6.2.1.3 Liberalization and Restructuring of Energy Markets

Liberalization of energy markets gives the suppliers greater freedom in the extraction, processing, generation, transportation, and distribution or supply of energy products and the consumers greater freedom to choose from different providers (WEC, 1998). In the electricity subsector, the separation of transmission from generation followed the realization that only transmission is a natural monopoly (Hunt and Shuttleworth, 1996). Recently, various measures have been taken to liberalize energy markets. The EU, for instance, adopted rules to liberalize its electricity market (IEA, 1997a), which became operational early in 1999 (although some EU countries, such as the UK, had started earlier). It is expected that this will be followed soon by rules regarding a liberalization of the natural gas market.¹⁸ In the USA, as a result of changes in policies at both federal and state levels, the generation and sales of electricity are being opened to competition. Liberalization of the energy markets in developing countries and EITs has, in many cases, been part of the macroeconomic restructuring in these countries. Both in Africa and Latin America, one of the main driving forces behind the reform of the power sector is to attract private capital to expand and improve the sector.

Although these policies are mainly inspired by the wish to increase competition in the energy and power markets, they can have, through their impact on the choice of production technology, significant emissions implications. Energy restructuring may include regulation of the transmission monopoly, environmental cost internalization, and system-benefit charges (SBCs; see Boxes 6.6 and 6.7). Several studies have examined the effects on GHG emissions of the restructuring of the electricity industry, but the issue is far from resolved. Indications are that the impacts can be either positive or negative (IEA, 1998b). The degrees of the environmental effects of liberalization of the electric utility industry are case specific and depend on pre-existing circumstances (e.g., fuel mix, vintage of plant, taxation schemes, and other factors). They also depend on such factors as national endowment of resources, the fuel mix, the vintage structure of generation capacity, scope for restructuring, and the size and speed of policy reform (OECD, 1999). In short, energy-sector structural reform cannot, in itself, guarantee a shift towards less carbon-intensive power generation.¹⁹ On the whole, however, it may provide for a more economically driven behaviour that would be more responsive to price signals placed on GHG emissions.

Finally, the impacts of energy-sector structural reforms can be enhanced if appropriate additional policy measures are taken,²⁰ such as demand-side management (DSM). An example of the latter is the British Energy Savings Trust, which was set up 3 years after restructuring the UK energy markets, in 1992, to finance DSM programmes run by regional electric companies.

According to an IEA study (IEA, 1999a), in the UK energy sector the structural reforms in the electricity, coal, and gas supply sectors reduced the share of electricity generated from coal from 65% in 1990 to 35% in 1997. This resulted from closure of older coal-fired plants and the construction of combined cycle gas turbines. In countries where the electricity systems are largely based on non-fossil fuels, like Brazil, Norway, Sweden, and Switzerland, competition without environmental regulation may well lead to increased CO₂ emissions, as gas-fired power stations often will be the most economically attractive option for the development of new capacity.²¹

In Japan, after liberalization of the power-generation market several independent power producers entered it. However, around 85% of their fuels were coal and residual oil that, though inexpensive, emit more CO₂ per unit of power generated. With the liberalization of the retail market, adopted in 2000 for large power users, it is possible that the construction of an atomic power or liquefied natural gas (LNG) plant, both of which require a longer lead time and a huge investment, will become difficult. This may lead to adverse effects in terms of CO₂ emissions (Sagawa, 1998).

Several studies in the USA have tried to quantify the potential impacts of restructuring the electricity industry on GHG emissions (see Lee and Darani, 1995; Rosen et al., 1995; US FERC, 1996; Palmer and Burtraw, 1997). The FERC study suggests that there would be no significant increase in total CO₂ and nitrogen oxides (NO_x) emissions. The other studies, however, suggest that the impact of a more open transmission grid on CO₂ and NO_x emissions could be substantial. A more recent study by the US Department of Energy’s (DOE) Office of Policy found that the restructuring envisioned under the Comprehensive Electricity Competition Act (CECA) will lead to 145–220 megatonnes (Mt) less CO₂ emissions in 2010 than would have occurred in the absence of an explicit policy to reduce CO₂ emissions from the electricity sector (US DOE, 1999).²²

There is a growth in literature that focuses on the impacts of liberalization and restructuring of energy markets on the key technologies of interest in the context of GHG reduction, such as energy efficiency, co-generation, and renewables.²³

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