Electricity market liberalisation and environmental performance: Norway and the UK

Energy Policy. Vol. 26, No. 12, pp. 917— 927, 1998  1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0301-4215/98 $ — see front matter

PII: S0301-4215(98)00035-4

Electricity market liberalisation and environmental performance: Norway and the UK Per Ove Eikeland The Fridtjof Nansen Institute, P.O. Box 326, N-1324 Lysaker, Norway

Environmental concern was not on the agenda when competitive reform was introduced into the Norwegian and UK electricity industries. After the reform in 1989, short-term environmental improvement has been recorded in the UK, primarily because natural gas has replaced coal-fired capacity on a massive scale. No real boost for renewable energy has yet occurred, however. In Norway, the most noticable short-term impact has been a halt in new large-scale hydro power project development of watercourses. The most comprehensive change has been a cognitive one – brought about by the creation of the free-market area in electricity between Norway and Sweden in 1996. A common exchange, Nordpool, has been established, in which also Finnish and Danish companies have become traders. The Norwegian hydro-based electricity system suddenly became integrated with thermal-based systems, relying on coal and nuclear power. The Norwegian environmental debate could no longer take place in isolation from those in the neighbouring countries. As to long-run environmental challenges, the new energy legislation in Norway and the UK direct the state (regulator), industry and consumers to share responsibility for finding effective solutions. The state has problems in fulfilling its environmental responsibility since it comes into conflict with other overriding duties. The industry has been given scant incentives, whereas consumers still have been relatively passive. As our Swedish example of ‘green labelling of electricity contracts’ shows, however, there are exciting new arrangements, pushed by environmentally concerned consumers, which may eventually have dramatic effects on the liberalised electricity supply industries, and push the market towards improved environmental performance.  1998 Elsevier Science Ltd. All rights reserved. Keywords: Electricity; Deregulation; Environment

Introduction

¹o what extent were environmental concerns integrated in the policy processes of reforming the electricity supply industries in Norway and the ºK? ¼hat have been the short-term environmental impacts of the competitive reforms? ¼hat may be the longer-term environmental impacts?

In conjunction with the drive towards competitive reform of the world’s electricity supply industries, it is important to ask: how will reform affect the environment? We compare the competitive reforms undertaken in Norway and the UK — forerunners in Europe on electricity supply industry liberalisation. The British Parliament enacted the new Electricity Act in 1989, a year before the new Norwegian Energy Act was passed. The main question raised above will be discussed in light of three sub-questions:

To answer the two former questions, we track the policy-processes in the two countries from the pre-reform stage till late 1995, and inquire how industry environmental performance developed. Longer-term impacts are less obvious and contingent on forces being

 A comprehensive comparative study of the liberalisation models chosen in Norway and the UK is given by Midttun and Thomas (1998).

 For a comprehensive analysis of differences between the Norwegian and UK reforms, see Eikeland (1995).

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suffieciently dertermined to push for sound environmental management of the industry. We will therefore discuss whether a clear-cut responsibility has been given for long-term environmental management through the reforms, and shortly, whether new institutional arrangements provided by the reforms will allow environmentally concerned actors to play a role in conducting future industry investments.

Pre-reform electricity-environment nexus Since environmental impacts of electricity production in Norway and the UK differ substantially, a brief overview will be given before we proceed with discussing the questions raised at the outset. As will be argued later, however, liberalised trade has made the post-reform electricity—environment nexus in Norway far more complex, and in fact, more similar to that in the UK. Norway — nature conservation issues In Norway, nearly all electricity has historically been generated from hydro (between 99 and 100%). With negligible air pollution from the production process, the major environmental problems have occurred in the plant construction phase. River development, pipelining of waterfalls, erection of transmission grids, and the construction of dams for water reservoirs have mainly caused aesthetic degradation, although wildlife (migration routes of wild animals and birds) and river fauna have also been affected on a permanent basis. River development has been loudly protested by the nature conservation movement. Since the 1960s, a steadily increasing environmental opposition led the Parliament in 1973 to make a plan, indicating which watercourses could be developed and which should be preserved infinitely. This plan was completed in 1993, leaving 35 TWh of the total 175 TWh annual production capacity closed to development. As 109 TWh has already been developed, this leaves 26 TWh open for development in the future (Norwegian Ministry of Industry and Energy, 1995).

