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Deregulation of Power System

Deregulation of an industry involves removing regulations that control prices and opening the industry to market competition. True deregulation does not mean removing all rules, but rather establishing a new framework with rules that allow competitive market forces to determine prices and allocation of resources. There were several factors that led to deregulation of the power industry in the 1990s, including concerns about the lack of incentives for efficiency under regulated monopolies, and technological changes that made smaller power plants and independent power producers more viable. Deregulation aims to introduce competition at various levels of the industry to potentially reduce electricity prices while providing more choices and better service for customers.

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168 views2 pages

Deregulation of Power System

Deregulation of an industry involves removing regulations that control prices and opening the industry to market competition. True deregulation does not mean removing all rules, but rather establishing a new framework with rules that allow competitive market forces to determine prices and allocation of resources. There were several factors that led to deregulation of the power industry in the 1990s, including concerns about the lack of incentives for efficiency under regulated monopolies, and technological changes that made smaller power plants and independent power producers more viable. Deregulation aims to introduce competition at various levels of the industry to potentially reduce electricity prices while providing more choices and better service for customers.

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What is deregulation or restructuring of an industry?

From the name, one can sense discontinuation of the framework provided by the regulation.
In other words, deregulation is about removing control over the prices with introduction
of market players in the sector. However, this is not correct in a strict sense. An
overnight change in the power business framework with provision of entry to competing
suppliers and subjecting prices to market interaction, would not work successfully. There
are certain conditions that create a conducive environment for the competition to work.
These conditions need to be satisfied while deregulating or restructuring a
system. Sometimes, the word deregulation may sound a misnomer. Deregulation does
not mean that the rules wont exist. The rules will still be there, however, a new framework
would be created to operate the power industry. That is why the word deregulation finds
its substitutes like re-regulation, reforms, restructuring, etc. The commonly
used word in Europe is liberalization of power industry; deregulation is a more popular
phrase in US. If the power industries worked successfully with the regulated
monopoly framework for over 100 years, what was the need for deregulating or changing
the business framework of the system? There are many reasons that fuelled the concept
of deregulation of the power industry. One major thought that prevailed during the early
nineties raised questions about the performance of monopoly utilities. The takers of this
thought advocated that monopoly status of the electric utilities did not provide any
incentive for its efficient operation. In privately owned utilities, the costs incurred by the
utility were directly imposed upon the consumers. In government linked public utilities,
factors other than the economics, for example, treatment of all public utilities at par,
overstaffing, etc. resulted in a sluggish performance of these utilities. The economists
started promoting introduction of a competitive market for electrical energy as a means
of benefit for the overall powerector. This argument was supported by the successful
reform experiences of other sectors such as airlines, gas, telephone,
etc. Another impetus for deregulation of power industry was provided by the
change in power generation technology. In the earlier days, cost-effective power
generation was possible only with the help of mammoth thermal (coal/nuclear)
plants. However, during the mid eighties, the gas turbines started generating cost effective
power with smaller plant size. It was then possible to build the power plants near the load
centers and also, an opportunity was created for private players to generate power and sell
the same to the existing utility. This technology change, supposed to have
provided acceleration to the concept of independent power producers, supported the
concept of deregulation further. This technology change is supposed to have provided
acceleration to the concept of independent power producers. This further supported
concept of deregulation. This was specifically true where the financial losses were
apparently high which was prevalent in some of the developing countries. It
should be noted that these are the indicative or major reasons for introducing the concept
of deregulation in power industry. There are many other reasons as well. One of the
important reasons is the condition under which power systems were regulated, did not
exist any more. There was no wind of skepticism about the electrical technology and all
the initial investments in infrastructure were already paid back. Further, the deregulation
aims at introducing competition at various levels of power industry. The competition is
likely to bring down the cost of electricity. Then, the activities of the power industry would
become customer centric. The competitive environment offers a good range
of benefits for the customers as well as the private entities. It is claimed that some of the
significant benefits of power industry deregulation would include:

1. Electricity price will go down: It is a common understanding that the competitive


prices are lesser than the monopolist prices. The producer will try to sell the power
at its marginal cost, in a perfectly competitive environment.
2. Choice for customers: The customer will have choice for its retailer. The retailers
will compete not only on the price offered but also on the other facilities provided
to the customers. These could include better plans, better reliability, better quality,
etc.
3. Customer-centric service: The retailers would provide better service than what the
monopolist would do.
4. Innovation: The regulatory process and lack of competition gave electric utilities
no incentive to improve or to take risks on new ideas that might increase the
customer value. Under deregulated environment, the electric utility will always try
to innovate something for the betterment of service and in turn save costs and
maximize the profit.

The deregulation of the industry has provided electrical energy with a new dimension
where it is being considered as a commodity. The commodity status given to
electrical power has attracted entry of private players in the sector. The private players
make the whole business challenging from the system operators point of view, as it now
starts dealing with many players which are not under its direct control. This calls for
introduction of fair and transparent set of rules for running the power business. The
market design structure plays an important role in successful deregulation of power
industry.

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