Competition is a means to an end, not an end unto itself. When examining the electricity sector value chain, policymakers need to ask themselves not only where competition can be introduced, but whether it should be. Competition is intended to provide consumers with the lowest sustainable long-term prices. Properly structured markets improve risk allocation, making producers responsible for the consequences of poor decisions.
However, competition requires an institutional infrastructure, just as regulation does. Although the benefits from improved incentives compatibility under competition may be large, they need to be balanced against both the costs of transition and the costs of maintaining (and nurturing) competition. Even if theoretically possible, competition provides fewer benefits relative to the traditional cost of service model in small markets, countries at very low levels of economic development, or specific niches of the electricity sector value chain.
It is important to note, however, that competition need not mean only wholesale energy market competition in which spot markets produce prices in five-minute intervals every hour of every day. For example:
- competition may also mean competition by generators for long-term contracts with an existing utility, even if a spot market does not exist;
- at an even more micro level, it may mean simply assuring that the utility contracts out for as many goods and services as possible, rather than doing everything in-house, so as to benefit from third-party economies of scale; and
- self-generation using DERs also serves as a form of competition; if delivered prices exceed the cost of self-generation, customers will make an assessment of the relative reliability benefits and costs and may fully or partially disconnect from the system.
