Bullets for Kean Presentation

Here's an attempt at some key "lessons" from CA to the UK (or vice versa as
the case may be). Actually they are more themes/differences/comments coming
out of the CA experience, which will need tailoring/trimming down to fit the
context of the actual presentation. As I've indicated, depending on the
point being presented, there may be a need for some caution in using the
examples in too simplistic a context.

? Barriers to generator entry.
? Apart from the moratorium, it has been relatively easy to gain consent to
construct new generation in the UK. This is clearly a good thing in itself,
but there are some potential pitfalls in just asserting this. The entry has
been criticised as unecessary in a market with significant overcapacity
(indeed this was one of the justifications for the moratorium) and had
surprisingly little impact on price for at least the first 8 years of the
Pool. Indeed prices only fell once NP/PG divested plant. Hence it would be
easy to retort that new capacity was not required in the UK, the entry that
did occur was wasteful and that the CA analogy is bogus (although clearly the
full story is more complex than this)
? Moratorium had a significant impact on investment and stalled competition.
(True, but difficult to sustain given that divestment and pre-committed new
entry ensured that prices fell significantly before the moratorium was
lifted.)
? Danger that measures designed to meet the CHP and Renewables targets
constrain future developments and lead to capacity shortages, ie, perfection
should not be the enemy of the good. This is not the case currently.
However, new applications must demonstrate that CHP has been fully explored -
if this hurdle acquires real teeth (or turns into something more formal) then
we could see easy consents getting significantly more difficult. This is,
however, largely speculation at the current time.

? Retail caps
? Purchase costs could be passed through in UK (for at least the first 8
years). Although some purchase costs were pseudo-regulated (through the
vesting contracts and their replacements), the Public Electricity Suppliers
also purchased power from CCGTs in which they also took equity at very high
prices. (Teesside was one of the first examples of this.) The cost of this
was passed through to franchise customers. This was widely criticised and
although the regulator allowed this to happen (on the grounds of entry
promoting competition), the fact that all the entry was baseload and NP/PG
still controlled the marginal plant meant that wholesale market prices didn't
change at all.
? Since 1998, prices caps have been instituted and have not been a problem.
Although the caps squeezed the PES margins, they could contract forward to
hedge the risk of wholesale price movements. Morever, the price caps have
actually reduce wholelsale prices - generator market power meant that the
wholesale price was, in part, a net-back from the allowed retail tariff.
? Watch out for Independent Energy, a supplier who did go bankrupt. This was
due to a combination of being under-hedged when power prices rose and not
having adequate infrastructure to bill customers and get the cash in.

? Competition
? Generator concentration meant excessive prices for the first 8-9 years of
the Pool. Restructuring and divestment was essential to realising the
benefits of competition.
? Retail competition has been very successful and has been a key driver in
increasing liquidity in the wholesale market

? Stranded Costs
? Stranded cost recovery largely didn't distort the market, eg, nuclear levy,
vesting contracts did not affect marginal decisions. (That said market power
provided a very soft landing and the market was clearly stitched up to meet
the needs of the miners for years.)

Hope these help. Please let me know if you need anything further.

Cheers,

Paul