Price worries over energy market

Developing the market cost Ofgem more than £100m

The New Electricity Trading Arrangements (Neta) are being launched on Tuesday as part of an attempt to increase competition into the market for wholesale electricity.

This will cut the price of bulk electricity and ultimately reduce electricity bills to domestic consumers.

The electricity bills may not change.

Savings of 10% were anticipated when the decision to spend more than £100m to replace the often criticised Electricity Pool was made over three years ago.

The Office of Gas and Electricity Markets (Ofgem) said prices have begun to fall already as traders have factored in Neta's arrival in advance.

Wholesale electricity prices have fallen by 15% ahead of Neta's launch, Ofgem said.

Supportive consumer group

A consumer group that represents large business customers agrees and points to how prices in annual contracts bought by industrial consumers have fallen sharply.

The contracts are now 35% cheaper than they were two years ago, despite a recent rise in generators' fuel costs.

This is a result of more aggressive pricing in response to Neta's arrival, according to the electricity group chairman of the Major Energy Users Council, Don McGarrigle.

Scepticism remains

But others say it is not clear that the new £7.5bn power market will work as intended.

Analysts acknowledge that prices have fallen in recent years, but they say this is because new companies have entered the UK electricity generation market.

"I really don't think we are likely to see further significant price declines as a result of Neta," said Simon Harrison, a director with the energy consultancy Mott MacDonald.

Alternative energy providers may lose out.

Some consumer groups have also criticised the new market because they believe its mechanism will allow big generators to manipulate prices.

Small generators, supply companies and renewable energy providers such as wind farms will lose out, critics said.

Expensive project

In addition to the £100m spent by Ofgem on the new electricity market, the industry itself has spent even more.

Much of the money has gone towards developing software for trading systems, and delays in these areas have delayed the launch of the new market.

A successful launch ahead of a general election would be a boost to the ruling Labour party.

But the government is also desperate to avoid another energy crisis in the wake of the fuel protests seen last autumn.

The uncertainty surrounding Neta has meant that many firms have put off the renewal of their annual contracts to purchase a year's supply of electricity.

Such contracts often run from April to April in line with the tax year.