MITIGATING MARKET RISK WITH CONTRACT FOR DIFFERENCES: IS THERE A FUNCTIONAL DIFFERENCE BETWEEN POOLING AND BI-LATERAL CONTRACT METHOD?

Transcription

1 MITIGATING MARKET RISK WITH CONTRACT FOR DIFFERENCES: IS THERE A FUNCTIONAL DIFFERENCE BETWEEN POOLING AND BI-LATERAL CONTRACT METHOD? Gregory Obidegwu ABSTRACT: There are generally two methods of electricity wholesale- pooling and bi-lateral contract method. It is believed that pooling is a competitive electricity wholesale system where the generators or wholesalers are meant to bear the market risk of being in or out of merit as an incentive to reduce prices. However, the practice in most electricity pools is that wholesalers hedge this risk with the use of Contract for differences. The effect of Contract for Difference is to at least make wholesalers or generators and purchasers to share in that market risk, rather than generators bearing it as expected of a pooling system. This happens because the wholesaler and the buyer contractually set prices or determine price by fixing- strike price- which by all means is not market oriented. This strike price mechanism or otherwise Contract for Difference seems like the price fixing mechanism in a Power purchase agreement in the bi-lateral contract method. The object of this paper is to examine the similarity of Contract for Differences and price fixing mechanisms in a PPA. Put the other way, to evaluate how CFD s undermine competitive or market principles of a pooling system and conclusively assess whether with the use of CFD s there is really a functional difference between bi-lateral contract and pooling. The author is an Economist who gained substantial work experience at the Power Holding Company of Nigeria (PHCN). He is studying a Masters in Energy studies with specialization in oil and gas economics at the University of Dundee, Scotland. He is a member of the Society for petroleum Engineers (SPE) and Association for international petroleum Negotiators (AIPN). obidegwuc@yahoo.com

2 TABLE OF CONTENTS ABBREVIATIONS... iii 1.0 INTRODUCTION CFD S IN A COMPETITIVE WHOLESALE MARKET Electricity wholesale Competitive Electricity Wholesale market(pooling) The contrast method- Bilateral contracting THE POLICY OBJECTIVE OF A POOL CONTRACT FOR DIFFERENCES IN A POOL CFD AND FUNCTIONALITY OF A POOL THE EFFECTS OF CFD PRICE MECHANISM MARKET RISK SYSTEM INTEGRITY COMPARISON OF CFD AND PPA ANY FUNCTIONAL DIFFERENCE BETWEEN POOLING AND BI-LATERAL CONTRACTING? CONCLUSION BIBLIOGRAPHY ii

3 ABBREVIATIONS CFD Contract for difference CEGB Central Electricity Generating Board IPP Independent power project KWH Kilo watt hour MO Market Operator MW Mega watt NETA New Electricity Trading Arrangement PIP Pool input price POP Pool output price LOLP Loss of load probability SMP System marginal price UK United Kingdom VOLL Value of loss of load iii

4 1.0 INTRODUCTION Liberalization the introduction of competition for the purpose of enhancing market efficiency is a question of choice 1. In electricity sector reforms or market design, this choice of how to liberalize often finds expression in the decision of which segment of the value chain a jurisdiction wishes to commence the liberalization whether the topside down model or bottom up model. The latter option implies beginning from the generation sector and it has been chosen by many jurisdictions as the best point to begin liberalization. Wholesale trading is both extrinsic and incidental to the generation sector, thus, the process of liberalizing the electricity generation sector has at its bedrock the even more complex question of what wholesale trading method should be adopted. This paper aims to examine whether there is any functional difference between the two main methods of electricity wholesale trading pooling and Bi-lateral contracting - in the face of a financial hedge called contract for differences which is often used in the pooling system and which bears some similarity with the bi-lateral contracting model. Generally, there are two known trading mechanism used in wholesale electricity tradingpooling and bi-lateral contract method. Whereas pooling is thought to be market based, albeit, a one-sided and administered market 2, the notion is that PPA is a contractual regime and differs essentially from the pooling model. Pooling is a competitive wholesale electricity market in which generators come together and bid into the pool run by a market operator. The aim of the pooling system is to reduce power prices by making generators bear the market risk of being in or out of merit.. The pool uses a bidding system in which the market 1 Robert P. Electricity Market Reform An IEA Handbooks, in Energy Market Reforms. IEA 23 2 Jamash, B., Between the state and the market: Electricity sector reform in developing countries( World Bank working paper Vol 160, 2006, Washington DC, USA.) 1

