Competition in the British Electricity Spot Market

TLDR

The British electricity supply industry has been privatized, leaving two dominant generators to supply bulk power to an unregulated pool. Generators submit price schedules for generation and receive the market‑clearing price that fluctuates with demand. The Nash equilibrium of supply schedules produces high markups over marginal cost and substantial deadweight loss, and simulations show that entry by 1994 only modestly lowers prices while excessive entry harms efficiency; a five‑firm structure would yield better results.

Abstract

Most of the British electricity supply industry has been privatized. Two dominant generators supply bulk electricity to an unregulated "pool." They submit a supply schedule of prices for generation and receive the market-clearing price, which varies with demand. Despite claims that this should be highly competitive, we show that the Nash equilibrium in supply schedules implies a high markup on marginal cost and substantial deadweight losses. Further simulations, to show the effect of entry by 1994, produce somewhat lower prices, at the cost of excessive entry; subdividing the generators into five firms would produce better results.