In this blog Ronan Bolton, author of the book Making Energy Markets: The Origins of Electricity Liberalisation in Europe, reflects on the history of electricity markets in western Europe. He discusses what lessons can be learned from the period of liberalisation reform during the late 1980s and 1990s as we look to reconfigure today’s electricity markets and transition to net zero.
The inception of electricity markets was a story of interacting factors and forces of change which coincided in a western European context from the late 1980s onwards. Long-term trends, including a slowdown in demand growth, the changing relative prices of fuels, and the increasing influence of economics in government policy, coincided and began to undermine existing political commitments to national energy goals and industrial strategies.
The allure of electricity markets in the late 1980s and early 1990s was that they opened up the opportunity to take advantage of low international energy prices and technological innovations. This, it was thought, would drive down electricity prices for consumers and help to make struggling national economies more competitive in a globalising economy. Competitive forces would also drive efficiencies in what were seen by many as oversized and stagnant electricity supply industries dominated by national monopolies.
Competition introduced risks, so in designing the process politicians needed to evaluate who the likely winners and losers might be and the degree to which competition would impact key national industries reliant on cross-subsidies from the electricity sector, in particular indigenous coal mining and nuclear power.
Liberalisation was to a significant extent a political process through which cost savings were distributed amongst the owners of energy companies, different classes of consumers and taxpayers. Electricity markets, in this sense, can be viewed as political constructs.
Through the examples of Britain, continental Europe, and the Nordic region, the study shows that these trade-offs were made in different political and electricity system contexts.
The British case is of course well known because of its place within the wider privatisation programme of the Thatcher governments. As the process unfolded during the late 1980s, politicians and senior civil servants initiated a dialogue with a group of economists who argued that a shift towards private ownership and competition, as opposed to state-control, would improve the efficiency of the industry.
However, unrestricted competition could not be introduced on day one and the eventual market model and regulatory framework introduced in 1990 was a compromise. This was dictated by concerns about the risks that competition would pose to the coal and nuclear industries, along with concerns about the share price of the privatised companies if they were exposed to too strong a competitive threat.
Norway was also a pioneer of competitive electricity markets. Throughout the 1980s, excess production from its hydropower dominated system could not be absorbed domestically, creating an impulse to seek out export markets and for the growth of cross-border trade. This was not simply a matter of selling power to their neighbours (Sweden, Finland and Denmark); trade created interdependencies requiring robust market institutions and contracts.
There was a balance between autonomy and regional integration struck as Nord Pool enabled each national system operator to retain tight control over their respective grids, whilst enabling cross-border energy exchanges and trading in financial instruments. This mixed-economy approach aligned well with the tradition of state-controlled electricity companies across the Nordic region.
Initially, the European Commission’s strategy was based on the British approach of dismantling integrated monopolies and imposing, through legal means, a uniform model of competition throughout the region.
As the process evolved, however, it became part of a wider political process and complex institutional dynamic associated with the construction of Europe’s single market in the early and mid-1990s. After much to-and-fro, a compromise was reached to slowly phase-in competition. This was a long and drawn-out process with many countries being reluctant, and some vehemently opposed, to dismantling their national electricity regimes.
The book emphasises the importance of studying the legacy organisational frameworks build up around fossil-based energy supply systems which still govern financial flows and the allocation of economic costs and risks of energy systems. A historical approach shows that electricity markets and regulatory frameworks were not purely technical achievements or politically neutral, rather electricity liberalisation was a contested idea and markets were shaped by trade-offs made during the process of reform, with costs and benefits distributed unevenly across society. The book stresses that the links between political reforms, risk allocation and technological change need to be made transparent as we investigate future energy transitions.
Making Energy Markets: The Origins of Electricity Liberalisation in Europe by Ronan Bolton is published by Palgrave Macmillan. Available as both an e-book and in print.
A version of this blog was originally published on the website of the UK Energy Research Centre.
Ronan Bolton is an interdisciplinary energy researcher with a background in mechanical engineering and environmental social science. His work examines the interconnected policy, market and regulatory challenges of transforming carbon based energy systems. His particular research interests are focused in the areas of energy network regulation and system integration, along with the history and development of liberalisation processes in the energy sector.