Is energy reform worth it if value is lost?


One of the more interesting aspects of market reform is watching governments separate, balance and prioritize their roles in the energy market. As a government reforms the same market in which it is a shareholder, it must both establish the new rules and monitor how these same rules impact the value of its own assets. As successful reform will always reduce the market share of government-owned utilities, it can give rise to the question – is it really worth it?

Short-term pain vs long-term gain

The question tends to strike most governments about halfway through the reform process. The answer, easily identifiable in hindsight, is yes. In successful reform programs, the “losses” on one side of the ledger are more than compensated by the “gains” brought by reform.

From a starting position of 100% market share, it is inevitable that monopoly retailers will lose customers once others enter the market and that new privately owned capacity will displace government owned capacity in the short term. But in the longer term, this open market will deliver significant pricing and quality benefits to customers, give retailers a more diverse generation mix and, perhaps most importantly, help governments shift the huge cost of maintaining and building infrastructure. It’s this in particular that allows energy reform to deliver “big picture” economic gains to society – funds once spent on the energy sector are now available for other purposes such as education or health.

But all of this can be difficult to discern in the middle of what can be a long and arduous process of reform.

The challenge is that the dynamism and pace of reform will always come up against the inertia of most monopoly utilities that are driven by the instinct to preserve the status quo. I often see governments embark upon ambitious reform programs, without much consideration of the possible short-term losses in the value of their incumbent investments. Of course, the issue is soon brought to their attention by utility management. So commences a period of duality, which sees the government pushing forward as a reformer while retaining that shareholder mentality which, while not driving the process, remains an ominous presence.

When to sell?

As reform proceeds, it is government-owned generation and retail businesses that will most be impacted by competition. (While networks will also have to change many processes, the structure and business function usually remains the same post-reform.)

Government-owned retailers will inevitably lose customers – typically about 10-20% of customers will “churn” in a newly opened electricity market. Sometimes customers who move to new players will come back to their original retailers over time as the price, quality and service pathways determine the long term-market share for each player.

Government-owned generation will always face competition from new players. Sometimes the incumbent generators will contract themselves to new entrant retailers, or perhaps be owned by them, and some will enter the market with new fuel sources or equipment.  As the market grows, these new entrants will grow to occupy a share of the sent-out capacity and the supply/demand equilibrium will again be reached with a different configuration of private and public ownership.

As both retailers and generators lose market share in the face of competitors, governments can be tempted to sell all or some of their holdings in these assets. They often believe that asset values peaked prior to competition or that only new, private owners can drive the efficiencies needed to compete in the reformed market.

Are they right to sell? As with most decisions of the reform process, the answer is not straightforward. Ultimately, the decision to “hold or fold” will rest on how these government-owned entities are structured, governed, managed and regulated. Are they equipped to operate in a commercial and pragmatic manner – and compete with new entrants? Across the more than 30 countries currently in reform, we see some excellent examples of government-owned utilities that are competing fairly, commercially and aggressively in their markets and are very successful.  The nature of ownership per se does not drive results – leadership and behaviour does.  This is particularly the case when the new market will dominated by government-owned generation or retail companies. In these situations, lower costs, and increased quality customer services will define the benefits to society, as the market will be limited in its ability to force these outcomes.

Getting the balance right

When balancing the roles of reformer and shareholder, the governments that do best are those that prioritize the former over the latter. They have the vision to take a long-term view, knowing that, in time, markets will balance and that well-run companies – regardless of who owns them – will seek to innovate, change cultures where necessary, maximise profit through methods other than market power and dominance. Ultimately, they will drive long-term efficiencies for the benefit of customers.

Governments that do the opposite, and try to actively manage the value of their investments, will inevitably fall back to the status quo, dissuade new entrants and fail to achieve the benefits of the overall process. Successfully balancing the two roles will depend on establishing the right framework for fair competition, and choosing the management and governance teams of the newly competing firms wisely. These individuals are the true custodians of government’s investment and their ability to steer utilities through an open, competitive market will determine the value of a government’s investment in the long-term.

Matthew Rennie is EY’s Global Energy Reform & Unbundling Leader. He is based in Brisbane, Australia. For more insights on energy reform and unbundling, please visit and follow EY on twitter @EY_EnergyReform.


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