The Political Economy of Electricity Market Liberalization: A Cross-country Approach

Abstract

More than half of the countries in the world have introduced a reform process in their power sectors and billions of dollars have been spent on liberalizing electricity markets around the world. Ideological considerations, political composition of governments and educational/professional background of leaders have played and will play a crucial role throughout the reform process. Adapting a political economy perspective, this paper attempts to discover the impact of political economy variables on the liberalization process in electricity markets. Empirical models are developed and analyzed using panel data from 55 developed and developing countries covering the period 1975-2010. The research findings suggest that there is a significant negative relationship between electricity market liberalization and the size of industry sector, meaning that countries with larger industry sectors tend to liberalize less. Also, we detect a negative correlation between polity score and power sector liberalization, that is; it cannot be argued that liberalization policies are stronger in more democratic countries. On the other hand, our results imply that countries that receive foreign financial aid or assistance are more likely to liberalize their electricity markets. In OECD countries, single-party governments accelerate the reform process by reducing public ownership and vertical integration. Moreover, we detect a negative relationship between the years the chief executive has been in office and the reform progress in OECD countries. Furthermore, we identify a decrease in vertical integration in electricity industry during the terms of parties with "right" or "left" ideologies in OECD countries. Additionally, professional and educational background of head of executive branch (prime minister, president and so on) seem to have very significant impact on reform process in OECD countries, but this is not the case in non-OECD countries. Leaders with a professional background as entrepreneurs speed up electricity market liberalization process in OECD countries while those with a background as economists slow it down. As for educational background, the reforms seem to progress slower in OECD countries if the head of executive has an educational background in economics or natural science. As a final point, the study suggests that EU or OECD membership, the existence of electricity market reform idea, population density, electricity consumption, income level, educational level, imports of goods and services (as % of GDP) and country specific features have a strong correlation with liberalization process in electricity markets.

Reforming the power : an institutional analysis of power sector reforms in Pakistan

“…Electricity prices have increased due to enforcement of electricity taxes and adoption of the European Emission System on permits. However, illogically, the price hike has been attributed to electricity reforms which has also reduced admiration for reforms in the region (Erdogdu, 2013b). Amundsen and Bergman (2006) argue that factors that have been key to the comparatively successful electricity reforms in the power sectors of the Nordic countries are (a) adoption of a simple but comprehensive market design, which became possible due to the massive share of hydroelectricity (b) weakened market power due to formation of a well-integrated regional market in the form of Nord Pool (c) strong political commitment from the participating countries for a market based system (d) unconditional participation by the power industry in the market mechanism for the sake of public service due to heavy involvement of the public sector companies in the power sector.…”

“…MW have procured electricity from IPPs without any sort of unbundling, whereas 28 of 39 countries with large power systems (between 1000-5000 MW) have allowed Countries having more dependence on foreign aid or assistance tend to reform more (Erdogdu, 2012).…”

“…In addition educational level and background of utilities heads also impacts on the level of reforms (Erdogdu, 2012).…”

“…Institutional change of an economic sector requires changing the basic rules for governing transactions, altering existing organizational structures and creating new structures to meet the transactional requirements of a new framework (Bhattacharyya, 2007). By the early 1980's, poor performance of vertically integrated electricity sectors had motivated many countries (developed and developing) to reform their power sectors towards a market oriented institutional framework (Bacon and Besant-Jones, 2001, Erdogdu, 2012, Jamasb, 2002. Post-reform evaluations reveal that many reforming countries (mostly developing) have not made major improvements to the performance of their power sectors (Nagayama, 2007, Jamasb, 2006, Jamasb et al, 2004, Kessides, 2013.…”

“…Negotiated Third Party Access (nTPA) was suggested for transmission access in this directive. According to Jamasb and Pollitt (2005) and Pollitt (2009) (Erdogdu, 2013b).…”