the rest) must not be seen as "representatives" of a factional interest.
Finally there will be a Settlement Process. The BSCCo will carry this out, but it must not impact on the market any more than necessary. The company will have a monopoly, so it will be regulated by the Director General of Electricity and Gas Supply. The National Grid Company (NGC), as the System Operator, will define the "products" in which all participants in the market will be trading in real-time. The aim will be to reward flexibility (in either supply or demand) and to relate charges to the scale of imbalance between forecast and real-time exchanges of power.
This is a very simplified version of the changes RETA is likely to bring about. It skips over most of the more arcane issues which have been discussed and agreed.
One of these is the question of disparities between information about forward
contracts
supplied to the System Operator and actual demand and supply by the contracting
bodies. Bear in mind that the transmission channels will-be shared. Any
differences could affect the Balancing Mechanism without imposing penalties on
the offending participants. This is one of the reasons why there is unlikely to
be voluntary agreement on the licence changes which the new systems will
require. This in turn means that legislation will be required, which must be
fitted into Parliament’s legislative programme.
The legislation is firmly on the critical path for RETA, and means that the earliest date for implementation is July 2000. Not everyone at the seminar gave the proposals an undiluted welcome. Those with a special interest, like the Combined Heat and Power lobby, recognise that a more efficient market makes it more difficult to set up arrangements which can offer an environmental or Social benefit. There are concerns about the intervention of traders in futures, whose concern is second-guessing the market rather than supply meeting demand.
Perhaps most important, the transmission and distribution networks will remain monopolies, which are incompatible with a genuinely competitive market and will need very firm regulation in perpetuity.
Ken FrereRETA (you will remember) is the acronym for Reform of Electricity Trading Arrangements. This is the DTI/OFFER programme to deal with what Mrs. Anna Walker, DTI’s Director General, Energy called "uncompetitive, anti-social behaviour by the market".
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