In England and Wales, wholesale electricity is sold in a spot market partly covered by long-term contracts which hedge … the absence of contracts. If fully hedged, however, the generators lose their incentive to raise prices above marginal … costs. Competition in the contract market could lead the generators to sell contracts for much of their output. Since …

adequate reserve capacity is risky in a competitive wholesale electricity market without suitable contracts, and unattractive … counterparty for the contracts required for adequate investment to sustain competitive pricing. Gas liberalisation is key to making …

We ask what conditions transmission contracts increase or mitigate market power. We show that the allocation process of … transmission rights is crucial. In an efficient arbitraged uniform price auction, generators will only obtain contracts that … mitigate their market power. However, if generators inherit transmission contracts or buy them in a ‘pay-as-bid’ auction, then …

, and fixed price forward contracts for dominant generators. Conditions for the development of a voluntary contract market … are analysed, as it is not practical to rely permanently on vesting contracts imposed for the transition period. …