Table 1 Fuels used for power generation in the UK (% of total)

Coal Gas Oil Nuclear Other

1990

1993

1994

65 1 11 21 2

53 9 8 29 2

50 13 6 29 2

Source: Centre for the Study of Regulated Industries (1995) ‘The UK Electricity Industry’, London.

Coal combustion causes emission of acid rain precursors (SO and NO ) and the greenhouse gas CO . Run V  off from coal mines have polluted water and soil. Combustion of natural gas will also lead to acid rain and greenhouse gas emissions, although at a lower scale than for coal. Environmental costs and benefits of nuclear power are ambiguous. No acid rain precursors or CO  emissions are produced in the power generating process, but opponents have remained unconvinced that these benefits outweigh potential costs. Problems include waste disposal and storage, risks of accidents with potentially disastrous consequences, as well as nuclear proliferation. Although no major disasters have yet struck British plants, accidents have been recorded. In 1957, a fire at Sellafield caused serious pollution to the site. A major area close to the plant is still severely contaminated, including parts of the Irish Sea after radioactive spills (Thomas, 1996). Radioactive spills can be spread with ocean currents. Spills from UK plants have caused increasingly higher levels of contamination being recorded along the Norwegian coastline. The UK environmental agenda has changed substantially with time. In the 1950s, local air pollution problems led to a ban of coal burning in open fireplaces. During the 1970s and 1980s, international problems, such as acid rain and later, global climate change, came into focus. The UK was frequently labelled the ‘dirty man’ of Europe, due to British reluctance in reducing the high levels of sulphur emissions from power stations, and government refusal to sign international conventions on air pollution. The electricity supply industry accounted for more than 70% of British emissions in 1993 (Skea, 1993, p. 2). The massive closure of coal-fired plants taking place after the competitive reform will dramatically change this picture, however.

ºK — emission of air pollutants In contrast to Norway, environmental costs of electricity supply and consumption have been more complex and far-reaching in the UK. In addition to land conservation issues, environmental problems caused by emissions to water, soil and air have been extensive. Traditionally, coal was the major fuel in electricity generation. From late 1950s, nuclear power increased its share. Since the competitive reform process was started in 1989, natural gas has been the new choice of fuel.

Competitive reform – the role of environmental issues ºK When Ms Thatcher first launched her plan to privatise the electricity supply industry in 1987, environmental issues were largely ignored. Poor environmental performance of the state-owned General Electricity Generating

Electricity market liberalisation and environmental performance: P O Eikeland

Board (CEGB) could well have been used as an argument in promoting the privatisation plan, but were absent from the discussion. Nor was any attention paid to possible environmental consequences of the privatisation scheme. Somewhat later in the privatisation process, however, environmental issues became more visible, not least since various environmental policy processes coincided in time with the privatisation process. It coincided with EC completing its negotiations of the Large Combustion Plant Directive in 1988. Compliance with the Directive would require retrofitting of flue-gas de-sulphurisation equipment (FGD) at coal-fired power stations or, it soon appeared, would be possible at far lower cost if combined cycle gas turbine systems (CCGT) were substituted for coal-fired stations. The privatised generation companies, National Power and PowerGen, preparing for a competitive market where compliance costs could not automatically be rolled on to consumers, therefore cancelled plans for expanding their inherited coal-fired plants. The British government finally decided to implement the Directive by August 1989. A massive national FGDprogramme was supported by the Department of the Environment. The Department of Energy sought to minimise costs of prospective compliance investments, in order to facilitate the flotation of National Power and PowerGen. A compromise was reached, and in December 1990, just before flotation of National Power and PowerGen, a plan was produced which specified emission quotas for the companies and required retrofitting of 6000 MW of FGD. This was half the programme initially proposed by the Department of the Environment. By this time, another environmentally related issue came to influence the privatisation process. Investors had become convinced by various research studies that nuclear power was simply not a good investment object — partly because of future liabilities of deommissioning and waste disposal. As a result, nuclear assets were removed from the privatisation scheme, and nuclear stations retained in a public company. A marked shift in government policy towards environmental issues emerged from late 1988. Nationally, a comprehensive White Paper entitled ‘Our Common Inheritance’ was published in 1990. Internationally, the UK Government signed the SO protocol and EU directives  which it earlier had opposed. A report on energy-related greenhouse emissions was published early in 1990 by the Department of Energy, and in May the same year, Margaret Thatcher announced, quite unexpectedly, a target for stabilising CO emissions at the 1990 level by  the year 2005. New scenarios produced by the Department of Energy in 1991 indicated that a return of emissions to the 1990 level would be possible already by the year 2000. The re-elected Conservative government of

