Market liberalisation operates on a simple principle – by opening a market to competition, and incentivising operators to perform well, you create a market that is more efficient, affordable, and sustainable. To understand the principle in action, it’s useful to understand the three key areas of the industry’s value chain:
- Generation: Power must be generated either from traditional thermal power plants or innovative emerging technologies, such as solar and wind. Power producers operate across diverse technologies and fuel sources to ensure affordability, efficiency and quality of power generation.
- Transmission & Distribution Network: The process of transporting electricity from the point of generation to the point of consumption. This involves extensive grid infrastructure connecting power stations to premises of consumers.
- Retail: Retail is the final link in the chain, covering the process of a licensed supplier selling electricity to the end-consumer.
by stimulating market competition, you also stimulate an efficient ecosystem
In the retail segment, liberalisation means providing a framework where power suppliers compete for customers, allowing those customers to choose the right products, services and value for them. This has been embraced in countries such as the UK, Japan, and recently Singapore. But market liberalisation does face challenges in optimising value for customers, especially when customers are unaware, or uneducated, on the various options they may have. Below we hear from key industry experts on this transition.
Retail market liberalisation
In most countries, a traditional model for the electricity industry’s evolution is followed. As a vital economic enabler, electricity is closely regulated by the government. That situation leads to a single national or regional power provider in most jurisdictions, where electricity tariffs are set based on market conditions, to ensure competitive electricity for citizens.
With retail liberalisation, the electricity industry is opened to multiple suppliers, who compete to offer different electricity packages to customers. That means electricity suppliers arrange to purchase power from energy producers in a wholesale market, then sell it on to retail customers. This segmentation allows consumers to pick and choose the right deal for them.
The theory is that by stimulating market competition, you also stimulate an efficient ecosystem which delivers affordable electricity for consumers. That focus on competition also nurtures an environment designed to deliver customer-centric services, with providers competing to offer the best service as a way to stand out from the competition.
The United Kingdom was a pioneer of market liberalisation that began in 1989. The first step was liberalising their transmission and distribution (T&D) network, with 100% of the T&D network privatised by. This was followed by gradual liberalisation and privatisation of generation assets such as power stations in the coming years. Retail then completed the third part of this puzzle, with full retail liberalisation achieved in 1999.
This staged approach to liberalisation that tackles upstream areas (T&D and generation) of the ecosystem, before moving to downstream (retail) services is a common approach around the world.
It is not about a simple transition with retail
There is no golden ticket when it comes to evolving the electricity supply industry. While competition is broadly considered a positive step, liberalisation does not always come with uniform benefits. That is certainly true when it comes to retail markets.
Appropriate infrastructure must be established in order to support the transition from the traditional electricity ecosystem to a more competitive retail model. Only when appropriate infrastructure is in place can such a transformation provide true benefits for customers. That includes upgraded grid infrastructure to deal with emerging renewable energy generation. It also includes increasingly sophisticated forecasting software and technologies to manage fluctuating grid demand. Ultimately, it means substantial investment in electricity networks, from low voltage networks to high voltage distribution, to ensure that the fundamental need to deliver sustainable, secure power is maintained.
Market liberalisation can also come with additional financial costs for providers and consumers alike. There is concern that increasing supply costs can be passed on to consumers, creating a situation where markets with poorly regulated tariffs can result in a worse deal for the customer. Increased spending on advertising and marketing in the face of competition is another area where expanding operational costs could impact tariffs.