The British Electricity supply industry was extensively restructured in March 1990, when the bulk of its assets were privatized in twelve regional distribution companies and two generating companies covering England and Wales. The nuclear power stations remain in the public sector, and Scotland's two integrated utilities were privatized in June 1991. The two generating companies, National Power and PowerGen, are not regulated, and together with Nuclear Electric they submit price bids for every power station, which are scheduled in the least- cost combination to meet anticipated demand.

In Discussion Paper No. 557, Richard Green and Research Fellow David Newbery derive equilibrium supply schedules for both private generators and find that both will offer prices significantly above their costs, which together with their reduced output levels will lead to large operating profits and large losses to the economy. In the base case, prices rise by 55% and output falls by 15%, without collusion, yielding annual current cost operating profits of around £3.5 billion, with deadweight losses from reduced output of some £650 million. These undesirable features would be greatly reduced, however, if the generating industry had been split instead into five equal-sized firms, rather than the present (unequal-sized) two.

David Newbery presented this paper at a June lunchtime meeting, reported in greater detail in issue no. 44/45 of the Bulletin.

Competition in the British Electricity Spot Market
Richard Green and David M Newbery

Discussion Paper No. 557, May 1991 (AM)