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John Major established this target in a 1992 Environment White Paper. To sum up, environmental concern did not figure as an important factor in early discussions about privatisation in the UK. In fact, environmental obligations were seen as a possible threat to flotation of the industry. This lack of environmental awareness coincided with the general attitude of the early 1980s, when the UK was perceived as a laggard in international environmental negotiations. The complete turnabout in Government environmental policy in the very late 1980s is striking. An explanation for this move may be that during the electricity supply industry privatisation process, it became clear that natural gas would become the new preferred fuel, leading the Government to realise that compliance with international environmental agreements would in fact cause few short-term problems. We may thus conclude that environmental considerations did not guide the privatisation process, but vice versa, the latter influencing the former.

Norway By contrast to the UK, environmental degradation received much general attention in Norway in the 1980s. Where Britain figured as a laggard, Norway took the position as a leader in establishing international environmental regulation. Various government white papers which came during the decade showed concern with environmental consequences of energy production. A 1985 White Paper (Norwegian Ministry of Oil and Energy, 1985) elevated environmental conservation to a major objective of future energy policy. This marks a move from a White Paper 6 years earlier (Norwegian Ministry of Oil and Energy, 1979) which stated rational management of the environment and natural resources as the major objective. Another Government White Paper issued in 1988 (Norwegian Ministry of Oil and Energy, 1988), concluded that the electricity supply industry should have a central role in implementing energy savings, and that energy-efficiency measures would have a positive impact on the environment. Despite a high general environmental awareness, and pressure put on the government and industry to scale down watercourse development, the early debate about electricity supply industry liberalisation was rather motivated by other concerns than environmental damages. Academic economists criticised the system of politically set prices and area franchises for having led to too much capacity being developed. Nor did environmental considerations figure as a major topic when the debate about competitive reform entered the Parliament. In fact, the parliamentary process

 Much of the research leading to the failure of privatising nuclear assets was conducted at Science Policy Research Unit, University of Sussex.  Much of the contemporary history is collected from Collier (1995).

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prior to the establishment of the 1990 Energy Act developed quite unexpectedly. Whereas basic institutional changes normally require a lengthy public debate in Norway, the final reform bill was passed in a hurry. True, the need for change had long been discussed. Already in 1980, a government commission had been appointed to propose measures for rationalising the industry. The commission, however, came up with a proposal totally different from a marked-based trading system. It recommended mergers of the then 320 distributors into 20 regional vertically integrated public enterprises to strengthen the integration of the system. On the basis of these recommendations, Prime Minister Brundtland’s Labour Government introduced an Energy Bill into the Parliament in 1989 which was never put to vote. When the 1989 general elections brought a conservative coalition government into power, it withdrew the bill and introduced the new, totally revised one, which was enacted in a hurry in 1990. The electricity supply industry never voiced any outright opposition — perhaps not so strange, since the original Bill by comparison looked far more devastating to them. Observers also emphasise that the new ideas of marked-based trading were so unfamiliar to most of the technically trained industry management, that the scope and consequences were hardly understood. In this rush preparatory work, neither environmental concern nor any other potential consequences were paid much attention to. A minor passage in the law states that an effective electricity market will lead to efficient investments, production and use of electricity. The Act places the major responsibility for end-use efficiency on the consumers — assumed to make the right choice of whether to consume more energy or to save it.

