AN INTRODUCTION TO ELECTRICITY GENERATION:A BRIEF POLITICAL DIVERSION

A BRIEF POLITICAL DIVERSION

During the last years of the 19th century, when the technology was in its infancy, the generation of electricity was seen as one more opportunity for entrepreneurs and joint stock companies to make money. After all, electricity was not unique. There were other means of delivering energy; district heating was already common in the United States and in some European cities, while hydraulic power was sold commercially in cities like London. Gas, produced from coal, was also sold for lighting and other commercial uses. As a result, the early history of the electricity industry was one of small, privately owned companies competing with other energy companies. Gradually, however, the distribution of electricity rendered most other ways of distributing energy across a network obsolete.

In the 20th century, as the primacy of electricity became obvious, the distribution of electricity gradually came to be seen as a public service—that is, a public utility. Like water, sewage, and, later, the gas supply, electricity was needed to operate a modern civilization. In much of the world, the electricity industry was absorbed by government and became publicly owned. In countries such as the United States where this did not happen, legislation was introduced to govern the supply. In the vast majority of countries, however, national, vertically integrated utilities were established. Even in the United States, large utilities generated, transmitted, and distributed power.

Nationalization was a pragmatic solution, but it could also be seen as part of a socialist or left-leaning ideology that favored central government over independent business. In the late 20th century, western political ideologies began to shift, particularly among the more right-leaning political parties. Government ownership of industry, including the electricity industry, began to be seen as unnecessary and uneconomic. A move began to convert publicly owned utilities into privately held companies. Alongside this, utility legislation was relaxed to open electricity markets to competition.

Returning a national electricity company to private ownership was not easy.

Power stations had to be sold individually, to a number of different companies, to create market competition. Transmission and distribution were natural monopolies; these too were sold to private companies, but these companies had to operate within rules set by the government. Then a complex electricity market had to be established in which the competing generating companies could sell their electricity.

In spite of the complexity, by the beginning of the 21st century liberalization had become a global phenomenon. A few centralized governments still retained full control over their electricity industries, but most paid at least lip-service to the concept of liberalization. The result was both successes and failures. California, for example, recorded a dramatic failure when liberalization resulted in a virtual breakdown of its electricity supply system, with almost catastrophic consequences. The cost of electricity in California rose dramatically as a result. Elsewhere prices fell after liberalization.

Private sector ownership of the electricity industry is now the predominant global model. However, it is not without its drawbacks. If state control of the electricity industry was seen to be overbearing and too rigid, a liberalized industry can seem to have too much freedom. Economic rather than political considerations become paramount.

In the United Kingdom during the 1990s the result of liberalization of the electricity system was a rush to build gas-fired power stations because they were cheap and, when natural gas was cheap, they were the most economical source of new generating capacity. However, when gas prices rose dramatically, these plants became uneconomical, and by the end of the decade plants were being taken out of service. A centrally planned electricity supply system would probably have adopted a more balanced and diverse approach to increasing generating capacity.

Liberalization also makes government energy policy more difficult to implement. Renewable energy offers a good example. A government that wants to increase the proportion of electricity generated from renewable sources can- not simply pass an order down the line to its national utility. It must use taxes and systems of allowances and penalties to encourage energy suppliers to make the choices it wants. However, generating companies may simply chose to pay the penalties if that is the most economically attractive option. In that case the desire of government is ignored.

Given such difficulties, it is arguable that the balance has swung too far in favor of market forces in the electricity sector. Competition, the whole basis for market economics, can be extremely limited in some of these electricity mar- kets. The structures that need to be created to turn what looks from most angles to be a natural monopoly—electricity transmission and distribution, for example—into a competitive industry can be artificial and convoluted. In spite of such criticisms, the model has become entrenched.

It seems likely that free-market rules will continue to dominate the electric- ity industry, but it would be foolish to predict that it will be so. It is far from uncommon for one generation to reverse the policies of a previous generation. However, there is no sign of any movement in the opposite direction in the sec- ond decade of the 21st century.

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