International borders no longer define trade in electricity, as developed nations restructure and deregulate, and developing nations sell off state monopolies to invest in infrastructure.
The Federal Energy Policy Act of 1992, which required electric utilities to permit customers’ access to other utilities and to a growing number of independent power producers, signaled the beginning of a new era of trade in electricity supply in U.S. electricity markets. This policy aimed to foster competition and freer trade in the new spot markets for electricity. However, the results vary between the deregulating states. Some deregulation failed (e.g., California), while others succeeded in achieving deregulation goals.
From a global viewpoint, international borders no longer necessarily define trade in electricity. Some U.S. states, Mexican and Canadian provinces, France, and Scotland, as well as Scandinavian and other countries share varying degrees of common electricity markets and trade in electricity. The benefits are: (1) it enables participating countries to maintain lower levels of expensive electricity reserves; (2) it strengthens electricity market stability and decreases risks for participating countries; and (3) it allows for each country to optimize the pollution-investment trade-off. Some countries (e.g., United States, Australia, and so on) are too big and geographically diverse to function as a single market and actually function with multiple internal markets.
Broadly speaking, the world’s electricity markets are developing along two paths. On the one hand, most of the developed world is now in some stage of restructuring, deregulation, and liberalization. Reforms usually focus on some kind of separation (either accounting or legal) of the generation and transmission-distribution segments of the market (the “wires”), introduction of competition in the generation segment and treating the “wires” as a natural monopoly, and allowing third-party access to newly entrant and incumbent competing generators and marketers. Many restructuring schemes also include establishing a spot market for electricity, in which the unregulated market price of electricity is determined. On the other hand, most of the developing world is expected to remain inefficient, lacking reserves and continuing with national (or regional) monopoly electricity supply industries, usually state owned. The problem facing both the developed and developing worlds, however, is the emergence of global monopolistic competition in the developed world and in some countries of the developing world, the latter having to sell off some or all of their state monopolies to finance infrastructure investments. Indeed, most forecasters see the future global electricity trade as being characterized by competition among a few conglomerates that will decrease capacity (an “adverse Averch-Johnson Effect”), which will increase prices and profits in a market of relatively inelastic demand.
However, one solution for expected global monopolistic competition in electricity supply, and for other generic manifestations of market power or market manipulation, is some kind of real-time pricing. The hurdle facing the implementation of real-time pricing is financial: it is tremendously costly to set up the required metering devices. Nevertheless, attempts to use real-time pricing has been made in some places in the world (e.g., England and Wales), and it has been acknowledged as a tool for achieving increasing demand responsiveness to electricity prices.
Warren Young and Eli Goldstein
See also: Industrialism.
Newbery, David M. Privatization, Restructuring, and Regulation of Network Utilities. Cambridge, MA: MIT Press, 1999.
Vietor, Richard. Contrived Competition: Regulation and Deregulation in America. Cambridge, MA: Harvard University Press, 1994.
Young, Warren. Atomic Energy Costing. Norwell, MA: Kluwer, 1998.