Competition in the Electricity Industry in England and Wales

When the electricity industry was privatized, the government made structural changes to encourage competition in generation and in supply to consumers. The conventional power stations were only divided between two companies, however, and we show that duopolistic competition in an unregulated spot market might imply undesirably high prices. Most sales are hedged in the contract market, which makes the spot market more competitive, and a realistic threat of entry could also force generators to keep their prices down. In the event, a large amount of entry took place, supported by the regional electricity companies' franchise monopoly over smaller consumers. That monopoly ends in 1998, so that further entry might become very difficult, while competition between firms already in the generation market is still limited. Vertical integration between the major generators and regional electricity companies might make entry even harder, and should be blocked until the industry is more competitive. Copyright 1997 by Oxford University Press.