Restructuring Electricity Systems in Transition

Lutz Mez; Atle Midttun; Steve Thomas

The fact that there is regulatory debate around the shaping of electricity systems is in no way a new phenomenon. The organisation of electricity systems since the late 19th century has had many stages and provoked several political debates.

I The Early and Mature Structuration of the Electricity Systems

The first electricity systems were organised along decentralised lines. The large power losses of direct-current transmission necessitated small, locally situated power stations. Edison, the early pioneer of electricity, therefore aimed at an integrated organisation of all central stations, supplying lighting to users. His vision for the organisation of the electricity industry was therefore a large number of small, service-oriented utilities.

However, the industry gradually moved towards a larger integrated system. The first important invention to move electricity beyond the local level was the transformer. This made it possible to link urban centres to power stations situated far away, thermal to hydropower stations, and rural to urban areas. The transformer stimulated further technological developments. Alternating current became the dominant technology, and the turbine replaced the steam-engine. Over time, steam-turbine sizes increased a thousand-fold, as did the voltage in transmission systems. The efficiency of steam turbines increased by a factor of seven. These various economies of scale pushed down the real price of electricity over the course of the century, providing a basis for mass consumption and the emergence of national utilities.

The growing social importance of electricity triggered legislation and regulation. Shortly after the turn of the century, the new technological development of electricity and its perceived character of a natural monopoly led to public intervention, firstly through private franchised monopoly, and then gradually in many cases to full public ownership.

The dominant model for electricity-sector organisation was now characterised by the conceptualisation of electricity as a public infrastructure and part of the process of nation-building. It was a basic element in industrial policy and an important service to be made accessible to all consumers. In this period, large investments were therefore made in electricity systems, and subsidies were often made available to expand electrification to remote rural areas.

The post-World War II reconstruction put the electricity sector in focus as a major factor for modernisation, and again pushed the electricity-supply industry on to the political agenda of several European countries, strengthening the public ownership position. The development of nuclear and other large-scale technologies in many cases created a symbiotic relationship between utilities and electrotechnical suppliers, giving rise to some of the most powerful techno-industrial clusters in Europe. The power centre of these clusters varied. For several countries, the purchasing of turn-key power stations led to a run-down of utility design and construction departments, whereas utilities in other countries maintained their own technological competences in this field.

The perception of electricity as a public infrastructure with natural monopoly characteristics, and the organisation of the sector into publicly owned or franchised institutional monopolies’ led to a build-up of powerful sectoral configurations, dominantly operating as closed national systems. Coordination between these systems was undertaken on a voluntary basis, organised by sector associations like the UCPTE and NORDEL. Trade between them was largely a matter of marginal exchange of surplus to balance nationally independent production systems, and the exchange prices were usually based on short-term marginal costs. Depending on the resource base and national institutional traditions, some countries centralised the electricity system at the national level, whereas others anchored the electricity system organisationally at the regional and local levels. In all cases, however, the mandated public organisation or franchising agent had exclusive monopoly rights to supply customers located within its domain.

II The European Variations

However, the commonality of the basic principles underlying the electricity supply industry did not prevent considerable diversity in the systems which existed up to the time of the current wave of restructuring. This diversity reflected factors such as political traditions and natural-resource endowments. The various European electricity supply industries differed in many important respects, for example, technology and fuel choice, ownership, and degree of vertical integration (see Table I.1). For example, The Netherlands stands out as the only case where the operation of the high-voltage transmission network was carried out by a company other than the dominant generator.

The German system (excluding the system in operation in the former GDR, which was run along very different lines) is particularly complex, and is best seen as eight separate but federated systems. Some were fully vertically integrated, while in others, separate local distribution companies operated. Some systems were dominated by coal, some by nuclear, and some were mixed. Public ownership was also at a number of levels, from the Länder which comprised the Federal Republic down to small local authorities.

However, despite this variety, the industries almost invariably operated under four shared assumptions which shaped the way the industry did business. First, all costs incurred could be recovered from consumers or tax-payers. Second, there was a close identity between utility policy and national government policy, regardless of the ownership of the utilities. Third, electricity was regarded not as a normal consumer good, but a service which should be available to all at affordable prices. Fourth, electricity supply systems were largely nationally self-contained and operated by companies which had electricity as their prime and usually their sole business.

These four assumptions had very powerful consequences for planning and decision-making in the electricity supply industry. New investments were effectively underwritten by the consumer and therefore carried little economic risk to the utility despite the huge scale and technical complexity of much electricity supply industry plant. Electricity industry decisions on investment were justified on protecting the long-term interests of consumers and carried with them the implicit authority of government, and could not readily be deflected by third parties. Electricity industry decision-making used as its point of reference international electricity industry experience rather than general industrial experience. However, this international perspective was seldom used to compare the performance of national systems, and differences in consumer prices were generally assumed to be the consequence of differing national resource endowments rather than differing efficiencies. The international electricity supply industry can therefore be likened to a gentleman’s club, where each member would abstain from invading the other’s territory, and where members with common interests but different circumstances could meet to share experiences.

III Recent Challenges to the Electricity Systems

The traditional electricity system has, since the early 1970s, been subject to increasing pressure in most industrialized countries, with dramatic implications for restructuring and change. The pressure comes from several sources, ranging from the rise of environmentalism, market forces and changes in the overall demand for electric energy, to technological innovation.

The pressure exerted by ecological problems has been increased since the beginning of the 1970s, making the electricity supply industry a subject to an ecologically motivated reevaluation. This process has involved demands for (1) clean air protection motivated by health hazards and later by forest damage, (2) resource conservation which appeared in the aftermath of the oil crisis to justify the objectives of energy saving, (3) landscape preservation in view of open-cast coal mining or large-scale hydroelectric power stations, (4) radiation protection, which became an issue in Europe especially after Chernobyl, and (5) climate protection, which in the late 1980s introduced new aspects of energy conservation to reduce CO2 emissions.

The climatic risks...