5 operator accepts bids from generators in a price order starting from the lowest bid until such time as the demand assumption is met. The price of a particular pool segment is determined by choosing the highest successful bid price. This determines who makes the merit or out of merit list- the successful bids are said to be in merit and unsuccessful bids are said to be out of merit. In essence, the pooling system forces the generators to bid at a price that will enable them be in the merit list, by implication moving market risk to the generators which serves as an incentive for them to bid at lower prices 3. On the other hand, the Bi lateral contracting method is a contractual and not market based method of wholesale electricity trading, often done with the mechanism of a Power Purchase Agreement (PPA). The main function of a PPA is to move volume risk from the generator to the purchaser hence the generator pre-sells his availability and not the power he generates. Price risk is not left to the vagaries of a market as is the case at least notionally in a pooling. Rather, in a PPA power price is set by contractually determinable formulae. The conceptual difference between the two therefore is that whilst pooling is designed to move market risk to the generator as an incentive to sell at low prices, the Bi-lateral contracting method uses the PPA to move much of the market risk from the generator to the purchaser, locking-in prices with no incentive to reduce them. But the use of Contract for Differences (CFDS) in the pooling method brings this notional difference to question as the CFD bears some similarity with a PPA. This is because, to curb the risk of not being out of the merit CFD is set up between a generator and a supplier by contractually agreeing on a strike price with an arrangement that 3 Richard, G., Britain s Unregulated Electricity Pool, in From Regulation to Competition: New Frontiers In Electricity Markets. 73 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). 2

6 either party will make up for the other any differential in the pool price. In essence, the thinking that generators should bear market risk which is the fundamental principle of the pooling method becomes diminished as market risk is moved off the generator or at least mitigated for him and his selling price no longer becomes determined by the pool biding but rather by a mechanism of contract just like in PPA. With the use of CFDs therefore, is there a functional difference between pooling and bi-lateral contracting. This paper is focused to resolve this question. The paper proceeds on the assumption that the reader understands some fundamental elements of electricity trading, especially, market risk, which is a factor of volume and price risk. The approach of this paper is to analyses first of all, on who lays these risks in each of the different trading mechanisms and contracts in other to discover if there is any functional difference. The paper is structured into four complimentary parts. Chapter 2 follows this introduction and shows the notional difference of the two wholesale trading methods whilst chapter analyses the effect of a CFD to examine whether its use undermines, functionally, the notional difference discussed in chapter 2. Concluding inferences are drawn in the last chapter. 2. CFD S IN A COMPETITIVE WHOLESALE MARKET. 2.1 Electricity wholesale. Electricity wholesale implies the bulk purchase of power from a generator to a retailer or from a generator to a bulk consumer depending on the particular jurisdiction. Electricity wholesale is the first trading activity - and for that matter the first commercial activity 3

7 after the technological process of power generation in the electricity value chain 4. But even as wholesale trading follows the technological process of electricity generation, it is all the even an earlier issue to decide because wholesale trading is determined by and at the same time underpins generation activity. In essence electricity wholesale choice is germane to the structure of any electricity jurisdiction whether it is regulated or liberalized. In liberalization the question of what method of electricity wholesale is to be adopted is always a front burner question particularly when the jurisdiction has chosen to proceed on the bottom up model (commencing liberalization from the generation segment) because wholesale trading easily impacts on generation 5. For instance, it is a common notion that capacity short jurisdictions always want to choose a non-competitive wholesale method in order to avoid market risks for generators and to encourage investments in the sector. This section of the paper looks at the different types of electricity wholesale method with a view to identifying on whom notionally lies market risks in each of the methods in order that such notional concept would later be used as a framework for analyzing the actual or functional effect of CFD in chapter 3 of this work. Basically, there are two classic methods of running the wholesale market, namely pooling and bi-lateral contracting Competitive Electricity Wholesale market(pooling) This is a Wholesale market arrangement in which all the unbundled generators bid output into a single market to compete for dispatch. The electricity pool is a combination of grid access 4 Green, R., Britain s Unregulated Electricity Pool, in From Regulation to Competition: New Frontiers In Electricity Markets. 73 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). 5 Ruff, L. E., Competitive Electricity Markets: The Theory and Its Application, in From Regulation to Competition: New Frontiers In Electricity Markets. 11 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). 4

