From the pure doctrines of neoliberal thinking the
intellectual pendulum has been moving back from market fundamentalism towards
more ambivalent and centrist positions on the role of policy interventions by
the state. Nowhere is this more true than in the vitally important power sector
and its pivotal position in addressing climate issues. A major review from
within the World Bank confirms this trend.
The phrase Washington
Consensus was first used in 1989 by the economist John Williamson to describe
prescriptions on policies for macroeconomic stabilization, opening of markets
to trade and investment, and the expansion of market forces within domestic
economies. Subsequently, and to his dismay, it was given a wider meaning, to
refer to a more general orientation towards a strongly market-based approach
(sometimes described as market fundamentalism or neoliberalism). The
distinction is huge, and Williamson has argued
that his original, narrowly defined prescription is now broadly taken for granted, enjoying the
status of "motherhood and apple pie", but that the broader meaning,
as a kind of neoliberal manifesto, "never enjoyed a consensus in
Washington or anywhere much else" and can reasonably be said to be dead.[1]
We are now seeing the gradual but
measurable decline in influence of the more fundamentalist market philosophies that
have dominated the last 30 to 40 years. For much of that time, the power
sector, long a natural monopoly, has been in the nature of a laboratory for market-centric philosophies.
A main obsession of policy makers in the
power sector has therefore been pursuit of a so-called market liberalisation agenda. Nowhere
was this more prevalent than in major international institutions. These included
the Energy Directorate of the Commission of the European Union, in its vision for
a single integrated European energy market, and the World Bank, in its
prescriptions for developing countries. The prescriptions were often strongly
influenced by what came to be known, perhaps inaccurately, as the Washington
Consensus. For electric power this meant several key characteristics:
·
vertical and horizontal unbundling of what were
often fully integrated utilities; corporate separation of generation from the
wires businesses of the transmission (high voltage) and distribution (low
voltage) networks, and also from retail supply, and also division into multiple
entities in generation and distribution.
·
the establishment of an independent regulator
for the sector, and formal regulation of the residual elements of natural
monopoly.
·
privatisation of all the unbundled entities.
·
ensuring the maximum of competition in all aspects
of the sector, but particularly in generation and supply.
Paradoxically for an industry
that had always, due to its combination of economies of scale and real time
command and control, been regarded as a natural monopoly, reforms to open up the
sector also became something of an icon for free market enthusiasts. If this
industry could be converted to a collection of markets then anything was
possible.
Progress in Europe
The UK had led the way when it
came to reform. In 1990 the UK wholesale market was deregulated, competition
was promoted and the industry was privatised. The European Commission enthusiastically encouraged
other EU countries to follow this lead and liberalise their electricity markets.
This was the dominant direction of travel, even if progress was both slow and
partial. In France, in particular, the market is dominated by state-owned
nuclear power, has a single transmission and a single distribution company, and
remains one of the most successful power sectors in Europe, as is indicated by
the comparative price figures shown below.
Meanwhile the UK, after
attaining something close to theoretical perfection by the late 1990s, has, over
the last 10 to 15 years, abandoned a number of the basic tenets of the
fundamentalist philosophy. Government has intervened both through the introduction
of price caps[2] and by
making major decisions on, as well as underwriting of, new investment in
generating capacity. Unsurprisingly leading free market enthusiasts such as
Carlo Stagnaro[3]
now write that “…in the EU, and the UK in particular, the liberalisation of the
electricity market is rapidly being reversed and replaced by old-fashioned
command-and-control policies.”
There are a number of good (as
well as less good) reasons for this dramatic shift in policy direction.[4] An important one is the
increasing emphasis on policy for reducing CO2 emissions, where the
EU’s emissions trading scheme (ETS) has proved inadequate to the task of
generating realistic carbon prices consistent with ambitious emission reduction
policies. Another is the intrinsic failure of liberalised market structures to
provide the incentives necessary to induce new investment in long life generation
assets. A third is a failure to adapt spot markets designed by and for fossil
generation plant operators as they become increasingly unworkable in a world
dominated by the technical characteristics of renewables, nuclear and energy
storage. A fourth is that even in its most liberalised form the power market
has always retained significant elements of command and control, as well as a
significant and complex role for the network operators who remain as natural
monopolies. And, finally, competitive
retail markets, where they exist, have not delivered significant benefits to
consumers and do not command widespread public approval.
But the bottom line is that
the paradigm of energy markets free of significant intervention has been
quietly dropped. Certainly, privatisation of the monopoly network components of
the sector, with effective regulation, has brought some efficiency gains. But governments
have also recognised their continuing responsibility for maintaining reliable and
sustainable supply. In the UK there has been a dawning realisation
of the need to reverse direction and head downhill from the sunlit uplands of
the reform purists, and will shortly see it meeting an EU still struggling
half-heartedly towards the summit.
And in developing economies? A
recent ESMAP[5] (World Bank) review suggests a major loss of
faith in the Washington Consensus.
