The value of generating change
An Enron case study

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Page 2: Energy liberalisation and privatisation

Enron 4 Image 2In the UK, until the mid 1980s, the electricity and gas sectors were government-owned and controlled. British Gas was the vertically integrated monopoly entity responsible for gas transportation and supply; the Central Electricity Generating Board the monopoly entity responsible for electricity generation and high voltage transmission. Twelve Regional Electricity Boards, each with a regional monopoly, were responsible for low voltage transmission and supply to consumers.

During the 1980s, the then-Conservative Government instituted a series of wide-ranging reforms to both of these sectors. British Gas was initially privatised as a vertically integrated monopoly in 1986. Measures to promote competition have since been introduced. The most significant measure has been the voluntary demerger of British Gas’s supply business, now called Centrica plc, last year. Privatisation and liberalisation of the electricity sector began in 1990, but with more stringent measures than in the gas sector. At the outset, monopoly electricity transmission functions have been carried out by separate companies or separately managed parts of a company, and there has been no prohibition on independent companies generating or supplying electricity.

For both sectors at the outset of the reforms, industrial consumers were the only group of consumers who had the right to choose who supplied their energy. The market has slowly been opening up so that soon all residential customers will be able to choose their gas supplier, and towards the middle of 1999, their electricity supplier.

Liberalisation measures have consistently helped create competition, which in turn has provided substantial benefits to all consumers through increased efficiency and market transparency. Competition has led to innovation in technology, risk management products, and reductions in real terms to the price of energy for the consumer. In the near future, much of Europe’s energy market will become open and more competitive, following the natural forces of supply and demand. Consumers of electricity and natural gas will reap the benefits of increased customer choice. However, the transition from structured monopolies to a free market is challenging. The new markets that are emerging favour organisations which are flexible, innovative and willing to take intelligent risks.

Enron | The value of generating change