Electricity liberalization

Energy liberalisation refers to the liberalisation of energy markets, with specific reference to electricity generation markets, by bringing greater competition into electricity and gas markets in the interest of creating more competitive markets and reductions in price by privatisation. As the supply of electricity is a natural monopoly, this entails complex and costly systems of regulation to enforce a system of competition.

A strong drive for liberalisation occurred in European Union energy markets at the turn of the millennium, directed by European Commission directives favouring market liberalisation promulgated in 1996, 2003, and 2009. These programmes were supported with the interest of increasing the interconnectedness of European energy markets and building the common market. Similar initiatives, to varying degrees, have been pursued in nations around the world, such as Argentina, Chile, and the United States.

A standard model for electricity liberalisation is the "British model", a reform plan of which consists of six reforms: (1) creation of a competitive market for electricity, (2) the breakup of monopolized supply such that each consumer can select his provider, (3) separation of network maintenance from generation, (4) separation of direct supply from the generation of electricity, (5) creation of an incentive structure to set market prices in monopolistic competition, and (6) the privatisation of formerly state-owned assets. It was implemented under the Thatcher years as part of a mass privatisation campaign of many of the industries nationalised by previous Labour governments in the preceding decades. The risks involved for both generators and distributors have led to vertical re-integration.

The main benefit of liberalisation comes from the increased competition afforded to the market. This increases the availability and distribution of energy in supply situations by building transparent price signals and diversifying the production of electricity between gas-turbine technologies to nuclear energy. It has also led to the elimination of unnecessary overhead supply in formerly nationalised markets, allowing for capital resources to be utilised more effectively on things such as network infrastructure instead of maintaining idle power stations. These increases in efficiency have led to lower prices paid by consumers in nations, such as the United Kingdom, which have more heavily pursued deregulation.

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