Electricity Market Competition: Getting It Right

By the year 2006, more than 500 million people (and all large industrial users) in the OECD area will be able to choose their electricity supplier. Countries such as Finland, Germany, New Zealand, Norway, Sweden, England and Wales as well as several states in the US and Australia, have already provided free choice to all users, including households.

The International Energy Agency (IEA) published today Competition in Electricity Markets, which analyses the development of choice and competition in electricity supply. The publication reviews the approaches taken by different countries as they dismantle monopolies and move towards open and competitive electricity markets.

Competition in Electricity Markets shows that, in most cases, reform has been beneficial, resulting in large productivity increases and stable or lower final electricity prices. But the ongoing power crisis in California demonstrates that great care needs to be taken in designing the new system if major difficulties are to be avoided in reliability of electricity supply during the transition to competition.

The publication also demonstrates the importance of properly regulating transmission systems, to ensure a level playing field for market participants and guarantee sufficient investment in transmission. It provides a detailed analysis of key elements in the reform process, including the evolution of competitive electricity spot markets, the regulation and pricing of transmission, and the role of system operators.

Competition in Electricity Markets also examines the issue of unbundling: separating operation of the transmission network from potentially competitive activities such as generation. It shows that a degree of separation is needed between transmission and generation, distribution and generation, and distribution and end user supply.