Electricity market deregulation is driven by the belief that subjecting the sector to competition and other market forces will eliminate waste and inefficiencies in the traditional regulated monopoly model and generate cost savings for consumers.  How electric market reform is accomplished can create significant opportunities or barriers for the implementation of renewable energy technologies.  

The electricity market can be reformed in many different ways, but two of the main approaches are unbundling and retail competition.   Only a general description is provided here to support the discussion of its impacts on the implementation of grid-connected renewable energy systems.

Unbundling is to restructure the traditional, vertically-integrated utility into its generation, transmission and distribution components.  This opens the way for “wholesale competition” or competition between the utility generating company and independent power producers for the sale of electricity to utility distribution companies and large industrial customers.  The utility transmission company provides service to all customers.

Increased competition

The traditional integrated utility monopoly often has little interest in renewable energy, especially small and decentralized technologies, even if they are cost-effective.  Therefore, a positive impact of electricity market deregulation is the creation of independent power producers (IPPs), which increases opportunities for the development of renewable energy projects.  However, the other major impact of electricity market deregulation has been the increased pressure to measure all supply technologies only by the bottom line commercial price.  The new competitive market place does not factor in the environmental, energy security, price-stability and job-creation benefits that renewable energy systems provide, and so they are further disadvantaged by these reforms unless new rules and incentives are developed as part of the reform process to take account of these societal benefits.

Development of future technologies

In the United States, one outcome of unbundling the traditional utility into its generation, transmission and distribution components has been the loss of the “social compact” where by the regulated monopoly utility carried out research, development and demonstration of new technologies, many of which were renewable energy technologies, on behalf of (and at the expense of) all its consumers.  The unbundled generating company no longer has this social responsibility and has no incentive to support such work in the new competitive environment.

Ways to incorporate renewable energy systems

The need to support the development and the market implementation of renewable energy systems (and energy efficiency) as part of electricity market deregulation has been recognized in some jurisdictions that have promoted electric sector reform.  The solutions that have most often been implemented include:   system benefit charges, renewable portfolio standards, feed-in laws, small power producer programs, net metering laws and various tax incentives.

Nicaragua¹ is an example of how electricity market deregulation (power sector reform) can be biased against investment in renewable energy.  The country has over 3000 MW of economically viable renewable energy resource potential - five times higher than national power capacity in 2004. Many of these renewable energy resources (geothermal, hydropower and wind) can supply power at a lower risk-adjusted cost per kWh than conventional power plants, provide price stability, save foreign exchange, generate employment, increase GDP, and reduce the country exposure to the risk of potentially increasing fuel prices. However, in spite these facts, the share of renewable energy supply in national power production has fallen during the last twenty years, and power sector reforms have been incapable of promoting the development of new renewable energy projects.

A strategy to promote renewable energy in the reformed electric market of Nicaragua includes:

• Reducing long-term power purchase risks, in this case caused by a financially weak monopsony purchaser;
• Improving power purchase prices using financial portfolio theory (the risks of fuel price uncertainty);
• Implementing market facilitation activities, such as streamlining approval processes and procedures and providing upfront incentives;
• Strengthening local financial markets to enter the power sector; and