Back in 1989 when Britain’s then Conservative government introduced the Electricity Act, paving the way for privatisation and market liberalisation, the selling proposition was electricity being converted from a public service good to a freely traded commodity. Twelve years later, with an increasing number of countries embarking on the liberalisation route, history tends to suggest that electricity cannot, in the purest terms, yet be considered a commodity.
In 2000, the failure of the California electricity market, due in part to a poorly structured competition model, sewed the seeds in the anti-liberalisation debate. And now, with the UK nuclear industry effectively being bailed out (albeit temporarily) by the government, and the last of the major US utility companies exiting the UK market with its tails between its legs and a crater in its corporate finances, some questions are being asked as to the effectiveness and efficiency of competition in the UK electricity market.
There are some who feel strongly that the current problems in the UK market are a direct result of Ofgem’s inability to properly structure a competitive market. Others absolve the regulator of responsibility and apportion blame to the government. And then there are those that blame neither the regulator nor government but suggest that corporate failures in the competitive market are due to incompetent management. In fairness all of the above are contributory factors to the current market scenario of rapidly falling wholesale prices and company failures.
When it comes to taking overall responsibility it is the current government that has to shoulder the market problems. It is this government that introduced the electricity review from which NETA evolved, and it is this government that appointed the current regulator. And while it was the previous government that privatised British Energy it is the current government that changed the market rules under which it has to operate.
To most observers the problems with British Energy define the current state of the market. For the government, it has to decide whether to extend the loan period, which terminates on 29 November, or allow the company to enter administration. With the Treasury seemingly unprepared to inject more money into a private company, and the European Commission asserting that the government loan is ‘illegal’, it is appearing increasingly likely that British Energy will go into administration.
But British Energy is just an end product of the central problem faced by the government – wholesale electricity prices falling to what the energy minister has referred to as ‘unsustainable levels’. As the government finalises its Energy White Paper, expected early in the New Year, it is coming under pressure to amend NETA. Some generators are calling for a re-introduction of a capacity element to prevent generator losses and ensure plant is on standby. Other lobbyists are calling for older and less efficient plant to be mothballed, thereby reducing the overcapacity in the market and supporting prices. And there are those who believe an extension of emissions trading to the generation market, and a de facto carbon tax, is the correct approach.
Any meddling with market mechanisms, particularly those that may be seen as benefiting one company over others, may be detrimental to competition. But there is another market evolution in the making that will have a consequence on market competition, one the government appears content to tacitly accept, which is the emergence of a cosy cartel. With PowerGen’s acquisition of TXU Europe’s supply and UK generation base, the expected re-acquisition of Drax by Innogy from AES, and the possibility of Scottish Power and Scottish & Southern Energy merging, the UK market will be in the control of just five companies all, with the exception of Centrica, highly vertically integrated.
It appears that the acceptance of this new market order is a trade-off between market competition and market security. It may also effectively signal the end of market liberalisation as originally envisaged. Certainly there are those who believe the UK electricity market is not really deregulated or liberalised, but is moving towards more of a managed market to deliver security of supply. Although the market retains a competitive façade it is really a market that is now evolving through market power. As yet the dominant utility groups have not abused this market power and the test for the regulator, and government, will be the response to any perceived abuse of power.
This emergence of a market power base within a so-called competitive market raises questions of the competitive potential for electricity. Although electricity is increasingly viewed as a commodity it is still, and always will be, an essential public service good. For this reason the development of an efficient and effective seamless competitive market may not be fully achievable. Although market competition can flourish at the larger user level it may not, ultimately, be so effective at the residential user level where security of supply is a political necessity. In this respect the stance taken by France against opening up its domestic market to competition may have some value.
Later this month, at the 25 November Council Session of the Danish EU presidency, the plan is to reach accord on energy market liberalisation. However, the underlying issues of unbundling, network access, and the date of final market opening will almost certainly prove hard to resolve, and any real progress from the Barcelona summit last March may be limited. In light of current market developments maybe a new approach to liberalisation needs to be developed, which accepts that electricity is a public service first and a commodity second.
