US Electricity Market Liberalisation

Market liberalisation and privatisation is a highly politicised matter. In the US it is reported that the drive for electricity deregulation was led by seven groups, each of which advocated changes to the system to provide the greatest benefit to their members. These groups have spent a combined $50 million lobbying lawmakers, probably more, according to their own reports to Congress. On the other“side”, an activist opposition industry has been spawned, with institutes and organisations opposing the electricity deregulation process, often funded by socio-political interests such as public sector labour unions. These have a strong interest in retaining institutions which tolerate over-manning and pay wages above the private sector. Much of the rhetoric of these bodies is highly partisan and often starts with outright condemnation, followed by a manipulation of facts or distortions to justify the position. Some of these organisations use highly emotive terminology and language in putting their view across. One notable feature of the rhetoric is the repeated demonisation of the World Bank, the IMF and other institutions which have it in their mandate to aid developing countries and are proponents of electricity market liberalisation. In reaching a balanced evaluation of the success or failure of the electricity market liberalisation process it is important to see through these manipulations and to establish facts, to help identify what works and what does not.

Progress of Electricity Market Deregulation in Europe

In February 2006, the European Commission published a report in which it analysed and criticised progress toward energy liberalisation in the EU and in which it named specific aspects of electricity and gas compliance with EU Directives. This also applied to the ten Accession States. The problems are not just the result of incomplete implementation of the existing 2003 Directives, but also the result of built-in structural and regulatory problems not yet addressed. Even in member states where the current legislation is being fully implemented, problems remain to be solved.

In May 2006 three announcements gave the commission report extra credence and threw the European energy sector into confusion. The reliability of Russian gas supplies, which account for a large proportion of European imports, has been called into question for some time and in 2006 Russia cut off Ukrainian supplies in retaliation for Ukraine’s pro-western stance in elections. Fears were reinforced by belligerent threats from Gazprom, warning European governments not to oppose its ambitions to enter the downstream gas sector in Europe. It is increasingly apparent that President Putin is prepared to use Russian energy as a weapon for political purposes.

In 2006 the European energy market was disrupted as the Emissions Trading Scheme was thrown into turmoil by the disclosure that most member states had issued too many carbon credits at the start of the year, resulting in serious imbalances between countries. The third dramatic announcement which came on May 18, 2006 was that EU anti-trust investigators had used powers to search 20 offices of E.ON, RWE, Gaz de France, ENI, Distrigas and Fluxys of Belgium and OMV of Austria. This third event has been influential in announcements by the Commission in September 2007 aimed at curbing the abuses perpetrated by some major operators.

The European energy sector is at a crossroads, with ever increasing demand and some uncertainties about supply. A number of European countries will require large scale replacement of generating capacity in the next decade, as either generating assets reach the end of their life or because policy decisions have been taken to phase out coal or nuclear plants. Germany is phasing out nuclear and the UK had planned to phase out both, although nuclear now looks set to be rebuilt and coal is enjoying a renaissance. In neither country is the future clear. The UK government, in particular, is avoiding the issue and says the market will decide and some observers predict an energy crisis in ten years in the UK because of this lack of preparation. In this climate of opinion, market liberalisation does not get a good press and after a “bedding in” period some governments and institutions are now questioning the success of market liberalisation in the energy sector. It was widely acknowledged when the concept was launched that it was impossible to foresee all the outcomes, and many countries have designed liberalisation schemes including the successful parts of practice in other countries, or of different components of other schemes. With some experience under our collective belt, there is now empirical data to assess the results and there are different points of view on its success.

Global Electricity Market Deregulation

Deregulation and privatisation in the electricity sector is now reaching a stage around the world when it is possible to discern some patterns and factors emerging, based on experience rather than hypothesis about what ought to happen. Some outcomes have been good but some have been bad, notably in North America, and electricity market liberalisation has advocates and critics.

The momentum towards liberalisation of the electricity supply industry continues around the world but it proceeds at varying paces. As a region, only the EU is moving systematically in a co-ordinated manner, while other markets are developing new structures on an individual country basis. In February 2006 the European Commission published a critical report drawing attention to a number of aspects in which progress towards electricity market liberalisation is considered unsatisfactory.

The countries of the EU, with the United Kingdom and Scandinavia at the forefront, have been leaders in creating the sea change which liberalisation of the energy markets is bringing. In July 2007 the final stage was reached for most EU countries in which electricity markets have been fully opened to all customers. A number of countries have negotiated ‘derogations’ in which they have delayed or reduced the scope of the change, due to special circumstances in their markets. One of the main reasons for this is the small size of a market, which only justifies the existence of one generator or very few, thus making competition unfeasible. In practice there are many imperfections in the new European structure, due either to original structural conditions or failures in implementing new rules. The EU Commission has been monitoring progress and is implementing new rules. It may be many years before the optimum situation is reached.

