The Fall in British Electricity Prices: Market Rules, Market Structure, or Both?

Abstract

In this paper we investigate the factors contributing to the fall in the Lerner Index (price-cost margin) in the British electricity market during the 90s. A ¯rst stage of our analysis models the number of breaks in the Lerner Index and their dating as unknowns. Our results suggest the existence of one structural break in the time series of the Lerner Index. The break point interval includes the go-live of the New Electricity Trading Arrangements (NETA), but also several other (but not all) regulatory interventions. In a second stage of our analysis, we construct a general regression model for the Lerner index as a function of the regulatory interventions within the estimated break point interval, the Her¯ndahl-Hirschman Index (HHI), and the demand-capacity ratio. The results show that both the HHI and the demand-capacity ratio are strongly signi¯cant for explaining the fall in the Lerner Index. NETA is also signi¯cant, even when the Lerner Index is corrected for the in°uence of the HHI and the demand-capacity ratio.