Electricity liberalization

Electricity liberalization refers to the liberalization of electricity markets. As electricity supply is a natural monopoly, this entails complex and costly systems of regulation to enforce a system of competition.

The standard model for electricity liberalization is the "British model", after the British system which began in the late 1980s with the privatization and vertical de-integration of the UK electricity industry. At a cost of over $3bn, a system of competition was developed to auction spare capacity through a central system. The risks involved for both generators and distributors have led to vertical re-integration.

Liberalization of electricity tends to substantially benefit large consumers (mainly industrial users), but benefits for domestic consumers compared with a public monopoly or a regulated private monopoly are questionable. There are also doubts over whether the system can ensure long-term security of supply through providing sufficient incentives to begin building generation capacity in time for when it is needed.

In the European Union, electricity markets are governed by a Europe-wide directive on liberalization. In 2003, the European Commission introduced a new Electricity Directive (EC/2003/54/EC) with much stronger requirements on competition.

See also


  • Steve Thomas (2004), Electricity liberalisation: The beginning of the end, PSIRU, University of Greenwich

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