Do private sector participation and competition in power markets help in improving electricity sector outcomes?

Power infrastructure is important for economic development and growth. Access to reliable electricity services is associated with economic development and growth through various channels, including the role of electricity in power industrial processes and as a key factor in the production of goods and services in most productive sectors (Burke, Stern, and Bruns 2018; World Bank 2017). Studies also show that electrification is positively associated with employment, firm performance, income, expenditure, and education. The importance of electricity is further highlighted in the Sustainable Development Goal 7 Ensuring access to affordable, reliable, sustainable, and modern energy for all. To improve electricity sector performance and outcomes, many countries have implemented electricity sector reforms with a shift toward a more market-based approach in the 1990s.

Using a new and comprehensive panel dataset across 230 countries and territories between 1989 and 2020, a new working paper (Doumbia 2021) studies the links between power sector reforms that have been implemented and final sector outcomes. The analysis – based on four groups of power markets: Vertically Integrated Utility (VIU) models, single-buyer models, wholesale competition, and retail competition models (figure 1) – finds that the introduction of private sector participation and competition in the power sector is associated with enhanced electricity access, affordability of electricity, and electricity reliability.

How power market structures have evolved across countries?

Market-oriented reforms were pioneered in the 1980s and 1990s by the United Kingdom, Norway, Chile, and the United States and involved policy measures including (a) corporatization and commercialization (b) restructuring or unbundling state-owned VIUs; (c) the establishment of independent regulation; (d) the introduction of independent power producers; and (e) privatization of competitive segments (that is, generation and distribution).

The implementation of these reforms and the resulting market structure vary based on specific country contexts. Since the 1990s, many countries have established more competitive power markets, albeit at different paces. In 1989, about 90 percent of countries and territories followed a state-owned VIU model, but this dropped to 35 percent in 2020 (figure 2). Many countries have adopted one of the two variants of the single-buyer model. In 2020, about 21 percent of countries and territories had adopted a model whereby the single buyer owns and controls some generation assets – an increase from less than 2 percent of countries in 1989. Currently, about 12 percent of countries have adopted an unbundled single-buyer model, up from fewer than 1 percent in 1989. Power markets in only 8 percent of countries were labeled as having wholesale competition models, while 16 percent of countries had retail competition in 2020. Reforms have developed more quickly in most European and North American countries and parts of Latin America than in many African countries. For instance, while two-thirds of North American countries are currently in a retail competition model, VIU models are predominant in East Asia and the Pacific and in Sub-Saharan Africa. Moreover, power markets in more stable countries and democracies tend to be more competitive.

Figure 1. Power market structure taxonomy

_{Source: Doumbia (2021)}

Figure 2. Share of countries by prevailing power market structure, 1989 vs. 2020

_{Source: Doumbia (2021) using IFC global power market structure database.}

Is power market sophistication associated with improved electricity sector outcomes?

In a new working paper, I empirically assess the relationship between power market sophistication – defined as the move toward a more competitive market – and selected sector outcomes: social performance (access to electricity, and affordability of electricity), electricity reliability (System Average Interruption Duration Index: SAIDI, and System Average Interruption Frequency Index: SAIFI), and renewable energy penetration (electricity production from renewable sources excluding hydroelectric in total production). The analysis is twofold.

The first estimation leverages documented changes in power market structure over time to assess whether a move from VIUs to more competitive power markets is associated with improved sector outcomes. The panel regression model considers changes in outcomes over time across a group of countries that introduced a more sophisticated power market structure over the period of study, moving from a VIU model to a more sophisticated power market relative to countries that did not experience any changes in power market structure. A second set of empirical evidence consists in assessing whether certain transition paths in power market sophistication are associated with better outcomes. Three types of transition paths are defined for this purpose: step 1: from VIU to single-buyer, step 2: from single-buyer to wholesale competition, and step 3: from wholesale to retail competition. Two main findings emerge:

• First, power market sophistication is associated with improved specific sector outcomes. Controlling for country economic, sector-specific, and political characteristics, findings show that moving from VIU models toward more competitive power markets is associated with higher electricity access, better consumer affordability, larger renewable energy penetration, and lower SAIDI. The introduction of private sector participation and competition brings private management and capital into the power sector. It is associated with enhanced operational efficiency and labor productivity, which lead to better sector outcomes.
• Second, certain steps in power market sophistication had stronger correlations with final sector outcomes. The results highlight that, for certain steps in power market sophistication, improvements in sector outcomes are greater. For instance, moving from VIUs to single buyer models is associated with relatively larger improvements in access to electricity and electricity reliability, while moving from wholesale to retail competition models is associated with a relatively larger penetration of renewable energy. Results are robust to alternative specifications, including the introduction of additional control variables and lagged indicators of power market sophistication.

To conclude, findings suggest that the introduction of private sector participation and competition in the power sector is important in promoting economic development through its role in enhancing electricity access, affordability, and reliability. While this is true on average, the effects of power market sophistication on sector outcomes may be heterogenous and vary across years.