Abstract
In this report we have shown how a dynamic simulation model can help to gain insights into the potential regulation of the radically new market system for electricity in England and Wales. If left to itself, the market's signals for investment will lead to cycles of under- and overcapacity. This, together with the scope for tactical behaviour on the part of the generating companies, will add to the uncertainty in the market and induce risk-averse behaviour on the part of the distribution companies. The cost of this risk aversion has already been seen in terms of a high level of forward contracting (at a premium) and a strategic motivation to co-invest in new gas-fired plant. This paper demonstrates how more regulatory intervention in managing the construction and retirement of plant can provide the circumstances by which the new market system can behave with more stability in the way it was intended.
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