Deregulation European Electricity Executive Summary

Executive summary

In this paper, the focus is on different aspects of the deregulation of the European electricity sector. First, we explore the broader context of our subject, we sketch a brief outline of the history of deregulation in the EU. The strive towards deregulation started off in the eighties, and accelerated in the mid-nineties; by the end of the nineties attention shifted towards the actual implementation and enforcements of the Directives of the EC. We list the basic reasons why the EC wanted & wants to deregulate : so as to sustain economic growth, so as to improve competitiveness (market efficiency) and so as to achieve greater cohesiveness within the EU. The electricity sector belongs to the so-called “network industries”, and we compare the sector to the transport sector, to the postal services sector and to the telecom sector. Sectors such as the air transport sector and the telecom sector have advanced much quicker on the road to liberalisation. Within the EU, certain countries have progressed much faster than others, eg the UK is generally speaking ahead of the other EU member states.

We look into the main aspects the EC has dealt with in the electricity sector, one of the most important being is the division between the vertical economies : generation, transmission, distribution and supply of electricity. This division can be implelemented accounting-wise or through complete split ups. The directive requires countries to have an independent system operator for the transport of electricity, and an independent authority for overlooking the regulation and arbitrating in disputes.

It is clear that this approach poses problems in terms of capacity needs : if newcomers can access the market, then the system operator has to be able to forecast the future demand as accurate as possible. If they do not manage to do so, they will either over-invest (unused capacity) or under-invest (then being unable to meet market demand).

Newcomers have a number of disadvantages (“barriers”) that prevent them from fairly competing with incumbents, and oppositely, newcomers have the advantage that they can start with new and efficient technology, contrary to the incumbents that are faced with “stranded assets” and “stranded contracts Deregulation is linked to privatisation. We deal with the question whether or not privatisation improves efficiency of the company. Intuitively, one would think that private ownership (presence of shareholders) is the strongest drive behind efficiency. However, we bring to the fore that the presence of competition is a much stronger factor. So, even state-owned can grow strongly towards efficiency if there is enough competition in the market. Another phenomenon that leads to increased efficiency is the tendency to mergers and take-overs in deregulated markets. We argue that privatisation can have many disadvantages, but that thorough and well-thought regulation can prevent and or minimize many of them.

After a market has been opened for competition (deregulation), a re-regulation is necessary to avoid excesses and distortions in the functioning of the supply and demand. We look into the California debacle, with the question in mind if reregulation was a failure in the US electricity market.