8 rules and a competitive spot market for whole sale electricity; competitive wholesale market is aimed at crashing the price of electricity by allowing more generators of power to come in and bid in a specified volume of power at a price they can offer. It could be hourly or half hourly. Each hour or half hour session is a separate market that has its demand assumptions and obligations to be met by the generators 6. Basically, two forms of pooling exist, namely compulsory and voluntary pooling. Compulsory pooling ensures that all power be traded through the pool whilst voluntary pooling allows other trading method to co-exist. Pooling has been referred to as a one-sided market because it only allows full participation of generators and minimal participation of suppliers only at the preliminary stage in determining their power off-take volume. The pool is run by a market operator (MO) who details the market by an informed and intelligent guess to know the volume of power needed at each period going by the knowledge of previous and recorded electricity demands. The pool uses numerous price bids and a mass of technical data as input to a large linear program that minimizes the cost of meeting the demand for electricity 7. The generators are called upon to bid a volume of power at a price they could offer to the market. The market operator accepts these bids from generators and in a classified order starting with the lowest bid until his demand guess is met. The bids that are accepted are the ones to trade power at that particular period, and they are said to be in the merit list whilst unaccepted bids are out of merit. It is worthy to note that, out of merit generators are not usually paid and this is a disincentive to be out of merit as well as it is an persuasion to be in merit by bidding at a low price unmindful of the cost of generation.. 6 Hunt,S., Making Competition Work in electricity(new York, John Wiles Inc.2006) 7 Newbery, D. M., Pool Reform and Competition in Electricity (November, 1997) ( last visited on the 6 th Feb, 2010) 5

9 As soon as the merit order and the successful bidders are known, the amount to be paid to generators in that session is established based on the highest successful bid price (Pool input price) which is otherwise known as system marginal price (SMP). Also the loss of load probability (LOLP) and value of loss of load (VOLL) can also be put into consideration in determining the payout price to the generators taking into account their efforts in maintaining system integrity, and the value each individual plant add to the system respectively. Since not all the generators in a pooling system make the merit list, it is important to note that out of merit generators would bear the volume risk, and they will try to reduce costs in order to get in merit in the next bid. When the generator yield to this, it would put pressure on his generating cost and he can lose money, if the receipts from selling into the pool fail to recoup his generating costs. In fact, to mitigate the volume risk and be in merit, base load plants can take a risk and bid at zero to secure a place in the merit list and bear the price risk but it will be market -risky if other generators bid at zero causing the pool input price to be zero 8. Deriving from the above, it goes even without saying that generators bear market risks in a pool. Price risk is moved to the generator because of the uncertainty of being in or out of merit 9. He bears it all the time because he is in under a constant pressure of being in merit and he bears the worst of it if he ever goes out of merit. Volume is also rests on him because the market is not essentially free he bids through one market operator and where he ever falls out of merit he does not sell. Thus the aim of the system is to create a market system - a process of uncertainties for the wholesaler or the generator as an incentive of selling his power at the lowest possible cost not minding his generation cost. As shall be discussed in 8 Hunt,S., Making Competition Work in electricity(new York, John Wiles Inc.2006) 9 See id 6

