7 Market-Oriented Reform
of the Power Industry
7.1 Review of International
Experience
Vivid Economics, a UK think tank, and a Shell
International team of experts summarised the
global market-oriented reform of the power
industry and made suggestions for the future
reform of China’s power industry.
7.1.1 The Evolution and Effects
of Power Market
Deregulation
China and the World: Economic Transformation
through Structural Reform, prepared by Dr. Mallika
Ishwaran, Senior Economist, Shell International,
for the 2017 China Development Forum, summarises the reform of the global power market. The
paper points out that power market reform has
evolved over several decades. Liberalised power
markets, such as those of the USA and UK, were
initially designed to meet the dual objectives of
energy affordability and energy security (the energy
dilemma). Starting with the UK in the 1990s, many
countries have liberalised their power markets,
based on standard market design criteria involving
privatisation, competitive wholesale power generation and retail power supply markets, fair
third-party access to transmission and distribution
networks, and unbundling the ownership of transmission and distribution networks from power
generation and retail supply. Liberalisation has
been premised on encouraging competition—and
competitive pricing—as a way to reduce electricity
prices and develop diversity in supply sources to
ensure supply security (Fig. 16).
16
The first phase of power market liberalisation
started in 1990 with the UK. This entailed
unbundling power generation and retailing
activities from the natural monopoly of
transmission and distribution. In parallel, a process of privatisation also occurred, particularly in
the competitive segments of the supply chain.
This form of liberalisation spread to Norway,
Chile, Argentina, New Zealand and Australia in
1991, and began to spread across the USA from
California in 1994. The European Commission
published directives in 1996 that encouraged
more countries across Europe to liberalise.
Following the 1990s liberalisation, notions of
a standard market design began to coalesce
around maximising the role of competition,
rather than around government involvement, in
order to optimise dispatch and investment in
power generation and retail. Whereas the costs of
production for power generation and the supply
of electricity to the consumer could be minimised
through competition, grid infrastructure, as a
natural monopoly, was best delivered through the
regulation of a single company.
Phase 2 of power market liberalisation came
in the 2000s. This second phase of reform began
with increasing focus on regional integration,
harmonisation and environmental objectives. The
European Commission and US Federal Energy
Regulatory Commission began to promote standard market designs by attempting to prescribe
best practice and facilitate trade across borders.
The challenge of addressing climate change has
meant that the energy dilemma facing policymakers has evolved into an energy trilemma—
delivering affordable, secure and decarbonised
electricity. Current liberalised power markets,
which were designed to deliver energy dilemma
objectives, have struggled to cope. The novelty
and high initial cost of renewables has required
generous government subsidies (undermining
affordability) and their contrasting economics
with fossil fuel generation has reduced the ability
of the wholesale power market to incentivise
investment and balance demand and supply
(undermining security of supply).
Consequently, power markets across the world
are in a state of flux, as countries have started
decarbonising their power supply and the levels of
renewables penetration have increased. Germany,
which has led the way in renewables adoption,
has nonetheless struggled to decarbonise energy
16
Structural Power Market Reform to Support a Decarbonised Economy, March 2017. Prepared by Dr. Mallika
Ishwaran, Senior Economist, Shell International, for the
2017 China Development Forum on China and the World:
Economic Transformation through Structural Reform.
Special Report 4: China’s Energy System Revolution
489
of the Power Industry
7.1 Review of International
Experience
Vivid Economics, a UK think tank, and a Shell
International team of experts summarised the
global market-oriented reform of the power
industry and made suggestions for the future
reform of China’s power industry.
7.1.1 The Evolution and Effects
of Power Market
Deregulation
China and the World: Economic Transformation
through Structural Reform, prepared by Dr. Mallika
Ishwaran, Senior Economist, Shell International,
for the 2017 China Development Forum, summarises the reform of the global power market. The
paper points out that power market reform has
evolved over several decades. Liberalised power
markets, such as those of the USA and UK, were
initially designed to meet the dual objectives of
energy affordability and energy security (the energy
dilemma). Starting with the UK in the 1990s, many
countries have liberalised their power markets,
based on standard market design criteria involving
privatisation, competitive wholesale power generation and retail power supply markets, fair
third-party access to transmission and distribution
networks, and unbundling the ownership of transmission and distribution networks from power
generation and retail supply. Liberalisation has
been premised on encouraging competition—and
competitive pricing—as a way to reduce electricity
prices and develop diversity in supply sources to
ensure supply security (Fig. 16).
16
The first phase of power market liberalisation
started in 1990 with the UK. This entailed
unbundling power generation and retailing
activities from the natural monopoly of
transmission and distribution. In parallel, a process of privatisation also occurred, particularly in
the competitive segments of the supply chain.
This form of liberalisation spread to Norway,
Chile, Argentina, New Zealand and Australia in
1991, and began to spread across the USA from
California in 1994. The European Commission
published directives in 1996 that encouraged
more countries across Europe to liberalise.
Following the 1990s liberalisation, notions of
a standard market design began to coalesce
around maximising the role of competition,
rather than around government involvement, in
order to optimise dispatch and investment in
power generation and retail. Whereas the costs of
production for power generation and the supply
of electricity to the consumer could be minimised
through competition, grid infrastructure, as a
natural monopoly, was best delivered through the
regulation of a single company.
Phase 2 of power market liberalisation came
in the 2000s. This second phase of reform began
with increasing focus on regional integration,
harmonisation and environmental objectives. The
European Commission and US Federal Energy
Regulatory Commission began to promote standard market designs by attempting to prescribe
best practice and facilitate trade across borders.
The challenge of addressing climate change has
meant that the energy dilemma facing policymakers has evolved into an energy trilemma—
delivering affordable, secure and decarbonised
electricity. Current liberalised power markets,
which were designed to deliver energy dilemma
objectives, have struggled to cope. The novelty
and high initial cost of renewables has required
generous government subsidies (undermining
affordability) and their contrasting economics
with fossil fuel generation has reduced the ability
of the wholesale power market to incentivise
investment and balance demand and supply
(undermining security of supply).
Consequently, power markets across the world
are in a state of flux, as countries have started
decarbonising their power supply and the levels of
renewables penetration have increased. Germany,
which has led the way in renewables adoption,
has nonetheless struggled to decarbonise energy
16
Structural Power Market Reform to Support a Decarbonised Economy, March 2017. Prepared by Dr. Mallika
Ishwaran, Senior Economist, Shell International, for the
2017 China Development Forum on China and the World:
Economic Transformation through Structural Reform.
Special Report 4: China’s Energy System Revolution
489