The Current Situation
In an ideal situation, both the generation and supply of electricity are fully competitive activities. It means that none of the companies, which pursue generation activities, can influence electricity prices on the wholesale market by using their market power. This should eventually lead to lower prices for the consumer. Also in the retail market, where the suppliers sell electricity contracts to households, free competition is in the benefit of the consumer. Households now have the choice to pick the supplier that offers them the best tariff and service.
In reality, a perfect competition seldom exists. Especially in industries with large capital investments and large infrastructure – like the energy sector - commercial activities are typically in the hands of a few large companies. For the energy economy, national regulating institutions monitor abuse of market power and quantize the level of free competition with the so-called concentration ratio CR3. An analysis by ACER, the Agency for the Cooperation of Energy Regulators in Europe, revealed for example that the level of market concentration in Italy is still very high, with Enel being the main supplier with a market share of more than 80% in household’s electricity supply.
Infrastructure as a Limiting Factor for the Unbundling
The infrastructure of the electricity grid creates a natural monopoly – very similar to telecommunication infrastructure, railroads, or motorways. It would be almost impossible to build a second grid, since the construction of such a large infrastructure would require a high level of investment and extensive permits.
In order to ensure a reliable operation of the grid and to avoid market power abuse, not only the ownership is unbundled. In addition, the natural monopoly is regulated by an independent regulator. It monitors, for example, the access tariffs that the transmission system operators (TSOs) and the distribution system operators (DSOs) charge to producers, who wish to connect their plant to the electricity grid.
While in Europe most countries secure the electricity supply via a national grid, this is not the case in all countries of the world. Off-grid solutions gain in relevance in many developing countries, particularly to provide cost-effective access to electricity in rural and sparsely populated areas. How these are to be integrated into the energy system and whether this should also lead to a liberalization of the natural monopoly of transmission and distribution is highly controversial.