Liberalising Electricity Markets

Introduction The EU Electricity and Gas Directives 96/92/EC and 98/30/EC were adopted in 1996 and 1998, with member countries having until February 1999 and August 2000 to incorporate their provisions into domestic legislation. At one level, the directives were the logical extension to public utilities of the principles of the single market – “the free movement of goods, persons, services and capital.” At a deeper and perhaps more significant level, they reflect the view that energy policy can be managed by the Commission at the European level, largely using market instruments. Many of the challenges to European electricity liberalisation arise from the tensions between national sovereignty over a critical industry, energy, and federalist aspirations combined with a technocratic desire to de-politicise apparently straightforward economic issues. The attempted de-politicisation of energy is an admirable goal for an economist, but perhaps surprising to a political scientist. It has been made possible by a benign set of circumstances that the recent Californian electricity crisis may disturb. Electricity and gas under privatisation and unbundling proved successful in Britain, leading to lower prices, substantial public sector receipts, and vigorous investment. Electricity privatisation largely completed the Conservative policy of restraining state and unionised labour power, and the shift to a market-friendly energy policy. For a variety of reasons connected to the end of state socialism in the COMECON block, the financial drain on governments in developing countries, and substantial excess capacity in electricity in developed market economies (Newbery, 2000), the lessons of British energy liberalisation were eagerly adopted and widely disseminated (Pollitt, 1998). The United States saw electricity unbundling as the route to lower prices in high-priced states, as competition combined with the falling costs of recent technologies (such as combined cycle gas turbines, CCGT) offered the escape from backward-looking rate-of-return regulation to forward-looking competitive pricing. In Europe, the attractions of de-linking coal subsidies from electricity prices, and