What is Liberalisation?

Deregulation Briefing – Electricity, Gas, Water and Waste Water Sectors From the NRG Expert Historical Energy Data Series.

Electricity and Gas

The liberalisation of the energy markets involves three basic processes, which may or may not go together and which may not all be applied. Privatisation is not the same as deregulation.

1. Privatisation – Usually the first step in liberalising markets is to privatise state-owned assets wholly or partially. If this is only done partially, the state may retain a share or even a controlling “golden” share. Or it may retain only a minority share for representation.

2. Unbundling – The separation of the monopolistic functions (transmission and distribution) from the competitive functions (production and supply). Some countries have done this by hiving the four functions off into separate companies which all operate commercially, and dividing the competitive elements of production and supply into many competing companies. The electricity can only go down one line and the water or gas through one pipe, but different entities can produce it competitively and sell it. Other countries have conformed to the minimum requirement of retaining a vertically integrated utility but separating the accounting functions within the one company. Competition is introduced through independent power producers and energy sellers. There are many and varied permutations to suit national requirements. An industrialised country with a mature infrastructure and strong industrial off-take has different needs from a developing country, where the provision of cheap electricity to a poverty stricken population is an overwhelming priority for social and political stability.

3. Deregulation – To provide customers with a choice of supplier and introduce price competition, markets are being opened. The EU and EEA countries are the most advanced along the path of liberalisation and to-date six European electricity markets are 100% open to all customers (UK, Germany, Norway, Sweden, Finland, Austria) and Denmark is 90% open. Others will follow according to the EU Electricity Directive. With the exception of Germany, which liberalised everything in one fell swoop and left the industry to sort it out, most markets have been opened in stages, starting with large industrial users and finishing with domestic consumers. In countries where industry or consumers have been subsidized full deregulation means that prices will go up as subsidies are withdrawn. This is a condition that the IMF is imposing on developing countries when it offers financial help, to force these countries to compete on a level playing field but some governments are not willing to pay such a price.

From the NRG Expert Historical Energy Data Series