Transitioning to Liberalized Energy Markets

About the Project

The workshop series Energy System Modeling provides a forum to discuss the role of models in formulating and analyzing energy policies. The workshop series has been focusing on timely themes that are both technical and policy-relevant. Insights from these workshops are expected to help foster a common understanding among creators and consumers of models, enriching our future research direction.

Key Points

Some countries have successfully navigated the transition to using a free market to provide energy more efficiently, while others are only just embarking on this journey. This transition is a lengthy, costly and complex process. Consequently, lessons learned from their experiences can help improve policy formulation in Gulf Cooperation Council (GCC) countries that are themselves at various stages of the reform process. KAPSARC’s workshop focused on the electricity sector and offered the following policy insights.

Successful reform requires institutions as well as institutional capabilities to manage the transition process, and an adequate market size for a competitive market to function. For example, it is unclear whether the individual GCC members’ power markets are large enough to support competitive trading and if they have developed the institutional capabilities to make it work.

The single buyer model market structure is seen as the way to improve the security and reliability of electricity supply. However, this comes with a risk that power producers may over invest in generation capacity because they are receiving state guaranteed returns on capacity additions, thereby creating long-term fiscal liabilities.

Alternatively, a hybrid reform model that, along with an entity buying a major portion of electricity, allows independent power producers (IPPs) to sell electricity directly to end-consumers through bilateral contracts and a spot market can minimize government intervention and thus fiscal risk. But this hybrid reform model has higher implementation costs.

Reforms in the GCC region have several objectives: improving the power sector’s efficiency, attracting new investments and removing fuel subsidies. The reform agenda in the GCC presents new opportunities, such as intra-regional electricity trading among GCC countries. It also offers challenges, including providing incentives to invest in renewables, managing reliable electricity supply and balancing fiscal budgets.