Electricity market liberalization: in theory and practice.

Abstract

During the past few decades the electric power industries around the world have undergone fundamental change. The traditionally “naturally monopolistic” view which encompassed the whole production process and the vertically integrated structure of the industry, gave way to a new model according to which the introduction of competition in particular segments of the industry has been possible, while at the same time a vertically disintegrated governance structure has been favored. Moreover, the new model has offered far less scope for state involvement, with private ownership of the firms operating in the market being favored instead of public and with strict regulation being replaced by a new more liberalized environment. Naturally, all these changes have attracted much attention, with an intense debate taking place regarding the alternative regulatory, institutional and market design structures implemented along with the outcomes produced. Of course, all these issues constitute a major part of the analysis taking place in this paper. On a theoretical level the first part is concerned with the pre-reform structure of the industry and the fundamental economic rationale behind it, as well as with the changing factors which made the introduction of competition possible in the sector. Furthermore, the specific characteristics of electricity which have rendered the liberalization of the industry challenging along with the basic model proposed for successful restructuring is analyzed, while the issues that have emerged in the context of the new model are discussed. Finally, in the second part of the paper, the examination of the reform process in a single country, Greece, takes place. This analysis offers first of all an opportunity to compare some the theoretical issues discussed with a real world example, but it also provides an overview of the framework adopted by Europe regarding electricity market liberalization with its actual implementation and the challenges it faces being demonstrated.