Competitive reform and short-term environmental performance ºK In the short run, a liberalised electricity market was not only compatible with, but a driving force for improved environmental performance in the UK electricity industry. Skea (1993) and Collier (1995) have substantiated this on several points. Firstly, the state-owned CEGB, as an instrument of macro-economic policy, had been successful in slowing down FGD-investment. During the early 1980s, the CEGB had funded almost half of the UK’s research on acid rain, contributing considerably more than the Department of the Environment (Skea, 1993, p. 5). It had deployed the findings of the research, however, to counter arguments for a major FGD-investment programme, which would have added to the public sector borrowing requirement. Secondly, CEGB, carrying national interest obligations, had weakened the role of the formal regulatory

regime for pollution control. The body formally responsible for pollution control in Britain, the Industrial Air Pollution Inspectorate, played no role in early decisions related to the clean-up of emissions from the electricity supply industry (Skea, 1993, p. 6). CEGB actually shouldered the national responsibility for acid rain policy. Not until 1983, when the EU formally proposed the Large Combustion Plant (LCP) Directive, and the Department of the Environment assumed responsibility for international negotiations, did acid rain policy become a matter for inter-departmental discussions within government. Nevertheless, the CEGB remained a key player (Skea, 1993, p. 6). Thirdly, it appears that state organisations, such as the CEGB, demonstrated a remarkably strong degree of ‘lock-in’ to existing technologies — underpinned by major vested interests associated with traditional technologies within the organisation. As long as there was no threat of entry into the market, and with the opportunity to pass costs on to consumers, the continued use of traditional coal- and nuclear technologies posed no threat. When new entrants started to use cleaner CCGT, National Power and PowerGen were forced to respond with their own CCGT projects. Finally, since the electricity supply industry has become a mature industry, downturns in demand will occur during recession, leaving the industry with capacity in excess of demand. CEGB had tended to retain its less efficient capacity at such times, in anticipation of a later increase in electricity demand. It is reasonable to assume that a competitive regime will lead to a faster rate of closures in the downturn, followed by a more rapid rate of investment as demand increases. This will reinforce the tendency towards a more rapid diffusion of cleaner technology in a competitive environment (Skea, 1993, p. 13). The positive short-term environmental consequences of the UK reform have materialised first and foremost through the massive closure of uncompetitive coal-fired stations and the ‘dash for gas’ in electricity generation. Table 1 illustrates this development, which has reduced emissions of air pollutants substantially. Coal-fired plants were closed primarily because they were found unprofitable. Likewise, nuclear plants did not find private investors because of poor economic performance. Environmental responsibility has at best been a subordinate motivation.

Norway In Norway, a temporary stop in new development of hydro-projects occurred after the reform. In the old system, increased regional demand had been met basically by expanding regional supply. Abolition of the area franchise system revealed excessive national supply capacity — and further development of mountainous ecosystems and rivers came to a halt. In this respect, a short-term environmental improvement occurred.

Electricity market liberalisation and environmental performance: P O Eikeland

The most fundamental short-term change in Norway, however, came because the reform opened for increased power trade with neighbouring countries. As of January 1996, Norway was fully integrated with the Swedish power system in a common electricity market with a joint power exchange, Nordpool. Norwegian customers are free to choose between Norwegian and Swedish suppliers, and even third-country suppliers can trade on the Nordpool exchange. New long-term contracts have been established between Norwegian and German or Dutch companies — involving the laying of sea-floor cables across the North Sea to be completed early next decade. Cables already links Norway to Sweden and Denmark. The result is that there is no longer a ‘pure’ Norwegian hydro-based electricity system. Power consumed in Norway may have been generated by fossil- or nuclear fuels abroad. This has caused renewed environmental concern in Norway, and ignited debate about whether or not trade will lead to a net decrease in environmental damages in the area as a whole. The debate has been marked by economic interests veiled in unsubstantiated environmental arguments. The commercial benefits of interconnecting a hydrobased and a thermal-based electricity system cannot be doubted. Norwegian hydro-based plants can produce peak-load power at little extra costs. Peak-load capacity in the thermal-power based systems on the Continent is much more costly. During base-load hours (at nighttime), Norwegian plants can store water and instead import power from abroad. During day-time, Norwegian plants can produce and export peak-load capacity abroad. The Norwegian industry and the Minister of Industry and Energy has praised this trade as beneficial not only commercially, but also environmentally, by claiming that Norwegian hydro-power will replace coal-based capacity abroad. This was at least the argument during the first years after trade liberalisation, when Norwegian hydro reservoirs were full after several years of above-normal precipitation, and Norway was a net exporter of electricity to neighbouring countries. However, 1995 and 1996 were extraordinarily dry years, and Norwegian hydroreservoirs were heavily tapped off. Consequently, there was a net import of coal-based power from Denmark during 1996, leading the Norwegian Minister of Industry and Energy to turn around his arguments on environmental benefits of trade — claiming that Norway may well