10 chapter 3, it is this uncertainty that the CFD is designed to mitigate but the essential point being made at this stage is that in a Pooling, the conceptual or notional aim is to shift market risk to the generator. 2.2 The contrast method- Bilateral contracting Bi-lateral contracting is the other side of the coin. As the name implies bilateral contracting is a method of wholesale trading of power between a generator and a retailer or bulk consumer without having a third party or a facilitator. It involves the use of sales contract to trade not just the power that the generator produces but instead his readiness to do so, which, in the electricity lexicon, is known as availability 10. Unlike the pooling method where sale is coordinated by the market operator at the uncertain outcomes of the merit listing, the bilateral contracting method is executed by the use of a standard kind of contract, known as the Power Purchase Agreement (PPA). The PPA is often used in jurisdictions where there is a single buyer or retailer (most times a government utility) hence it envisages that there is no market to diversify offtake route but this does not mean than the PPA cannot be used in jurisdictions of multiple offtaker like is the case with UK. The point to be drawn is that the PPA essentially moves volume risk from the generator to the purchaser whilst price is not left at the vagaries of market but is contractually determined by a set of formulae known as indexes which can be reviewed on the basis of changes on a set of some other variables like interest rate or inflation known as escalators. Unlike pooling which is coordinated at short- lived segments, the PPA or more broadly put, the bilateral 10 Harbord, D., McCoy, C., Market Analysis Mis-Designing the UK Electricity Market? (last visited on 5th January, 2010) 7

11 contracting option, is often long term - usually as long as 25 years, even though there are short term PPA of about 5 years or may be less. Bilateral contracting can also come in the form of short term sales used to meeting balancing requirement and congestion management 11. The contractual element of bilateral contracting makes it possible for the generator to hedge some uncertainties inherent in electricity trading. Though it is not within the purview of this paper to discus power financing, it is that mechanism of addressing uncertainties that has enables bilateral contracting to underpin project financing and has made it the choice wholesale method for jurisdictions still trying to build capacity. That is by the way, what is material to our discourse here is that bilateral contracting as an electricity wholesale trading method is that it relies on contractual mechanism to trade the availability of a power plant by moving volume risk to the buyer and mitigating price with contractual formulae based on indexes and escalators. This method is often believed not be market based and it is notionally a contrast to the pooling option which is believed to be a competitive wholesale trading because it moves market risks off the generator, as such eliminating for the generator any incentive of selling at competitively low price which is the policy objective of a pooling method. The section below briefly flags the policy objective of pooling method of wholesale trading as a foundation to consider the effect that CFD has on such policy objectives. 11 Harbord, D., McCoy, C., Market Analysis Mis-Designing the UK Electricity Market? (last visited on 5th January, 2010) 8

12 2.3 THE POLICY OBJECTIVE OF A POOL As has been said in chapter 2.2 of this paper, the main object of pooling as an electricity wholesale trading method is to force power generators to bear market risk as an incentive to sell at low prices. That logic could be extended to mean that pooling is predicated to excess capacity or at least its top motive cannot perfectly be to underpin investments for capacity building. This logic finds justification in the fact that pooling has been introduced mostly in jurisdiction which main aim is price affordability more than power availability is a problem 12. As many jurisdiction moved from vertically integrated monopoly system to a disintegrated one there became equally the need to engender competition in both generation and retailing. The conceptual thinking had remained that such pass through competition will come from a spot or competitive electricity market which has the effect of moving market risk on to generators and disconnecting them from any contractual ties with purchasers such that the market would fluctuate, be fluid and robust to create for the generator a huge uncertainty of volume risk and then act as an incentive for low price offer. But business is what it is liberalization has led to private participation and this generators interest is profit making and no longer the days of state ownership when the prime consideration was the Public Service Obligation of the electricity commodity 13. The result of all these was that generators thought out a contractual risk-hedging mechanism - CFD with which they mitigate the intendment of or the policy objective of the pooling system. The next section explores the how the CFD functions. 12 For instance, at the wake of liberalising its electricity sector in the s the UK introduced the pooling method in order to lower prices than merely to underpin investments because it was an excess capacity jurisdiction unlike the present time that it has the threat of security of supply. 13 Rothwell, G., Gomez, T., Electricity Economics Regulation and Deregulation (New Jersey, USA: Institute of Electrical and Electronic Inc., 2003). 9