In the home of the Washington
Consensus, the World Bank has long been attempting to improve power sector
governance in developing countries, often using the
liberalised market paradigm as an ideal. The typical underlying problems in much
of the developing world are well known. They include arbitrary and inconsistent
political interference in the sector, inadequate cost recovery (which in turn
limits funds available for investment), and managerial inefficiency in state
monopolies. World Bank prescriptions invariably contain many sensible proposals
to remedy these problems, but they also pushed the comprehensive free market
agenda far too hard in a sector that had always been recognised as one of the
most difficult in which to create a genuine and effective competitive market.
The results were predictable. An
extremely valuable recent review[6]
by ESMAP reviewed experience across a
wide range of countries. The lessons are revealing.
Only one in five countries
implemented both vertical and horizontal unbundling of utilities, separating
generation transmission and transmission from distribution and creating
multiple generation and distribution utilities. Restructuring is intended primarily
as a stepping stone to deeper reforms, and countries that went no further
tended not to see significant impacts. Indeed, restructuring of power
systems that are very small and/or poorly governed … can actually be
counter-productive by reducing the scale of operation and increasing its
complexity.
Only one in five developing
countries has been able to introduce a wholesale power market during the past
25 years. … A demanding list of structural, financial, and regulatory
preconditions for power markets prevents most other developing countries from
following suit.
Many countries announced
reforms that did not subsequently go through, and some countries enacted
reforms that later had to be reversed.
Although many countries
enacted solid legal frameworks, the practice of regulation continues to lag far
behind. For example, while almost all countries give the regulators legal
authority on the critical issue of determining tariffs, this authority is
routinely overruled by the governments in one out of three countries. … cost
recovery remains an elusive goal.
Among the best-performing
power sectors in the developing world are some that fully implemented
market-oriented reforms, as well as others that retained a dominant and
competent state-owned utility guided by strong policy mandates, combined with a
more gradualist and targeted role for the private sector.
Where distribution utilities
were privatized, countries were much more likely to adhere to cost-recovery
tariffs. This however is a confusion of cause and effect. It will
normally only be possible to persuade private investors to participate if
financial viability has already been guaranteed by tariff reforms. Requiring a
newly privatised business to implement tariff reforms will tend to discredit the
private sector by blaming it for higher prices.
Market reforms can be helpful
in improving the overall efficiency and financial viability of the power
sector, and in creating a better climate for investment. However, they
cannot—in and of themselves—deliver on these social and environmental
aspirations. Complementary policy measures are needed to direct and incentivize
the specific investments that are needed.
This is a complex and
revealing story of modest successes and disappointing failures. The theoretical
ideals of unfettered competitive markets and minimal state involvement have
proved to be less important than much more basic goals of good governance, limiting
arbitrary political interference and patronage, introducing cost covering tariffs
and improving revenue collection (eg by reducing illegal abstraction). Much of
this depended simply on making power sector entities into commercial
organisations rather than organs of government.
All these basic reforms were in any case preconditions for the success
of more ambitious targets, such as privatisation or functioning spot markets
for energy trading. And developing countries will be under international
pressures to face the same policy challenges as the developed world in terms of
sustainability; this will continue to limit the scope for “hands off” policies
for the energy sector.
The Way Ahead
To a very large extent the
power sector is the future of low carbon energy provision, and its organisation
is therefore a vitally important matter to everyone. The “Washington Consensus”
will have had some notable achievements in promoting independent regulation, transparency,
formal separation from government and a more commercial approach. But the more
ambitious aspirations, for pure market structures free of policy interventions,
have remained out of reach. The central importance of the sector, especially in
the context of sustainable policies to address the issues of climate change,
mean that governments are increasingly likely to play a major role in monitoring
and supporting low carbon policies for the power sector.
[1]
This summary paraphrases a Wikipedia article on this subject which also
references Williamson’s observations on the subject.
[2] Earlier posting of April 2016. PRICE CAPS.
HYPOCRISY GOES INTO OVERDRIVE, BUT ARE WE WITNESSING THE DEATH OF
NEO-LIBERAL PRINCIPLES FOR THE ENERGY SECTOR?
[3] Stagnaro is a Senior Fellow of the Italian free market
think tank Istituto Bruno Leoni. His comments can be found in a 2016 article Whatever
happened to electricity market liberalisation?
[4] A much
fuller discussion of these issues can be found using the tab LOW CARBON POWER on the
top bar
[5]
The Energy Sector Management Assistance Programme of the World Bank. “ESMAP is
a partnership between the World
Bank Group and 18 partners to
help low and middle-income countries reduce poverty and boost growth, through
environmentally sustainable energy solutions. ESMAP’s analytical and advisory
services are fully integrated within the WBG’s country financing and policy
dialogue in the energy sector.”
[6] Rethinking
Power Sector Reform in the Developing World, ESMAP Background Paper, September
2019. https://www.esmap.org/rethinking_power_sector_reform
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