 Power exchange between the Nordic countries is not new. Also before the reform there had existed a need for coordination at the regional, national and international levels in order to secure a balance between demand and supply — particularly important for the hydro-based Norwegian system in periods with low precipitation. The NORDEL arrangement — a short-term exchange system between Norwegian, Swedish and Danish suppliers had therefore been established. NORDEL was, however, confined to a group of executive leaders of the largest Nordic utilities, often described as a real ‘Gentlemen’s Club’ and did not involve any joint market as we know it today.

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become a net importer of coal-fired electricity due to trade liberalisation, and therefore, should further develop its own hydro resources and develop natural-gas based capacity. A consortium, Naturkraft initially received goahead for the construction of two large natural gas-fired plants on the west coast of Norway — approved by the Minister as well as the Parliament majority in 1997. General elections brought a new minority coalition government into power late 1997. The three parties forming the government had all voiced opposition towards the proposed plants, and managed to postpone any decision on emission licences for the plant. Then came the Kyotoconference in late 1997 and a new debate on the rationale of constructing a plant which would add to Norwegian problems of fulfilling its obligations under the Kyotoprotocol. An unexpected move by one of the Naturkraft consortium partners, Norsk Hydro, during spring 1998, in which an alternative project was launched, put the project to a halt. The alternative project will investigate the possibilities for separating CO from natural gas,  using residual hydrogen as the combustion fuel and storing the CO in sea-bed oil reservoirs.  The two natural gas-fired plants were met with outright opposition by Norwegian environmentalists right from the beginning, since it would have added an extra increase of CO -emissions by 5% on top of an already  failed effort at stabilising emissions by the year 2000 at the 1990 level. In light of Norway’s original leader position in proposing targets for CO -stabilisation interna tionally, and scant analyses of how natural-gas fired capacity in Norway would contribute to lower emissions abroad, the environmental movement declared any environmental argument from the Minister of Industry and Energy as nothing but pure ‘rhetoric’. Environmental NGOs pointed to several problems with international power trade and with the planned natural-gas power plants, which are still to be sorted out. Firstly, whereas natural gas plants have improved environmental quality in, e.g. Great Britain in the short run (due to replacement of coal-fired capacity) it will impair environmental quality in Norway, since the current system of nearly 100% of total electricity being generated from hydro, is free from emissions. There is also considerable uncertainty as to whether exports of Norwegian natural-gas fired capacity will actually lead to reduced net emissions within the greater Scandinavian or European area. The latter doubts are due to technological factors. The power plants planned in Norway will be constructed in remote areas, without possibilities for effectively utilising the heat associated with power production. Since new coal-based plants constructed in Sweden and Denmark effectively utilise combined heat and power technology, total CO -emissions per kWh 

 A consortium of the state oil company, Statoil; the state-owned electric utility Statkraft and the semi-private industry company Norsk Hydro.

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produced may well be lower at these plants than at the Norwegian natural gas plant. Hence, whereas natural gas has been an environmental asset in British electricity production, it may add to environmental problems in a strictly Norwegian context. Secondly, environmentalists have been concerned whether increased trade in fact may have a consolidating effect on foreign nuclear and fossil-fuel based energy systems if these are still characterised by regional monopolies, such as the German system. The concern is that exported power can be cross-subsidised by raising the price of power to captive domestic consumers, and thus, that capacity which would otherwise have been laid idle for commercial reasons, will find new market opportunities. Another concern has been that imports of Norwegian peak load capacity may delay innovation on renewable energy in other countries. In fact, scant analyses have been done with regard to environmental impacts of increased electricity trade between a marked-based system and one still characterised by regional monopolies. To sum up, trade liberalisation has brought the Norwegian industry from an era, in which local environmental problems were the only ones facing the industry, into a new era in which the industry is no longer isolated from global environmental problems, such as the climate-change complex. The cognitive changes are well illustrated by the recent discussion in connection with the proposed construction of natural gas-fired plants on the west coast of Norway.