13 2.4 CONTRACT FOR DIFFERENCES IN A POOL. The nature of the pooling system gave rise to the use of contract for differences in electricity pool. It is likened to a financial instrument 14 devised to mitigate the vagaries and uncertainties of the pool system and it can be argued as an antithesis of pooling. It is a financial instrument that bears the semblance of a PPA hence both of them are bilateral contracts, the major difference being that whilst the PPA is a contract used to sell availability, CFD is not a sale but a hedge used to facilitate a constant sale of power. It is on this reason of it making a generator to constantly be able to sale that this writer posits that CFD undermines the policy objective of a pooling. To accept this point requires an understanding of the functionalities of the CFD. It had been discussed above that electricity pools make use of an approach that does not guarantee all generators will be in the merit list, and that the cost of generation of each generator is not considered in determining the system marginal price (SMP). The sole aim of the pool is to bring in competition in the seller s market. In order to avert the market risks - the price volatility and volume uncertainty of a pool, generators enter into contract for differences (CFD) which is a financial hedge wherein instead of rely on the uncertain pool price, buyer and seller agree on a constant, negotiated price (strike price) for an agreed quantity. The equally agree that either party makes up for the other greater or lesser, any differential between the pool price and the strike price. It eliminates the susceptibility effect of the hourly 14 See id 10

14 or half hourly price fluctuations that occur in the pool 15. This can make the generator bid at lowest price - even at zero prices hence it has contractually set its selling price and not essentially affected by the pool price as the pool policy anticipates. It is this phenomenon that forms the basis of this paper hence the research question here is to ascertain whether there is, in the resultant sense of a market system, any functional different difference between pooling and bilateral contracting given the overly contractual mechanism which CFD brings into a supposedly market based pooling. The next chapter will seek to examine this issue and begins by looking at the effect of CFD in the shifting of market risks. 3. CFD AND FUNCTIONALITY OF A POOL 3.1 THE EFFECTS OF CFD The effect of CFD on the overall policy objectives of a pool had been flagged above but for a closer analysis it would be better to examine its effect on some key parameters in electricity trading. This paper uses the following parameters for analysis: Price Mechanism, Market Risk and System Integrity. The approach of this analysis is to outline how these CFD affects the functioning of these parameters and then proceed to examine the similarity of the functioning of these parameters in a bilateral contract in order to answer our research question. 15 Newbery, D. M., Pool Reform and Competition in Electricity (November, 1997) < (last visited on the 5th of Feb, 2010). 11

15 3.1.1PRICE MECHANISM The effect of CFD on the price mechanism of a pooling is that essentially, price the generators actual selling price - no longer remains an outcome of uncertainties of the merit order but instead is a product of carefully negotiated and predetermined contractual terms. The effect therefore is that even though the CFD is a hedge and not a sale, a combination of its contractual effect with the mere formality of bidding at whatever price in the pool produces the actual effect as if the CFD is the selling contract, in essence diminishing the market-contract difference between pooling and bilateral contracting. Consequently, other considerations which ordinarily should add in determining the amount to pay generators in effect are rendered impotent. For instance the loss of load probability (LOLP), which is referred to as payment to generators in recognition of their contribution for system integrity and value of loss of load (VOLL), payment to individual generators because of transmission constraints and crucial location of some plants 16 would no longer be effectual to bring the incentives they are hoped to make MARKET RISK It was conceptually thought that market risk which is a function of volume and price risks - should reside on the generators alone to the exclusion of the buyers, hence the pool is a onesided market. This is because the classic notion of an electricity pool is that it is segmented into periodic pool which would inhibit contractual connection between generators and 16 Green, R., Did English Generators Play Cournot? Capacity Withholding In The Electricity Pool, (6th April 2004)< > (last visited on the 4 th feb, 2010). 12

