Failure of Network Industry Liberalisation in Eastern Europe: The Case of Electricity Liberalisation in Ukraine

By Illiushchenia, Katharina | Journal of Comparative Politics, January 2015 | Go to article overview

Failure of Network Industry Liberalisation in Eastern Europe: The Case of Electricity Liberalisation in Ukraine


Illiushchenia, Katharina, Journal of Comparative Politics


1 PROBLEM SETTING

Through the mid-1980s, the monopoly was the dominant form of organisation for national electricity markets all over the world. Vertically integrated monopoly companies, usually owned by states, controlled all spheres of electricity production, transmission, distribution and supply (Figure 1). In some national electricity markets, independent power producers and sales companies existed, but they sold or purchased electricity from state monopoly companies through special agreements and were not allowed to set their own prices. Electricity tariffs for consumers were fixed by state regulatory bodies. Such consensus on the monopolistic organisation of the electricity industry was based on two core assumptions. It was believed, first, that state ownership is necessary to provide the appropriate mechanisms for control and finance and, second, that the monopoly is an efficient means to preserve and develop electricity networks and to secure energy supplies (Helm 1993, 411).

Since the 1980s, however, two of the most significant trends in world economic policy have been the deregulation of infrastructure sectors, such as electricity, telecommunications, aviation and railways, and the replacement of monopolies with competitive market models. The major philosophy behind the deregulation of traditionally monopoly-dominated infrastructure sectors is the economic belief that free competition between infrastructure companies will lead to large efficiency gains, lower prices for all groups of consumers, high economic growth, increased welfare and, as a result, a more competitive position for national companies in the globalised international economic arena. Hirsh (1999), in his study of the deregulation of the American electricity industry, claims:

By the end of the century, however, technological change discredited the central tenets of the consensus and contributed to the downfall of utility elites. Change manifested itself as technological stasis, the end of previous trends towards increasing thermal efficiency and economies of scale in standard generating hardware. By itself, the reversal of historical patterns would not have contested the rationale for utilities' natural monopoly status unless other producers could generate electricity at comparable costs. But in other embodiment of technological change, independently owned cogeneration units and small-scale renewable energy facilities evolved rapidly, and they produced electricity as cheaply (or more cheaply) than could utilities. (Hirsh 1999,262)

Deregulatory reform of electricity industries includes three main steps: a) the break-up of vertically integrated monopolies; b) the privatisation of generation (and sales) companies; and c) the introduction of competition rules in the electricity market The introduction of competition is achieved primarily by separating transmission and generation activities (vertical restructuring) and selling generation assets to a number of private companies in order to introduce competition into the generating sector. Such an electricity market with competition in the power generation sector is called a single buyer market In this model, the transmission, distribution and supply sectors of the electricity market remain bundled and merged in one monopolist, vertically integrated company that normally is state-owned. The subsequent stages of the reform include the introduction of competition into the wholesale and retail markets (Figure 2). The introduction of competition generally has been limited to power generation activities and the supply of electricity, while maintaining transmission and distribution power grids as natural monopolies has been widely accepted. However, it is worth pointing out that the monopoly features in the electricity sector arise from technological factors that are constantly developing and that, in the future, these changes might lead to opening up the transmission and distribution power grids to competition (Mittra, Lukas and Fells 1995, 690). …

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