Competitive reform and long-term environmental concerns It may be hard to justify picking only one of a range of potential environmental problems to be the most important to cope with in the long run. However, for simplicity we concentrate on the global climate change problem. This is not to say that other problems may not be in need of a solution in order to enter a path of sustainable development. Loss of pristine areas, and in some countries, a massive relocation of local population due to hydro-power development may clearly be in conflict with

 If Norway is to stabilise CO -emissions at the national level, reduc tions will have to be made either by oil and gas producers in the North Sea or by the transport sector. Remedies to reduce emissions from the North Sea (eg by injecting CO back into underground reservoirs or to  scale down the pace of production) have been claimed to be detrimentally expensive for the industry and the Norwegian petroleum-dependent economy. Hence, this alternative has been opposed by the incumbent Labour Party. So has the possibility of a substantial reduction from the transport sector, not least because of the Parliament majority wishing to pursue an ambitious rural policy, aimed at keeping the population level stable in even the most remote areas of the country. Since public transport in sparsely populated rural areas is expensive, the promotion of the use of private cars has been seen as the only viable option. The environmental movement, on the other hand, claims that huge reductions in emissions are possible in urban and coastal transport and that the pace of oil production should be scaled down.

sustainable development principles. The environmental risks associated with nuclear power have already been mentioned. Nevertheless, the potential severeness of the greenhouse problem, and its link to the combustion of fossil fuels, has only been reinforced with the latest report from the IPCC (Intergovernmental Panel on Climate Change). To mitigate the problem, long-term environmental management within the electricity supply industry involves a continued shift from fossil fuels to fuels causing less environmental damage and risk as well as increased efficiency in production and use of electricity. Will these two options be paid due attention within the new market-based trading systems? Let us discuss this by contemplating two related questions: (1) Where lies the commitment to long-term environmental investments within this new structure? (2) Does the new liberalised framework provide environmentally concerned actors with the proper instruments for conducting the industry towards environmentally benign solutions? The electricity market, like most markets, consists of three major groups of actors: the industry (producers, transmission companies, distribution companies), consumers and the state (regulators). A basic normative assumption underpinning any system of marketbased trading is consumer sovereignty — supply of goods and services are supposed to be driven by consumer demand. Indeed, both the UK 1989 Electricity Act and the Norwegian 1990 Energy Act state the major responsibility consumers have for choosing energy-efficient end-use solutions. Nevertheless, neither of the Acts exclude the other major actors from responsibility. The shared responsibility for long-term environmental management may, on the one hand, stimulate cooperation between the groups of actors. On the other hand, it may lead to unclarities as to who have major responsibility — there is always room for blaming absence of action on other actors. Let us briefly see how the various groups have handled their long-term environmental commitments so far.

¹he state (regulator) The state institutional complex may itself warrant a study of shared and overlapping responsibilities. In both Norway and the UK, particular regulatory bodies have been established outside the ministerial structure — designated to issue licences, and with a multitude of responsibilities, ranging from regulation and control of monopoly parts of the electricity supply industry, to controlling that statutory required energy efficiency efforts are carried out by industry. Despite considerable autonomy, the regulatory authorities are sensitive to signals and dependent on funding from ministries. Own discretion will therefore be limited. We will not go into details on relationships between various state institutions, and only exemplify how the state complex so far have handled their long-term environmental

