Extending Competition in the UK Electricity Market

Even after recent reductions, the UK end-user price of electricity is high by international standards. In January the price per KWh was 40.7 euro cents, compared to France c€29.1, Spain c€22.0, and the US c€16.3. High electricity prices damage UK competitiveness.

The lack of competition in the electricity market is the main reason for this. And things can only get worse. For years, electricity has been only 20% of the energy market, so there is at least some competition from other sources. Soon, Net Zero 2050 policy implies that electricity will be nearly five times bigger.

The problem stems from the fact that in 1989, Margaret Thatcher only partially denationalised the electricity market. A key element, the National Grid, remained a monopoly structure and the regulator Offer (which later became Ofgem), kept government in control.

Today, both Labour and the Conservatives intend to return electricity to monopoly. Labour’s argument is that we will need a central planning authority, ‘Great British Energy’. This is supposed to save households £92. But how? Certainly not from a reduction in bureaucracy: it seems highly unlikely that this nominally independent but publicly owned authority will replace the 4,000+ Department of Energy Security and Net Zero’s core staff. We can confidently expect greater bureaucracy as well as less competition in the sector under this plan.

To the Conservatives, going green and expanding the power transmission infrastructure are the priorities. The UK presently spends hundreds of millions of pounds in constraint payments to energy generators, simply because the existing grid infrastructure to absorb all the energy produced; with increased reliance on electricity, better infrastructure is needed. But the Conservatives have no coherent plan on how to produce that extra electricity. They talk up nuclear but have made no commitments to any new reactors.

If we are to reduce prices, secure supply and improve customers’ experience, however, we need to complete the original aims of privatisation and introduce more competition within the electricity sector. Here’s how.

The National Grid should be replaced by privately-owned Distribution System Operators (DSOs), which would buy from generators and sell to households and business. Although DSOs would be largely regional, each customer location should be entitled to buy from any DSO nationwide. Fuel poverty payments should be funded by the Department of Work and Pensions, not the operators.

In effect, each DSO would be a regional grid selling direct to consumers anywhere in the UK. They would balance electricity in and out, normally by buying and selling from/to each other, though national shortages/excesses would be traded with IMPEX (buying from/selling to) Europe. IMPEX would also be a grid, buying and selling to UK DSOs and European distribution companies. It would need to balance purchases with sales and breakeven or make a marginal profit. 

The best regulator is competition, and with greater competition in the electricity market, the Competition and Markets Authority should take over from Ofgem (but not set prices as Ofgem does).

With these reforms, the original objectives of electricity privatisation — a competitive and consumer-focused industry — would finally be realised. This would give consumers a better deal and boost the UK’s international competitiveness.