Integrating Energy Markets: Does Sequencing Matter?

This paper addresses three questions that are relevant to integrating different regional transmission areas. Market integration normally increases the number of competitors and should therefore reduce prices but the first section shows that prices could rise when the number of generators initially increases. Regulatory effort will also be affected by market integration. If the number of generators in either market is low, then our analysis suggests that the outcome depends on whether the regulators act independently or coordinate. Finally, if markets are gradually combined into larger units, the choice of transmission allocation (auctions or market coupling) will affect the prospects of making further gains and hence could lead to incomplete reform. 1 Problems in the evolution towards competitive markets In 1990 the Central Electricity Generating Board (covering generation and transmission in England and Wales) was restructured to separate out transmission (as the National Grid Company) and three generation companies: National Power, PowerGen, and Nuclear Electric. All except Nuclear Electric were privatized, although the modern stations of Nuclear Electric were subsequently sold as British Energy in 1996. Nuclear Electric, as its name suggests, contained all the nuclear power stations: the aging Magnox stations, the more modern Advanced Gas Cooled Reactors, whose earlier troubled history of delays appeared to have ended around 1990, and one PWR under construction. All these nuclear plant were inflexible and ran on base-load, while the fleet of mainly coal-fired power stations were divided in the ratio of 5:3 between the other two fossil-based generating companies. As these set the price 99% of the time, it was feared that the ∗We would like to thank Damien Caby, Christophe Gence-Creux and Richard Green for comments and Heren Energy for providing electricity prices. Research support from Cambridge-MIT Institute under the project 045/P ‘Promoting Innovation and Productivity in Electricity Markets’ is gratefully acknowledged. [email protected], [email protected], Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DE, UK