Electricity market liberalisation and environmental performance: P O Eikeland

responsibility — that is, for promoting renewable energy and energy-efficient production and consumption. According to the UK 1989 Electricity Act, the main task of the Director General of Electricity Supply (DGES who is the appointed head of the Office of Electricity Regulation — OFFER) is to ‘exercise his functions in the manner which he considers is best calculated to achieve three objectives: (i) to secure that all reasonable demands for electricity are satisfied; (ii) to secure that the licence holders are able to finance their activities; and (iii) to promote competition in generation and supply of electricity. Other duties include protecting the interests of customers and to promote the efficient use of electricity’ (OFFER, 1995a). The DGES has been given large discretionary power to influence the level of energy efficiency activities in the industry since no statutory targets exist. In October 1992, a response to a 1991 Consultation Paper and a future plan was published by OFFER (1991) — in which the DGES noted that: ‘‘The issues surrounding energy efficiency in the context of the electricity industry are complex. Changes designed to have a beneficial effect in relation to energy efficiency may have unintended and adverse effects on other areas where I have important duties’’ (OFFER, 1992, p. 2). This statement highlights a problem. How can the regulator manage possible conflicting responsibilities? Responsibility for long-term environmental benign solutions may clearly be subordinated to more immediate problems. True, the DGES has taken some concrete action. It has directed the National Grid Company to install energyefficient equipment even where such equipment has a higher initial cost. The NGC has also been directed to take full account of losses when selecting overhead line conductors and when evaluating transformer tenders. Moreover, the DGES has provided specific but very modest energy-efficiency standards. In 1994, the RECs were required to save 0.675% of distributed energy. In connection with the revisions of the price formula, which came into force in April 1994, the RECs were required to invest in energy-efficiency measures. The DGES also required the RECs to recoup an extra £1 per customer to invest in the promotion of end-use efficiency. Most of the fee is expected to be handed over to the Energy Saving Trust, a joint partnership between the Government, British Gas, the RECs, Scottish Power and

 The new price control for NGC specifies levels of demand in advance (in accordance with NGC forecasts), entailing that NGC’s maximum revenue level during the next control period is fixed-removing any artificial incentive to boost peak demand for electricity and disincentives to cooperate in load-management initiatives.  Several commentators to the 1991 Consultative Paper suggested that the supply price formula would need further revision to boost incentives for energy-efficiency investments. It includes a Y-factor enabling supply companies to pass fuel costs directly over to franchise customers at no risk. With no parallel arrangement for passing through the costs of demand-side investment, the choice between supply and demand-side investments will be distorted.

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Scottish Hydro Electric set up in May 1992 to develop, propose and manage programmes to promote energy efficiency. By late 1994, the Trust was facing a cash crisis since gas and electricity regulators had become increasingly reluctant to force companies to pay. The DGES’s reluctance in effectively pursuing his responsibility in promoting energy-efficiency is easy to understand. He has witnessed more than enough problems in realising his overriding objectives, mentioned above, with less time and resources necessarily left for subordinated duties. When several RECs during 1995 offered share-holders a massive increase in dividends to stop hostile bids for take-overs, they also revealed that price-cap regulation on distribution tariffs had been too lenient. A massive criticism followed in the media, that distribution companies earned super-profits, and that management and owners were the only beneficiaries. Consumers were claimed to only get the little bit of it. The DGES was forced to interfere and hastily reduce the price cap. Since lower electricity prices to consumers had been a major promise behind the competitive reform, it is understandable that OFFER in this period was reluctant in allowing the RECs to recoup costly energy-efficiency efforts, which would have added to prices. The situation shows how the duty of promoting energy-efficiency can come into in conflict with more overriding duties of the DGES. In fact, the promise of keeping prices to consumers low may be directly in conflict with efforts at spreading energy-efficient technologies. OFFER’s policy on renewable energy has not been free from criticism either, even though post-privatisation investments have shown a clear upturn (Collier, 1995, p. 17). The non-fossil fuel order (NFFO) has been the main instrument for achieveing this policy, in which the government order renewable energy capacity within a bidding sytem, where the most successful bidders will get the order. The NFFO requires that each of the RECs buy a set amount of electricity generated from non-fossil fuel sources. The first renewable energy order from the Secretary of State for Energy included 102.25 MW capacity to be constructed over the period 1 October 1991 — December 1998. After lobbying by organisations supporting renewable energy, an extension of the quota was made to 627 MW in 1994. More information about the system is given by Fouquet (1998). Parts of the Fossil Fuel Levy — established first and foremost to continue the subsidisation of nuclear power — have been allocated to support renewable energy. In 1991/92, only 1% of the total £1,324m Levy went to renewable energy generators. 99% went to Nuclear Electric. In 1992/93, 2%, and the year thereafter 3% of the receipts went to renewable energy (OFFER, 1995b). What about the Norwegian state regulators? Have they pursued a more comprehensive long-term plan for energy-efficiency and new renewable energy? During the 1980s, much of energy-saving efforts had been conducted by the electricity supply industry on a voluntary basis. A 1992 survey by the Norwegian Water Resources and

