Electricity Liberalization in Britain and the Evolution of Market Design

This chapter describes the experience of Britain in liberalizing electricity. The British market may be characterized as the exemplar of electricity market reform, demonstrating the importance of ownership unbundling and workable competition in generation and supply. Privatization created a de facto duopoly that supported increasing price-cost margins and induced excessive (English) entry. This problem was addressed by trading horizontally for the vertical integration in subsequent mergers. Competition arrived just before the Pool was replaced by New Electricity Trading Arrangements (NETA) intended to address its claimed shortcomings. NETA, which intended to address many of the claimed shortcomings of the Pool, however, has had ambiguous market impacts. Increased competition caused prices to fall, companies withdrew plant, causing fears about security of supply, but price-cost margins then increased and plant was returned to the system. NETA was extended to Scotland in 2005 as the British Electricity Trading and Transmission Arrangements (BETTA) and the entire British transmission system is now under a single system operator.