16 purchasers such that a power plant could not have pre-sold its availability but instead would be aiming to mitigate its volume risk by participating successfully in each bidding segment. But what the CFD does is to not only mitigate that market risk for the generators but also brings the purchasers into the risk ambit and make them bear some of the risk by agreeing to make up the differential of the strike price. In sum, CFD is a contract instrument which diminishes the anticipated market functionalities of an electricity pool SYSTEM INTEGRITY System as used in this context does not refer to the transmission or distribution system but rather the pooling system. The pool is anticipated to function like a transparent market system where there would be access to information between all participants in the pool. Integrity of a pool system ought to be based on the non-predictability of a selling price by a generator so that he can bid at a price induced my market speculation and not contractual predetermination. Other integrity of the pooling system ought to be that uncertainty of being in or out of merit ought to enhance competitiveness amongst the generators. Conversely, the use of CFD undermines the integrity of a pool system because once the generators have hedged the uncertainties by contractually agreeing at a strike price they can collude and bid at zero. In fact their participating in the pool becomes a mere formality as they now have a contractual mechanism which circumvents the market risks which the system had shifted to them. In essence CFD can bring about a system where the actual selling price of a generator is distant higher than the pool price. The purchasers (retailer) would eventually sell to consumers at a price determined by the CFD strike price and the judgment of the entire system depends on the actual price burden on consumers 17. In sum, because CFD 17 Rothwell, G., Gomez, T., Electricity Economics Regulation and Deregulation (New Jersey, USA) Institute of Electrical and Electronic Inc., 2003). 13

17 does prevent consumer prices from being a signal of bidding price, it undermines the system integrity of a pool. Having said these, it still kept in mind that the overall focus of this paper is not only to analyze the effect of CFD in a pool but to examine whether the use of it essentially allows a difference between pooling and bilateral contracting. The next section begins to answer that question by comparing the bilateral contracting option and a pool system in which CFD is used. 3.2 COMPARISON OF CFD AND PPA CFD here is not discussed as per the classic hedge, it is as a financial instrument but rather is used to mean a pooling system where CFD operates and the analyses here are based on the three parameters mentioned above. Starting with the price mechanism, just CFD achieves in a PPA price mechanism is not market based but contractually set based on pre-determined formulae 18. A PPA equally has clauses which provide hedges like the CFD but more remarkably is that price is not transparently or collectively set as amongst all power generators but rather each generator can agree with the purchaser on a set of pricing indexes and formulae. The same thing occurs with market risk. Like the CFD achieves also the PPA moves market risk from the generator to the buyer such that prices are locked in. In fact the main thrust of a PPA which is to sell the plant s availability is also achieved by a CFD because the generator 18 An Over View of the New Electricity Trading Arrangement, Department Of Trade and Industry (31 of may 2000), < v(last visited on the 29thof Jan, 2010) 14

18 having agreed at a strike price can always bid at zero and would be in merit all the time a certainty that he will sell at anytime he wants to sell, which in essence produces the same effect of a pre-contracted or pre-sold availability. Let us now cast look on system integrity. It was argued above that CFD undermines the integrity of the pool in that pool price is not the signal which sets consumer prices but rather the contracted strike price. In essence that absence of a common pool price determined by merit order is a lack of transparency. Whilst not trying to judge between bilateral contracting and pool which is a better method than each other, as far as market principles are concerned which is the philosophy on which pooling is based, this same lack of price transparency amongst generators exist in the bilateral contracting option. It is based on this same argument of lack of transparency in PPAs that it has been argued by some analyst that any purely liberalized electricity market ought to have a competitive electricity market 19. That argument is reserved as it is not the focus of this paper but the point it drives home is that with use of CFD and PPA bears a semblance in the area that the entire wholesale trading system lacks the transparency of a common selling price amongst generators and this undermines system integrity. 3.3 ANY FUNCTIONAL DIFFERENCE BETWEEN POOLING AND BI-LATERAL CONTRACTING? Whilst we have extensively showcased the similarities of pooling and bilateral contracting, looking essentially at what CFD does in a pool system. It cannot altogether by supported by whatever stretch of imagination or freedom of argument that there are no marked differences between the two methods. The examination above had been limited to the functional 19 Besant,J., Detecting corruption in electricity market (World Bank paper Vol 60, Washington DC, USA, 2003) 15

