Pioneering electricity system faces IT hold-up

Ofgem warns that computer glitches could push back launch of Britain's new market for trading power until next year

By Saeed Shah

14 September 2000

Britain's attempts to lead the world in deregulating its energy markets suffered a setback yesterday when it emerged that its revolutionary new electricity trading system is in danger of missing its November launch date.

Dummy runs of the New Electricity Trading Arrangements (Neta) were supposed to start on Monday, but Ofgem, the industry regulator, admitted that the computer systems may not be ready in time. The "go-live" launch of Neta, set for 21 November, may have to be put back until the new year. Ofgem said it would make a decision by the end of this week.

Nigel Hawkins, an analyst at Williams de Broe, said: "This is an embarrassment for Ofgem. They had nailed their flag to 21 November."

Stephen Byers, Secretary of State for Trade and Industry, told The Independent in July that there would be no slippage in the timetable for Neta after rejecting pleas from the power industry to delay the introduction of the arrangements. The power groups had argued that the computer systems would not be ready.

Neta is a fundamental change to the wholesale trading of electricity in England and Wales. It is meant to bring electricity prices down, benefiting consumers and business users.

Neil Bryson, chief executive of Electricity Pool, which runs the current electricity trading system, said: "Industry participants have been sceptical about the 21 November date, or even whether it could be done this year. We would all be much happier if Ofgem were to set a realistic date as soon as possible."

Mr Hawkins said the possible delay meant that electricity prices will not be reduced as quickly as anticipated.

Electricity is currently traded through the "pool" system, which acts like a clearing house. That provides a guaranteed customer  one of the electricity suppliers  for the electricity generated. Producers, acting a day in advance, offer electricity for half-hour slots for the following day. Crucially, prices are set at the level of the highest bid accepted by the pool for any half hour period.

The Neta world will mean that electricity is traded just like most other commodities. The safety net for the generator of the pool will be gone. It will mean trading moves closer to a real-time scenario, replacing the pool with a spot and futures market. Bilateral deals will be struck between generators and suppliers, rather than taking a price from a pool. Under Neta, the generator will have to supply electricity at the price it quotes, rather than at present where it quotes one price but may receive a higher one.

Richard Hunt, a spokesman for Ofgem said that while generation costs have crashed by 50 per cent over the last 10 years, prices have barely budged  until this year. "The pool makes it very easy for the major players to manipulate prices, to the detriment of consumers," he said.

Customers and the regulator always suspected that many generators used tactics to manipulate prices under the pool system. Rogue offers would have the affect of increasing prices for all the electricity sold for that particular half-hour block. Plants could be taken off-stream to lower the amount of electricity available and push prices up.

Jeremy Nicholson, economic adviser to the Energy Intensive Users Group, which represents big consumers of electricity from the steel, chemical and paper industries, said: "Prices have been well ahead of the level of investment undertaken by the electricity industry. They have been creaming off extra cash. Businesses used to generating profits with ease under the old system will have to come to terms with lower profits under Neta."

The changeover to Neta will cost Ofgem #90m and each of the 90 participating companies in the pool will pay up to #10m each for new computer systems.

Nick Pink, an analyst at UBS Warburg, said: "Neta increases the level of risk for both generators and suppliers. It makes prices much more volatile. Over the last two years, electricity in the UK has gone from being one of the least competitive markets in Europe, to one of the most competitive."

With greater fluctuation in prices under Neta, companies need to be bigger to absorb shocks. Electricity groups also need to have a better balance of supply and generation assets.

With no pool to fall back on, suppliers could be held to ransom by the generators, if they have no production capacity of their own. Generators, for their part, do not want too big a business in the production of electricity, as this is a market becoming less lucrative by the day. Most have tried to balance their generating capacity with supply activities.

This year, electricity prices have fallen by more than 10 per cent. The movement in prices has been so drastic that PowerGen, one of the biggest players, has warned that its profits for the second half of this year will be down.

On the electricity futures market, prices quoted for October onwards show 15 to 20 per cent reductions on last year.

The fall in prices is partly in anticipation of the introduction of Neta. The other big factor is the increased competition in the generation market, as a greater number of companies now own price-setting plants. Without this proliferation of generators, which has taken place over the last few years, Neta could never have been contemplated, as there would not have been sufficient competition to create a dynamic market.

National Power and PowerGen used to work, effectively, as a duopoly. In 1990, for instance, the two companies provided 74 per cent of the electricity in England and Wales. Now there are eight major generators.

The industry has now reshaped itself further to gear up for Neta. Last month United Utilities and British Energy both sold their domestic energy supply businesses, because, they said, Neta would have left them exposed to new price volatility.

http://www.independent.co.uk/news/Business/News_Analysis/2000-09/electricity140900.shtml

-- Martin Thompson (mthom1927@aol.com), September 13, 2000