1. Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR

2. The issue Retail competition is spreading –UK since 1999 –Nordic countries since mid-1990s –some US states –EU draft directive Does this reduce suppliers’ incentive to contract? Would that affect electricity prices?

3. The model Two generators Regional incumbent retailers Non-strategic customers & entrant retailers Stage 1: long-term contracts Stage 2: annual wholesale market Stage 3: retail market

4. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Profit Rival’s Sales

5. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Profit Rival’s Sales

6. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Profit Rival’s Sales

7. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Rival’s Sales Forward Sales

8. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Rival’s Sales Forward Sales

9. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Profit Rival’s Sales Forward Sales

10. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Profit Rival’s Sales Forward Sales

11. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Profit Rival’s Sales Forward Sales

12. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Rival’s Sales Profit Forward Sales

13. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Rival’s Sales Profit Forward Sales

14. The annual wholesale market £/MWh MWh Marginal Cost Industry Demand Rival’s Sales Profit Forward Sales

15. Forward sales depend upon Rival’s forward sales (  ve) Forward  annual price premium (+ve) Impact of extra sales on this premium (  ve)

16. The retail market(s) £/MWh MWh Industry Demand Small customers Large customers

17. The retail market(s) £/MWh MWh Industry Demand Small customers Large customers Annual wholesale price

18. Regulated incumbents £/MWh MWh Industry Demand Small customers Large customers Annual wholesale price Regulated price

19. Regulated incumbents Profits Annual price Forward price Average cover

20. Regulated incumbents Profits Annual price Forward price Average cover More cover

21. Regulated incumbents Profits Annual price Forward price Average cover More cover Less cover

22. The regulated firm Likes profits Dislikes risk - Utility = mean (profits)  ½ variance (profits) Tends to buy the average level of cover Would buy more if the forward price is less than the expected annual price (it won’t be)

23. Competing incumbents £/MWh MWh Industry Demand Small customers Large customers Annual wholesale price Entrants’ sales

24. Competing incumbents £/MWh MWh Industry Demand Small customers Large customers Annual wholesale price Entrants’ sales Profits Retail price

25. Competing incumbents £/MWh MWh Industry Demand Small customers Large customers Annual wholesale price Entrants’ sales Profits Retail price

26. Competing incumbents Profits Annual price Forward price No cover

27. Competing incumbents Profits Annual price Forward price No cover Forward cover

28. The competing firm Will only buy contracts if their price is less than the expected annual price Buys fewer contracts than the regulated firm Faces a higher annual price Might face a lower forward price - if risk aversion is great enough

29. Calibrating the model Use values reflecting early-90s England Marginal Cost £20/MWh Equilibrium (no contracts) £30/MWh Equilibrium (no risk-aversion)£26/MWh Variance of the annual price5.76 (annual average Pool price, 90-01)

30. The impact of risk and competition Avg Price, £/MWh 2.6 4.7 8.3 11.4 Regulation Competition (% change in profits needed to offset 10% point rise in c.v.)

31. Conclusions Firms are buying & selling in annual markets Retail competition does reduce long-term contracting Risk aversion probably not great enough for this to have a very large impact Results may be sensitive to model design Impact of contracts on entry not studied