19 difference of the two trading methods in terms of pooling not being essentially market based as it ought to be or CFD bearing the semblance of a PPA in a bilateral contracting method. But what of other functionalities which are extrinsic to the existence of the system in itself such as capacity building and investments in the electricity sector? What of other consideration such as which of the two trading methods is best suited for a system which is newly getting liberalized? Would the pooling or bilateral contracting have the same effect in a liberalization process? The now notorious California electricity debacle comes to mind in this wise and shows that competitive spot market may change negatively distort a system more rapidly than a contractual method couldn t easily do - that is at least a functional difference! It has been argued by many that PPA underpins investment in a capacity short jurisdiction than pooling would do. This fact is now commonplace as cases are awash to show that bankers rely on PPA to perform the offtake function in a project finance deal 20. Another argument is that pooling may not essentially fit well in capacity short countries especially one with a single offtaker where it would not make any sense for generators to compete to sell to the same buyer hence that single buyer would have the capacity to set the prices. 4.0 CONCLUSION Deriving from the foregoing discourse on the conceptually different electricity wholesale trading methods, reasons have been brought to the fore to support the inference that as far as the choice of pooling over the bilateral contracting option is based on a market philosophy, there may, functionally, be no difference between the two if CFD is used in the pooling 20 Ruff, L. E., Competitive Electricity Markets: The Theory and Its Application, in From Regulation to Competition: New Frontiers In Electricity Markets. 11 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). 16

20 because it is a contractual mechanism like the PPA (bilateral contract) which diminishes that market based approach. However for other purpose such as incentivizing or underpinning investments or gradually opening up an erstwhile regulated environment to liberalization, the two trading methods yield different results and functionally differ to that extent. 17

21 BIBLIOGRAPHY SECONDARY SOURCES Books Bhattacharya, K., Bollen, M. H. J., Daalder, J. E., Operation of Restructured Power System (Massachusetts, USA: Kluwer Academic Publishers, 2001). Einhorn, M. A., Regulation of Regional Electricity Companies in the British Electricity Experiment, in From Regulation to Competition: New Frontiers In Electricity Markets. 73 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). Green, R., Britain s Unregulated Electricity Pool, in From Regulation to Competition: New Frontiers In Electricity Markets. 73 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). Jamash, B., Between the state and the market: Electricity sector reform in developing countries( World Bank working paper Vol 160, 2006, Washington DC, USA.) McEldowney, J., Electricity Industry Handbook: Law and Practice (London, United Kingdom: Chancery Law Publishing, 1992). Richard, G., Britain s Unregulated Electricity Pool, in From Regulation to Competition: New Frontiers In Electricity Markets. 73 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). Robert P. Electricity Market Reform An IEA Handbooks, in Energy Market Reforms. IEA 23 Rothwell, G., Gomez, T., Electricity Economics Regulation and Deregulation (New Jersey, USA: Institute of Electrical and Electronic Inc., 2003). Ruff, L. E., Competitive Electricity Markets: The Theory and Its Application, in From Regulation to Competition: New Frontiers In Electricity Markets. 11 (M. A., Einhorn, Boston, USA: Kluwer Academic Publishers, 1994). Sally, H., Making competition work in electricity ( New York, USA,John Wiley and Sons Inc. 2002) Steve, T., The British Market Reform: A Centralistic Capitalist Approach, in European Electricity System In Transmission. A Comparative Analysis of Policy and Regulation in Western Europe. 41 (A. Midttun, Oxford, England: Elsevier Science LTD., 1997). 18

22 OTHERS Internet An Over View of the New Electricity Trading Arrangement, Department Of Trade and Industry (31 of may 2000), (last Visited on the 29th of Jan, 2010). Green, R., Did English Generators Play Cournot? Capacity Withholding In The Electricity Pool, (6th April, 2004) > (last visited on the 9th, Feb. 2010) Harbord, D., McCoy, C., Market Analysis Mis-Designing the UK Electricity Market? (last visited on 5th Feb, 2010) Newbery, D. M., Pool Reform and Competition in Electricity (November, 1997) < (last visited on the 5 th of Feb, 2010). Newbery, D. M., The Regulators Review of The English Electricity Pool (18th August, 1998)< (last visited on 4th of Feb, 2010). Tovey, N. K., The Changing Faces of Electricity Market in the UK < > (Last visited on the 1st of Feb,2010). 19