Blackouts: do liberalisation and privatisation increase the risk?
Blackouts: Do liberalisation and privatisation increase the risk? by Steve Thomas and David Hall, PSIRU, University of Greenwich, December 2003
Electricity blackouts can be serious events that cause human suffering and economic disruption. Even in the best-run systems, there will be a risk of black-outs because of human error and extreme weather conditions. However, it is important to designate a security standard that strikes a good balance between security and cost and that this standard is maintained. For example, in Britain, the standard for generation is that there should be enough generating capacity that there should only be blackouts due to shortage of generation in 8 winters per 100 years. There is no performance standard for the networks despite the fact that blackouts due to network failure are much more common than those due to generation shortage.
The traditional, publicly-owned, monopoly cost-plus system was generally effective at meeting the required security standard. Because, for private companies, profit was regulated and for publicly owned companies, profitability was not the key objective, there was no incentive not to spend enough money on investment and maintenance to ensure the designated standard was met. Companies could be given a duty to ensure the security of the network and to ensure there was enough generation capacity.
This system was criticised as being inefficient because there was no profit-driven motive to minimise costs: any savings the company made were passed on to consumers. The liberalised model addresses this problem by making generation a competitive activity and by introducing incentive regulation for the monopoly network. Under incentive regulation, companies can keep cost savings as extra profit. It was assumed that a combination of market forces for generation and regulated performance targets for networks would be sufficient to prevent deterioration in system reliability. There are serious grounds to suggest this will not be the case. Activities in the electricity industry are now being bought and sold frequently and there must be a risk of a ‘take the money and run’ philosophy. Cutting back on maintenance may not be reflected in poorer performance for several years, by which time, ownership of the facility could have changed more than once. For example, in Britain, the Eastern distribution network has had five owners in only eight years, while ownership of some power stations has changed three or four times in the same period. Currently in Britain, about 40% of the generation capacity is owned by companies that are bankrupt or close to bankruptcy. This is clearly not a recipe for responsible stewardship of long-lived assets.
For a more detailed discussion of the potential problems, it is necessary to consider generation and network activities separately.
See full report attached