Lack of wholesale competition blamed

Despite the widespread view that household bills are rising because retail energy companies are making excess profits, some experts say the real problems lie in the wholesale market.

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The roots of the problems in the wholesale market lie in three changes over the past decade: the decline of independent power generation, the disappearance of a liquid trading market and the introduction of the New Electricity Trading Arrangements (Neta) to replace the old electricity "pool" in 2001.

Independent power generation has been in decline in Britain since very low power prices in the first half of the decade forced many companies out of the market, including US groups such as AES, AEP and TXU. Today about 60 per cent of Britain's electricity is generated by the "big six" integrated suppliers.

Electricity trading has been in decline since the failure of Enron, which played an important role in creating liquidity in the UK power market.

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Neta (later reformed and renamed the British Electricity Trading and Transmission Arrangements, or Betta) is a freer market than the pool it replaced. But Dieter Helm of New College Oxford says it gave "enormous benefits" to the big integrated suppliers.

Markets were liberalised. Competition ensued, with significant collateral damage (bankruptcies, bank defaults, price volatility). Competitors did what they could to be profitable, and that included consolidation and internalisation of supply to avoid price risk, within the existing framework.

The regulatory framework was constantly updated to try to be on top of things.

And yet it does not work (for strange values of "not working", by the way - the problem seeming to be high prices: since when were outsiders meant to second guess the prices set by the markets?).

So, either:

(i) regulation is not done properly - but after so many attempts, you'd think that they'd either get it right, or conclude that it's not possible to do so; or

(ii) it's the whole concept of competitive markets for energy which is problematic, given that techncial constraints that apply, the consistent (and rational, and logical, and actually desirable) behavior of the big players to ensure their own stability and the political sensitivity of the topic ;

But no, the conclusion is "more competition"...

In the long run, we're all dead. John Maynard Keynes