COMPETITION IN THE UK MARKET FOR ELECTRICITY GENERATING CAPACITY - A GAME-THEORY ANALYSIS

The electricity industry in the UK has been privatized with the intention of promoting competition among generators. It is important to establish whether this intention has been achieved, both to assess and influence privatization policy in the UK and to inform policy towards privatization and restructuring elsewhere. This article uses game theory to analyse how the bidding strategy of generators is affected by the administered payments for capacity availability. The paper concludes that without collusion the generators will naturally adopt bidding strategies which mimic a monopoly structure. Orderly expansion of generating capacity under the present regulatory system, and in the absence of major disequilibria in the system structure of incumbent generators, depends on the entry of new generators. Non-technical barriers to entry for such generators should therefore be carefully examined and removed.