The Electricity Contract Market in England and Wales

In England and Wales, wholesale electricity is sold in a spot market partly covered by long-term contracts which hedge the spot price. Two dominant conventional generators can raise spot prices well above marginal costs, and this is profitable in 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 privatisation the generators have indeed covered most of their sales in the contract market.