The encyclopedia · Trading & Investing · Strategic decision · 2001–2005
Britain replaced its electricity pool with bilateral trading and prices fell.
In 2001 Ofgem scrapped England & Wales' central power pool for self-scheduled bilateral trading plus an imbalance price; forward prices fell within months.
Ofgem · National Grid · Elexon
The solution
England and Wales privatised electricity in 1990 with a mandatory Pool: generators bid day-ahead and a central algorithm set one wholesale price for everyone. By the late 1990s Ofgem's research found bids were not reflecting costs and prices were not falling with generation costs.
NETA (New Electricity Trading Arrangements) went live on 27 March 2001. It removed the Pool's single-price mechanism and replaced it with voluntary bilateral and exchange trading, plus a Balancing Mechanism that prices the difference between what participants contracted and what they physically produced or used.
Within three months Ofgem reported UK OTC baseload forward prices down 6% and peak prices down 21% year on year, against a 12% rise in wholesale gas costs; day-ahead price volatility also fell sharply.
Why it worked
- Bilateral contracts reveal prices better than one administered pool price.
- Imbalance pricing pushes parties to balance, not game the schedule.
- Prices fell even as input costs rose — the old pool had hidden that pass-through.
What can be applied
A central planner setting one price invites gaming; letting parties contract privately and pricing only the residual imbalance makes the market itself do the coordination.
Aftermath
NETA was extended to Scotland as BETTA in 2005; it drew later criticism for hurting small and intermittent generators and was modified over the years, but its bilateral-plus-balancing skeleton shaped Britain's power market for two decades.
Sources
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