the counterparty. The Pool system was criticised by some who claimed that it frequently
resulted in unnecessarily high power prices and was subject to gaming by the largest genera-
tors, which could withdraw capacity to keep prices high.
The NETA system, implemented in March 2001, was intended to replace the Pool and
create a more competitive market for electricity. Rather than just selling into the Pool, gener-
ators would be required to find customers and arrange bilateral contracts with them. The new
system exposed generators to dispatch risk to the extent that they generated power they could
not sell or sold power they could not generate. Under the Pool arrangement this risk had been
assumed by the system operator. Under the new system a short-term balancing mechanism
called the UK Power Exchange sets the price for electricity sold from four hours ahead to two
days ahead. Participation in this mechanism is voluntary. Under the Pool system generators
and offtake counterparties could hedge against volatility in the Pool price with contracts for
difference. Under the new system these arrangements effectively became invalid and had to
be renegotiated, because there was no longer a Pool price.
In April 2002 the National Grid Group announced that as of July power trading would
continue until one hour before physical delivery, rather than the then current three-and-a-half
hours before. As a result companies that put more or less power into the system than their
contracts require will have more time to trade off the imbalance. However, if the grid has to
correct the imbalance and pass the cost on to the company, the cost undoubtedly will be high-
er. Because of the shorter period the grid is likely to call on the most flexible and hence the
most expensive plants to balance the system.
Reason for plant sale
In 1999 National Power plc, then the largest electricity generator in England and Wales, was
required to divest approximately 4,000 MW of generation capacity in order to comply with
regulatory conditions imposed when it purchased the distribution/supply business of
Midlands Electricity. In the view of Stephen Byers, then Secretary of State for Trade and
Industry, the merger created horizontal overlaps in electricity supply/distribution, as well as
vertical integration issues. While he did not consider vertical integration in itself objection-
able, he saw competition concerns as a result of integration where there was existing market
power on both ends of the supply chain, namely National Power’s market power in the price-
setting part of the generating market and Midlands Electricity’s market power in the market
for the supply of electricity to retail customers in its own authorised area. He saw an oppor-
tunity for National Power to disadvantage competitors to the detriment of end-customers.^3
National Power invited bids for the power station and received approaches from 30
potential buyers. The company did not reveal how many bids it had received. The US-based
AES Corporation was the winner. The £1.875 billion it paid was higher than had been expect-
ed and considerably above the £1.25 billion that Mission Energy had recently paid PowerGen
for two plants with a similar power level of 4,000 MW. In November 1999 InPower, a UK
subsidiary of AES, purchased the plant for US$3 billion from National Power Drax Ltd, a
special purpose vehicle set up by National Power plc.
Sponsor profile
AES Corporation is a global power company headquartered in Arlington, Virginia, across the
POWER PLANT