IEEE Power & Energy Magazine - January/February 2021 - 24

the missing money problem is not an issue anymore, but as we
later discuss, it is far from being among the main reasons for
the short-term market failure to attract sufficient investment.

The Political Will and the Investment Side
The liberalization of traditionally regulated activities was
meant to further efficiency in the operation and planning
of power systems, mainly based on the proper allocation of
risk-management responsibilities between regulators and
stakeholders. It could be expected that market liberalization
of generation and retail could indirectly even improve the
efficiency of the transmission and distribution businesses.
On one side, for example, merchant generation investors
could put pressure on transmission planners to expand the
network in a more efficient way, while on the other side,
more active end users could reveal different values of quality of service, useful to support the planning task of distributors. But there were three main dimensions in which market
liberalization was supposed to significantly improve the
overall system performance: 1) operation (increasing the
efficiency of the economic dispatch, which often had lacked
transparency and, in some cases, was heavily influenced by
diverse political interests); 2) capacity expansion planning,
assuming that market agents would make wiser investment
decisions, or at least, that they would bear the costs of wrong
ones; and 3) eventually, retail as a way to engage end users
in the decision-making process at all levels, as it nowadays is
starting to take place by taking advantage of the development
of distributed energy resources and the Internet of Things.
However, in such a capital-intensive industry, the key
dimension in which competition was expected to bring significant gains was on the generation investment side. Economic dispatch could certainly be improved but, comparatively, no great savings could be expected, and it was, and
still is, unclear which additional benefits retail market liberalization could entail compared to those derived from the
implementation of well-designed, sufficient, and not politically interfered regulated end user rates.
Until investment decisions were left to market forces and
since planning errors committed in regulated environments
were paid for by customer tariffs, utilities had weak incentives
to make efficient decisions. Examples of erroneous-planning
investment decisions under traditional regulation were not
difficult to find. Some examples are the nuclear development
plan in Spain in the 1980s, later followed by an expensive
moratorium imposed by the government (25% rate surcharge
for 25 years), and the large hydro projects undertaken in Latin
American countries that overran their budgets and drastically
increased state debt. At the same time, as previously mentioned, publicly owned utilities were unable to stop burning
expensive and inefficient national fuels (such as the autochthonous British or Spanish deep-mine coal).
The alleged key objective of market deregulation was to
take investment decision making out of the hands of governments and give it to market investors. This is one of the
24	

ieee power & energy magazine	

main motivations of the World Bank and other development
banks in certain developing countries. But at the same time,
some other relevant governments wanted to be relieved of
the responsibility of guiding capacity expansion. As previously mentioned, the British government in the early 1990s
was a good example.
However, this construct ended with the advent of initiatives to decarbonize the economy and the planet. The electric power sector is a key lever to achieve this aim. Policy
makers have decided that different rules are needed to pursue a higher-order decarbonization objective.
Take, for instance, the case in the United States, which
includes trans-state short-term energy markets complemented with 1) capacity markets that treat various technologies differently as the methodologies to allocate capacity
credits respond to diverse criteria, 2) renewable portfolio standards at the state level fixing different quotas for
various technologies and time terms, 3) federal production
and investment tax credits, 4) net metering and net billing
state policies rewarding distributed generation in diverging ways, 5) energy storage mandates in force in seven
states as of June 2020, 6) regulated programs to support
nuclear investments (for example, the Clean Energy Standard
implemented in New York), and 7) different out-of-market
demand response programs.
In the European continent, things are not very different. For instance, in Great Britain: 1) a capacity market
was implemented but later suspended in 2019 following the
decision of the General Court of the EU; 2) renewables are
supported through feed-in tariffs, a contracts for difference
scheme, and a tax regulation mechanism; 3) at the time of this
writing, the carbon price is made up of the EU emissions trading system price and the carbon price support rate, the latter
price set by the British government and largely uncertain after
Britain's exit from the EU; and 4) a RAB model for nuclear
is currently open and under intense discussion. As these two
examples show, mechanisms are not only uncoordinated as
they depend on different institutions at different jurisdictional
levels but also are extremely subject to unexpected changes.
In addition, due to the push on RES and CO2 reduction
objectives and the increase of gas prices in some jurisdictions
(certainly not the case in the United States after the advent
of shale gas), governments started to realize that retail prices
were not going to necessarily decrease as initially expected.
Thus, the initial expectation that political interference was
not going to be a factor cannot be held anymore, and also
the uncertainty linked to the investment decision-making
process is now significantly higher than at the time the liberalization processes started.
As initially mentioned in the enumeration of factors, there
are also some other less relevant factors that are turning liberalization into something more complex. When we expected
mainly gas-fired plants, transmission planning was not perceived as an instrumental problem to allow for competition.
In principle, gas plants could rely on the development of the
january/february 2021
IEEE Power & Energy Magazine - January/February 2021

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - January/February 2021
