Electricity liberalization
Encyclopedia
Electricity liberalization refers to the liberalization
of electricity market
s. As electricity supply is a natural monopoly
, this entails complex and costly systems of regulation
to enforce a system of competition
.
The standard model for electricity liberalization is the "British model", after the British system which began in the late 1980s with the privatization and vertical de-integration of the UK
electricity industry. At a cost of over $3bn, a system of competition was developed to auction spare capacity through a central system. The risks involved for both generators
and distributors
have led to vertical re-integration.
Liberalization of electricity tends to substantially benefit large consumers (mainly industrial users), but benefits for domestic consumers compared with a public monopoly or a regulated private monopoly are questionable. There are also doubts over whether the system can ensure long-term security of supply through providing sufficient incentives to begin building generation capacity in time for when it is needed.
In the European Union
, electricity markets are governed by a Europe-wide directive
on liberalization. In 2003, the European Commission
introduced a new Electricity Directive (EC/2003/54/EC)
with much stronger requirements on competition.
Liberalization
In general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation...
of electricity market
Electricity market
In economic terms, electricity is a commodity capable of being bought, sold and traded. An electricity market is a system for effecting purchases, through bids to buy; sales, through offers to sell; and short-term trades, generally in the form of financial or obligation swaps. Bids and offers use...
s. As electricity supply is a natural monopoly
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
, this entails complex and costly systems of regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
to enforce a system of competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
.
The standard model for electricity liberalization is the "British model", after the British system which began in the late 1980s with the privatization and vertical de-integration of the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
electricity industry. At a cost of over $3bn, a system of competition was developed to auction spare capacity through a central system. The risks involved for both generators
Electricity generation
Electricity generation is the process of generating electric energy from other forms of energy.The fundamental principles of electricity generation were discovered during the 1820s and early 1830s by the British scientist Michael Faraday...
and distributors
Electricity distribution
File:Electricity grid simple- North America.svg|thumb|380px|right|Simplified diagram of AC electricity distribution from generation stations to consumers...
have led to vertical re-integration.
Liberalization of electricity tends to substantially benefit large consumers (mainly industrial users), but benefits for domestic consumers compared with a public monopoly or a regulated private monopoly are questionable. There are also doubts over whether the system can ensure long-term security of supply through providing sufficient incentives to begin building generation capacity in time for when it is needed.
In the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
, electricity markets are governed by a Europe-wide directive
European Union directive
A directive is a legislative act of the European Union, which requires member states to achieve a particular result without dictating the means of achieving that result. It can be distinguished from regulations which are self-executing and do not require any implementing measures. Directives...
on liberalization. In 2003, the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
introduced a new Electricity Directive (EC/2003/54/EC)
Internal Market in Electricity Directive
Internal Market in Electricity Directive is the Directive 2003/54/EC of the European Parliament and the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC is based in the Treaty establishing the European Community, and in...
with much stronger requirements on competition.
See also
- PrivatizationPrivatizationPrivatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
- GATSGeneral Agreement on Trade in ServicesThe General Agreement on Trade in Services is a treaty of the World Trade Organization that entered into force in January 1995 as a result of the Uruguay Round negotiations...
(General Agreement on Trade in Services) - EC regulation