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Electric Reform in Great Britain: An imperfect Model.

Fortnightly Magazine - June 15 1996

they had little influence. Splitting up these companies was considered too great a risk, so they were privatized intact, with some accounting separation of the two component businesses. Now known as Regional Electricity Companies (RECs), these companies were allowed to own as much generation capacity as they wished, but could contract for no more than 15 percent of their power requirements from their own plant.

A priority called for separating transmission from generation, because many thought the CEGB had exploited its position as both a generator and transmission owner to price other generators off the system. However, a company solely devoted to transmission would appear unfamiliar and prove difficult to market to potential stockholders. Hence, the Government created the National Grid Company (NGC), to be jointly owned by the RECs and to provide them with substantial low-risk income during much of the transition to competition. To prevent the RECs from exploiting their ownership of NGC, the government restricted their ability to influence NGC policies.

Generation:

Far From Competitive

Competition in generation received the most attention at the time of privatization (em and would be achieved by creating a Power Pool. All generators wanting to use their plants must now place a bid, 24 hours in advance, that applies for each half hour of the next day. Price decides the winning bids and all successful bidders receive the cost offered by the highest successful bid. Only plant bid successfully into the Pool can be used; however, generators cannot be compelled to bid their plant, nor constrained on the price they can bid. The RECs must purchase their power from the Pool.

To smooth the transition from monopoly to competition, the Government imposed a number of contracts on the new companies to guarantee an orderly market for at least the first three years. Chief among these were contracts between the state-owned coal mining company and the two privatized generators. These contracts maintained demand for coal, which contributed about 80 percent of CEGB's generation at the time of privatization (slightly below historic levels). Prices fell significantly lower in real terms, however, to bring British coal prices more in line with world coal prices. While reducing the power of the principal miners' union lay clearly within the Government's agenda,3 a precipitate collapse of the industry was feared if the generators were left free to import as much coal as they wished. To protect the market of the generators from new entrants using cheaper fuels, the RECs were given contracts for power supply from National Power and PowerGen. These contracts made up the vast majority of power needs for the RECs, along with contribution from nuclear plant. To protect market shares for the RECs, choice in power supply was extended only to those consumers with a maximum demand of over 1 megawatt (Mw).

The contracts between the RECs and the generators (the so-called "Contracts for Differences," or CfDs) effectively rendered the Pool price irrelevant. Generators had to place a successful bid with the Pool, and the RECs had to purchase from the Pool, but the CfDs meant