Small generators fear risk penalties as Neta kicks in

Will the new system for trading electricity in the UK stifle competition in the industry rather than encourage it?

Fears drew this week as the new system for trading electricity in the UK came into force that it will stifle competition in the industry rather than encourage it as intended.

The concern is that the New Electricity Trading Arrangements will expose smaller generators and suppliers — such as operators of combined heat and power or renewables plants — to a far greater market risk than they faced previously.

Neta is a trading system based on bilateral supply contracts, with spot and futures markets to correct imbalances in supply and demand. However, prices in these balancing markets are expected to be extremely volatile and could leave a small supplier ruinously exposed if a plant outage forced it to pay spot prices to meet its contractual obligations.

The large electricity companies, which have a flexible mix of generating plant whose output they can match to customer demand, are better placed to cope with such unforeseen events.

‘We believe we have a competitive advantage under Neta, more so than under the pool,’ said Simon Skillings, strategy and regulation manager at PowerGen.

Paul Marsh, the chief finance officer at TXU Europe, claimed the position of small suppliers would be ‘completely untenable’ under the new arrangements.

The disadvantage that Neta will impose on smaller suppliers seems certain to impede government plans to encourage the development of CHP and renewables, which tend to be small, locally based projects.

The 120-member Combined Heat and Power Association highlighted the case of a CHP plant in Manchester, which ran for 4,590 hours a year under the pool system but would only be able to operate for 830 hours a year under Neta, because at other times the price it was paid for its output would not be enough to justify the commercial risk.

Compounding the higher exposure of smaller suppliers to market risk is the fact that they will not have access to the same kind of market information and trading expertise of the larger players. PowerGen revealed it spent £25m on preparing for Neta. No operator of one or two small CHP or renewable plants could afford such an investment.

‘It could be viewed as a barrier to entry,’ said Graham Meeks, deputy director of the CHPA.

While the government hopes Neta will reduce UK electricity prices by 10–20%, at this stage only big energy-intensive customers with flexibility to manage their demand seem to be winners.

Jeremy Nicholson, economic adviser to the Energy Intensive Users Group, conceded: ‘I think smaller manufacturers are likely to see less of a benefit.’ He added that electricity prices were likely to rise in the short term because of external pressures, such as gas prices and the Climate Change Levy.