PWP - 057 Competition in Electricity Supply : will “ 1998 ” be worth it ? Richard Green and Tanga

Starting in 1998, the electricity market in England and Wales will be opened up to full competition, and all consumers will be allowed to choose their electricity supplier. This promises to result in lower prices, but there will be additional transactions costs exceeding £100 million a year for the first five years. Relative to a counterfactual without competition, there are likely to be large transfers from electricity companies (and the coal industry) to consumers, but the companies lose more than consumers gain. This conclusion might be reversed if competitive pressure leads to significant additional cost savings in the future. 1.Introduction Restructuring of the electricity industry in the United Kingdom has been in progress since the introduction of the 1989 Electricity Act. Since then the industry has been privatised and much of it opened up to competition. Competition in electricity supply, the retailing activity of selling electricity to consumers, has evolved in stages. It began in 1990 when the largest 5,000 customers with a maximum demand in excess of 1 MW were allowed to choose their supplier. In 1994, competition was made available to an additional 50,000 customers with a maximum demand of between 100 kW and 1 MW. The 23 million domestic and small business consumers in the “franchise market,” who are currently