Where Next for the U.K. Power Market?

Abstract

The U.K. power sector is facing a series of significant challenges. Wholesale prices have fallen 40% over the past two years. Fierce competition in the retail market has prevented full recovery of this slump through electricity supply operations. Some independent power projects with significant merchant exposure are having difficulty supporting high, acquisition-related debt incurred during the late 1990s with operational cash flow. While power purchase agreements are not regarded as “money in the bank” for projects, their advantage in mitigating a sharp deterioration in the overall market has come to the fore. The volatility introduced by the new market environment also calls for intensified and expanded analysis in several areas including complementing market studies with empirical market data, focusing on downside sensitivities, focusing on liquidity more than before, and analyzing trading capacity and marketing risk management. The lessons learned after the introduction of NETA in England and Wales also have some relevance to markets in continental Europe and elsewhere.