The code governing electricity trading arrangements in the UK is failing to meet its original objectives according to industry commentators because the rules are narrowly focused and inconsistent with other key government policies.
The recent restructuring of the domestic electricity market in the UK is failing to meet its original objectives according the Combined Heat and Power Association (CHPA). The Association’s director, David Green, said that while market reform was needed, the New Electricity Trading Arrangements (NETA) are narrowly focused and are inconsistent with other key government policies.
Green says that in 1998 the government set out three criteria by which to judge the success of market reform. These were security of electricity supply, transparent pricing and encouragement for CHP and renewable energy. Now, Green says, the government has set up a review of energy policy (the PIU review, see page 3) because of worries about security of supply. It has also asked Ofgem, the electricity regulator, to examine the impact of NETA on both CHP and renewable energy.
There has also been a growing debate about price transparency, Green claims. In support of this he says that Ofgem has continued to seek special powers to limit the possibilities for market abuse.
In support, in part, of Green’s view, the working group established to address the problems of small generators has decided that changes to the market rules will be necessary if these generators are to compete effectively.
A major difficulty is that output fluctuations incur penalties under the new trading arrrangements. Small generators could avoid such penalties by consolidating their outputs so that fluctuations are balanced. However the current market structure does not accommodate this. The Consolidation Working Group has identified the main obstacle to consolidation to be the inability to sell fixed volumes of energy without becoming a party in the Balancing and Settlement Code. The fees involved with this are prohibitive for small companies.
It is now up to NETA participants to bring this improvement into effect by proposing changes to the rules. This could be achieved by April 2002, Ofgem claims.