Electricity Market - History

History

The earliest introduction of energy market concepts and privatization to electric power systems took place in Chile in the early 1980s, in parallel with other market-oriented reforms associated with the Chicago Boys. The Chilean model was generally perceived as successful in bringing rationality and transparency to power pricing, but it contemplated the continuing dominance of several large incumbents and suffered from the attendant structural problems. Argentina improved on the Chilean model by imposing strict limits on market concentration and by improving the structure of payments to units held in reserve to assure system reliability. One of the principal purposes of the introduction of market concepts in Argentina was to privatize existing generation assets (which had fallen into disrepair under the government-owned monopoly, resulting in frequent service interruptions) and to attract capital needed for rehabilitation of those assets and for system expansion. The World Bank was active in introducing a variety of hybrid markets in other Latin American nations, including Peru, Brazil, and Colombia, during the 1990s, with limited success.

A key event for electricity markets occurred in 1990 when the UK government under Margaret Thatcher privatised the UK electricity supply industry. The process followed by the British was then used as a model or at least a catalyst for the deregulation of several other Commonwealth countries, notably Australia and New Zealand, and regional markets such as Alberta. However, in many of these other instances the market deregulation occurred without the widespread privatisation that characterised the UK example.

In the USA the traditional model of the vertically integrated electric utility with a transmission system designed to serve its own customers worked extremely well for decades. As dependence on a reliable supply of electricity grew and electricity was transported over increasingly greater distances, power pools were formed and interconnections developed. Transactions were relatively few and generally planned well in advance.

However, in the last decade of the 20th century, some US policy makers and academics projected that the electrical power industry would ultimately experience deregulation and Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) were established. They were conceived as the way to handle the vastly increased number of transactions that take place in a competitive environment. About a dozen states decided to deregulate but some pulled back following the California electricity crisis of 2000 and 2001.

In different deregulation processes the institutions and market designs were often very different but many of the underlying concepts were the same. These are: separate the potentially competitive functions of generation and retail from the natural monopoly functions of transmission and distribution; and establish a wholesale electricity market and a retail electricity market. The role of the wholesale market is to allow trading between generators, retailers and other financial intermediaries both for short-term delivery of electricity (see spot price) and for future delivery periods (see forward price).