“At first the life of man on earth was happier than it is now, and then misery and discontent gradually crept in…” Most of us know the story (although versions vary) of Pandora’s box from Greek mythology. Pandora, “all gifted”, who gave in to curiosity and lifted the lid of a box, only to release all the ills of mankind. Electricity policy makers around the world must now be feeling that, through deregulation, they have opened their own Pandora’s box and are now trying to find a way of putting some of those ills back in the box.
It may have been a slight overstatement but at this year’s Power-Gen Asia, Robert Edgell, president of Edison Mission Energy’s Asia Pacific division said: “The industry has been damaged through this [deregulation] experimentation. It’s a galactic disaster.” Certainly there has been a growing feeling that deregulation is not necessarily a good thing for the electricity industry but it was probably the first time that anyone has stated it so strongly in public. Just hours earlier Edison, like many US developers, had become the victim of a ratings downgrade. And with a Moody’s analyst as one of Edgell’s co-panellists at one of the sessions, Edgell was in no mood to mince his words.
According to Gary Lau of Moody’s Investor’s, globally ratings have been going down with some 83 per cent of companies being downgraded compared to 17 per cent of upgrades. While the ratings agencies have been accused of over-reacting to the trading scandals of the US, no one can disagree that they are correct in their assessment that investing/operating in the power business has become riskier than in the days of the regulated monopolies.
“The biggest problem,” as Edgell put it, “was when companies started pretending they could trade electricity like pork bellies. Now there is too much price volatility which creates boom and bust. People are going out of business and that is not good for the industry.” Being anti-deregulation was seemingly an odd stance for an independent developer. But Edgell explained: “A well-run regulated utility is difficult to beat. You can deregulate but you need to be careful on the market design, fuel mix etc. You need to retain some government planning. It’s like the airline industry where you need someone paying attention to safety. Only New Zealand has come close to a deregulated market that works well.”
And so in the wake of California and Enron, it seems that moves are underway in an attempt to bring some form of control to an experiment that has not gone quite according to plan.
The UK, one of the pioneers in deregulation, is ready to make sweeping changes to NETA introduced just last year. The plan is to replace NETA with a mechanism that is more conducive to long-term security of supply and to renewables. Under NETA, wholesale power prices have plummeted 40 per cent, making it uneconomical for many generators to operate plant. Now the recent problems encountered by nuclear operator British Energy have finally forced the government to review NETA. A new arrangement, called BETTA (British Electricity Trading and Transmission Arrangements), is central to a government White Paper on energy policy which is due for delivery this December. According to Datamonitor, it is likely to recommend the re-introduction of capacity payments, encouraging generators to maintain reserve margins. The changes will come too late to save TXU Corp’s UK operations. The US company was recently forced to sell its UK power generation business because of the slump in wholesale prices.
Meanwhile in the US, the future of electricity reform is at a crossroads (see “A market for the future” in this issue). At the end of July this year, the Federal Energy Regulatory Commission approved rules for a Standard Market Design (SMD). The SMD is said to represent a framework based on lessons learned from the disaster of California as well as the success of Pennsylvania.
So it seems as if deregulation with an element of state/government planning as described by Edgell may be the way forward. In the special “Question Time” session at Power-Gen Asia, China was put up as a model that is taking a careful approach to sector reform. It is putting its transmission system in place and will retain a degree of government involvement. As a person well-positioned to comment on China, Andrew Brandler, CEO and managing director of CLP Holdings Ltd said: “Privatization and deregulation are not enough to ensure delivery of an essential product such as electricity. Ninety-eight per cent of China’s population has electricity – achieved the old fashioned way.”
It may be too late to go back to the ‘old-fashioned’ way and in fact it may not even be desirable. But all is not yet lost. The Greek myth continues: “…and Pandora hastened to replace the lid but alas the whole contents of the box had escaped. One thing excepted which lay at the bottom and that was hope. So we see at this day, whatever evils are abroad, hope never entirely leaves us.”
Here’s to hoping we get it right, eventually.