Deregulation 2.0: Europe And Japan Call For More Competition, Less Regulation In Utility Industry
As federal utility regulators in the United States focus myopically on preventing “the next Enron,” Europe and Japan are busy trying to build the next Google GOOGL +0.57%.
For the first time in well over a decade, efforts to deregulate the electric utility industry and promote greater competition appear to be gaining political support – just not in the United States.
In Europe, Jean-Claude Juncker, the President of the European Commission, has put the promotion of markets and competition in the energy industry near the top of the political agenda. Shortly after Juncker was elected in 2014, he initiated a major program – called “A Resilient Energy Union with a Forward-Looking Climate Change Policy” – to reform the EU’s power system. Distributed generation, prosumers and clean energy are at the heart of this new reform program.
Consider the following quotes taken from a report describing the program’s strategic framework.
Most importantly, our vision is of an Energy Union with citizens at its core, where citizens take ownership of the energy transition, benefit from new technologies to reduce their bills, participate actively in the market, and where vulnerable consumers are protected. To reach our goal, we have to move away from an economy driven by fossil fuels, an economy where energy is based on a centralized, supply-side approach and which relies on old technologies and outdated business models . . . Smart technologies will help consumers and energy service companies working for them to reap the opportunities available on the energy market by taking control of their energy consumption (and possible self-production).
Still more intriguing, the program identifies the need to reform and ultimately eliminate “regulated end user prices.”
[R]egulated tariffs still limit the development of effective competition, which discourages investments and the emergence of new market players. Regulated end-user prices are often used to protect households or even non-household customers from increases in energy costs . . . However, in the long run, these measures harm the interests of the consumers they are meant to help. The Commission will seek the phasing-out of below cost regulated prices . . . and encourage the phasing-out of all regulated prices.
Whether Europe actually follows through on these promises remains to be seen, but the mere fact that efforts to deregulate electricity prices has attracted such high-level political support is by itself remarkable. After all, in the U.S., deregulation is still a dirty word due in large part to the widely-held misperception that Enron caused California’s electricity crisis more than a decade and a half ago.
Meanwhile, in Japan, non-utilities will soon be allowed to compete with utilities for selling retail electricity to residential and small commercial customers for the first time. In 1995, Japan liberalized the sale of electricity for large-scale customers. However, in the wake of the California’s electricity crisis, Japan largely suspended plans to liberalize the electric and gas utility industry.
In 2013, the Japanese government released a study prepared by the Electricity System Reform Expert Subcommittee that explained how previous reform efforts had not affected real change in the structure of the utility industry.
Even after a series of reforms, however, the market structure of de facto monopoly by electric utilities has basically not changed, and competition is insufficient under the current partial liberalization . . . Secondly, the tight demand and supply brought about at the same time as the earthquake disaster revealed the risk inherent in the conventional mechanism of securing supply by means of a large-scale power source under the concept of ‘supplying any amount of power according to demand’ . . . For this reason, efforts on the demand side such as power saving demand response and distributed generation, which were not necessarily sufficient in the past, have come to be depended on as the means to balance demand and supply.
What is so remarkable about these efforts in Europe and Japan is how much they have in common, especially with respect to the virtues of competition over regulation. Promoting competition in the utility industry will enable prosumers, catalyze innovation, drive customer adoption of distributed energy resources, enhance security and reduce and eventually eliminate rate regulation.