Electricity sector unbundling requires careful planning and pragmatic implementation, coupled with the openness to consider and the ability to adjust the approach to account for changing conditions. A review of literature and experience to date suggests that there are several key factors that aid the transition process, and help to create properly functioning competitive markets and regulated utilities:
- commitment to reforms and abstaining from politically expedient changes: a key barrier to success is the unwillingness to commit to reforms and reluctance to expose customers to electricity price volatility. These concerns exhibit themselves through price-protection schemes on the user side (e.g., default services at regulated rates) or price caps of the wholesale market on the generator side;
- clear path for the restructuring program with well-defined milestones: defining a clear path for reforms with associated milestones allows investors to prepare for the changes in the marketplace. This creates an environment that facilitates investments in new generation capacity during the transition stage, where the market signals may not be fully transparent, or may not be sustained long enough to indicate the opportunity for private sector involvement;
- careful planning that includes proper tools to facilitate the transition: the transition process (a period when stakeholders are starting to familiarize themselves with the new marketplace realities, and new mechanisms and relationships are being established) is a critical stage in the restructuring process. The availability of transitional mechanisms is an important factor in ensuring the smooth and gradual change in the market dynamics, that mitigate the risks that are difficult or impractical to hedge;
- avoiding regulatory capture: creation of a strong independent regulator is necessary for a well functioning electricity system. The regulator needs to have skills in both price regulation for the monopoly aspects of the sector, and competition regulation for the parts of the value chain where competition is feasible;
- creation of competitive markets that consist of multiple players and minimal regulatory barriers to entry: creation of a competitive market with a sufficient number of players and minimal regulatory barriers to new entry is equally important for both generation and retail supply markets;
- availability of hedging instruments: a wholesale market without the availability of proper hedging instruments is likely to test the stability of the market in the event of exogenous events. Hedging instruments should provide opportunity for sellers and buyers to limit their exposure to price volatility and help stabilize the prices when the market is experiencing extreme events (for example, during extreme cold or hot temperatures and transmission and power failures); and
- be attentive to new technologies and how they are changing the industry: the growing installation of distributed energy resources (“DERs”) and the potential for increased use of electricity in transportation (electric vehicles or “EVs”) along with the declining cost of battery storage are all factors that will potentially change the organization of the sector.