Transmission and Distribution - A Global Snapshot

In China, the State Council authorised a huge expansion of capital expenditure in transmission and distribution in the 11th Five-Year Development Plan (2006-10), but for quite a different reason from Europe and North America. The transmission and distribution system is not reaching the end of its life in China, there is simply not enough of it. For the last fifty years China has spent 80% of investment in the electrical sector on generation and only 20% on transmission and distribution, following the Soviet style ideology which gives primacy to heavy industry, in this case power generation. The sudden addition, partly unexpected and unplanned, of 200 GW to Chinese generating capacity in 2006 and 2007 used up any gains that had already been made in transmission and distribution capacity. The Chinese authorities were forced to accept that it is not enough just to produce more electricity, it also has to be transported to the users. The result has been the allocation of $153 billion to be invested in transmission and distribution in China between 2006 and 2010.

India is starting to follow suite with increased capital expenditure in transmission and distribution as well as generation, on a smaller scale than China but still significantly.

The internationalisation which started in Europe and the Nordic regions is now being replicated in other regions of the world. Perhaps the most notable example of this is the Med Ring which has created a circle around the Mediterranean, linking the Middle Eastern countries with North Africa, from Morocco to Spain to the western European networks and on the eastern side through Sudel to south eastern Europe. This will eventually be linked across the Sahara to the various new Power Pools in Central, East and West Africa, right down to South Africa.

Surge in the Transmission and Distribution Industry

Recent times have revealed a surge in the global transmission and distribution market and I predict that the market will remain strong for up to five years. The electricity utilities report a significant expansion of their capital expenditure budgets, some doubling 2005/6 levels for a five year period. The transmission and distribution equipment suppliers have reported considerable growth in the last two years.

Two exceptional factors account for this optimistic outlook for the transmission and distribution industry. In the industrialised countries with mature electrical systems, liberalisation of markets has put pressure on margins and the competitive environment has constrained costs. The electricity utilities have been unwilling to invest in the regulated segments of the electricity industry and have channelled money to the more speculative unregulated segments where profits are to be made. At the same time, regulators have exerted pressure to keep costs down in the interests of the consumer. Operators have been able to keep systems running with sophisticated asset management techniques, avoiding replacement costs. However, a series of embarrassing outages through out the industrialised world in recent years has served a warning that aging systems, many of them 40 years old, cannot soldier on forever. Most of the industrialised countries have announced large increases in capital expenditure budgets.

Advances in the Japanese Gas Meter Market

The Japanese gas sector is evenly split between piped natural gas and LPG. The LPG is delivered from dealers to consumers by tanker or in cylinders. Both are metered with intelligent domestic microcomputer-controlled diaphragm gas Micom meters, which have safety warning devices on them.

Gas utilities in Japan introduced Micom meters in 1983 in order to reduce potential fire accidents. Micom meters have a safety function that interrupts gas supply automatically in an emergency such as an earthquake, as well as a metering function. Installation of Micom meters has reached almost 100%, now that gas utilities are obliged by law to take responsibility for safety functions. The number of gas accidents has been dramatically reduced with the widespread use of Micom meters.

Increasing numbers of Micom meters for both piped gas and LPG have AMR capability, in the latter case this enables the dealer to refill the storage tank with LPG or to deliver new cylinders.
LPG is delivered to large consumers by pipeline.

There are major developments in residential metering in Japan as a new residential ultrasonic gas meter designed by a Tokyo Gas led consortium, together with Osaka Gas and Toho Gas comes to market this year. The meter is being manufactured by Yazaki Corporation, Toyo Gas Meter Co. and Aichi Tokei Denki Co. Ltd, and two electronics manufacturers, Matsushita Electric Industrial and the Toshiba Corporation. The ultrasonic gas meter is an electronic gas metering device designed for domestic use. The measuring principle is the same as that of a standard ultrasonic meter and the structure is very simple, having no moving mechanical parts. The meter has increased functionality, including AMR and added value-services to the consumer.

Tokyo Gas Co. Ltd., started a pilot level introduction of the ultrasonic gas meter and its commercial application in July 2005 and the new meter will come into use in 2008. The new meter has almost identical performance for both natural gas and LPG.

Advanced Metering - a Growing Trend

The meter industry is poised for the most important technological development since the introduction of the Ferraris induction meter over a century ago. Replacement of electromechanical meters with basic solid state meters has already started. This trend has now been overtaken by a development which has been brewing for several years but in the last 12 to 18 months has taken a significant step forward to reality. This is the introduction of advanced or intelligent metering, with which energy providers and consumers communicate with each other. Advanced metering offers benefits such as, planning for lower energy consumption, demand management to reduce peak load, lower supplier costs, lower consumer bills, fewer GHG emissions, better service to the consumers, additional services for customers. Recent studies record modest cost benefit savings from 0% to 20%, with an average of 5% to 10%. But take note, the global stock of electromechanical meters is carried on utility books at installation value of some $20 billion, with a 20-30 year straight-line depreciation. For any utility, the write-off of this large asset would involve a huge accounting loss. Replacement is likely to be
phased over many years.