Since the 1990s, there has been an ongoing debate about the liberalisation of European energy markets. The sweeping overhaul of the British energy system, which was launched with the 1989 Electricity Act[1], remains the subject of much discussion 26 years later. At a time when the EU is opening up energy markets to competition[2], many lessons can be drawn from what has been achieved in the UK.

The “British model” for energy market reform

The UK, under the impetus of Margaret Thatcher and during her third and last term as Prime Minister, became the first country in the world to completely revamp its energy system. The government argued that the reform would empower consumers by opening up the market to competition and started implementing policy in 1989. The reform was three-pronged: privatisation, liberalisation, de-integration. The electric grid, previously unified under the aegis of the Central Electricity Generating Board (CEGB), gradually ceased to be under state control. In 1990, 100% of transport and distribution grids were privatized. The following year, 60% of production facilities (nuclear excepted) were put up for sale. The reform quickly bore fruit: between 1990 and 1995, operating margins went up by 167% in production, 60% in transport and 99% in distribution[3].

With state control giving way to market competition, the government relinquished its responsibility for strategic choices (generation capacity planning, choice of fuels and sites) to the private sector. The ensuing synergies caused a gradual de-integration of the British electric grid. The CEGB was split up into five independent companies while new entities joined the market, which caused a horizontal market segmentation, thus sustaining the newly established competition. The vertical fragmentation of the production and distribution chain made the British grid more flexible.

Emergence of a “semi-public sector”

Although the liberalisation of energy grids is its most distinctive feature, the British model is not completely exempt from public control. Legislators passed stringent regulation to retain oversight of this strategic sector. Transport and distribution are therefore subject to a set of rules[4] ensuring supply obligation, continuity of service and equal treatment of users. Besides, public authorities have oversight over prices through an original pool-based system which helps regulate market prices on a daily basis[5].

This energy overhaul did come at a high social cost, especially in the mining sector, but it also yielded significant improvements. The reform not only provided more flexibility through de-integration and fostered the emergence of a corporate culture focussed on cost optimization, but it also exerted a strong downward pressure on prices, which decreased by 22% between 1990 and 1998[6]. The pool-based system prevented manipulation and gradually ensured that price drops were passed on to households

Lessons to be drawn

Current and future reforms are in many respects different from the British experience. National frameworks gave way to an EU-wide strategy, while energy transition goals now rank high among policy priorities.  Nevertheless, efforts to shape future energy grids can and must take stock of what has been done in the UK. De-verticalization, also known as unbundling, remains an objective for many countries where the energy system is still characterized by a pyramid-like structure where “large production units generate alternating current distributed to households as low-voltage electricity”. Decentralization is therefore a key component of tomorrow’s 3.0 grid and smart management of consumption and production equipment.

However, rather than completely replacing preexisting standards, the establishement of a 3.0 grid should follow a gradual, long-term, approach. Whereas the British government privatized and de-verticalized the entirety of its grid within a few years, it is possible (and preferable) that the older centralized structure should coexist with decentralized innovations. The benefits of both systems could be combined for a certain amount of time, while minimizing the social costs entailed by an abrupt transformation of the industry.

This being said, it must be noted that transforming the energy system raises the question of the role of the state. Although the opening up of the sector to competition remains a priority, energy transition goals are of paramount strategic importance. 26 years after its inception, the British semi-public approach is a source of inspiration for creating a new system that combines public-private synergies, efficiency, long-term approach and strategic coherence. At a time when a European energy policy is emerging – and in the run-up to the COP12, which sets energy transition as a top priority – policy makers must draw lessons from the past in order to set standards for the future.

[1] http://www.legislation.gov.uk/ukpga/1989/29/contents

[2] The first directive was adopted in 1996, the latest in 2009 (available here)

[3] Cf GLACHANT Jean-Michel, « L’Electricité en Grande Bretagne : une industrie privée et un service public partiel » in Sociétés Contemporaines n°32, 1998, p.99

[4] Idem p.102

[5] Cf. REVOL Henri, Rapport n°439 de commission d’enquête au Sénat, 2ème partie, « Les Britanniques tirent les leçons d’une libéralisation vieille de presque dix ans » 1998 (available here)

[6] World Trade Organization, Social Effects of Energy Liberalisation : The UK Experience, 2000, (available here)