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Electricity market liberalisation and environmental performance: P O Eikeland

Energy Administration showed comprehensive activity by the companies in the late 1980s — in the form of information, advice, audits and education of customers. About one third of the companies offered grants or soft loans for end-use investments to their customers (Norwegian Water Resources and Energy Administration, 1992). In a similar 1994 survey, a consulting company, Energidata, concluded that the number of electricity companies providing financial aid to customers for energy savings had been halved from 1990 to 1994 (Energidata, 1994). The major explanation can in fact be found in changed government policies. The government initiated a scheme providing financial aid for energy-efficient enduse investments for the budget-year 1990. This scheme ‘crowded out’ those offered by electricity companies, since no point was seen by the industry in duplicating governmental funding. The government aid schemes were gradually removed from the budget year 1992, and by 1994 had disappeared altogether. This new policy was based on findings that financial aid to end-users was not a cost-efficient way to achieve energy savings. Some people would be ‘freeriders’ — acquiring governmental aid for investments profitable for them to carry out anyhow. The schemes were in fact about to become too popular, and to avoid escalation of expenses, it was convenient for the government to back out. In the meantime came the new Energy Act, stating that the government should assume a more passive role in the electricity market, and that chief responsibility for energy-efficiency investments rested with the consumers. Since the new Energy Act directs distribution companies to provide for only information/advice, the former arrangements of subsidies/grants were not reestablished by the companies after the state backed out of business. In order to provide for costs of the minimum requirements for information activities, the regulatory authority (the Norwegian Water Resources and Energy Administration) has directed distribution companies to add 0.2 +re/kWh (approximately 0.0003 US$/kWh) to their tariffs. To sum up, whereas Norwegian authorities (first and foremost the Minister of Energy) has opted for integrating Norwegian hydro-electricity (and natural-gas power) exports into a joint European strategy of combatting the climate change problem, no comprehensive analysis has yet been made as to how energy-efficiency investments and new renewable energy could contribute to such a larger strategy. The latter enjoys negligible state R&D funding compared to neighbouring countries. Norwegian authorities have so far largely chosen to sit on the fence letting market actors conduct the long-term environmental development. The new minority government, brought into power by the general elections in 1997, has announced a more active policy with increased funding of renewable energy and energy efficiency efforts. However, due to its minority position, it is heavily dependent on the parliamentary majority, and substantial changes have yet to take place.

¹he industry A major rationale behind the reforms was to transfer operational responsibility to the electricity supply industries. Is it reasonable to expect the industry to integrate responsibilities for long-term environmental problems into their larger strategies for earning money? As with the state institutional complex, the industry is clearly not a uniform actor, but can be grouped into generators, distributors, suppliers and transmission companies. Within a company, a host of actors: management, shareholders and employees may share responsibility for performance. Time and space limitations allow only us only to discuss the industry generically. Privatisation changed the attitudes of the UK electricity companies. Projecting a more environmentally friendly image than the CEGB had done made commercial sense. Besides producing environmental policy statements, as required by the Electricity Act, the industry got involved in advertising their green credentials in the press. Some companies created environmental policy divisions, or put in place environmental management plans. Others made environmental performance reports (Collier, 1995, p. 19). However, environmental performance and commitment are more than only producing a ‘green’ image. Competition made short-term profit maximisation the overriding company concern. Combined with higher discount rates than in the public sector, the companies became reluctant to invest in renewable energy and energy-efficient technologies, such as combined heat and power. The Electricity Act obliged the RECs to promote energy efficiency. Demand-side activities have not yet been regarded particularly profitable, and the RECs still display scant enthusiasm. Low prices have been the most important factor in new power contracts. The industry voices concern that the short-term nature of the new contracts in fact penalises involvement in demand-side management, since investment costs may be hard to recoup within the short time-frame of the contract. The concept of providing energy services has been viewed as interesting by several suppliers, but only small pilot programmes have been carried out so far. With respect to renewable energy, the subsidies allocated from the Fossil Fuel Levy has kept projects alive. A EU ban of the subsidy would have made many projects commercially unviable. The Norwegian industry has struggled with much the same problems. To pay for their duty to promote energy efficiency, they have been permitted to add a 0.2 +re/kWh duty to the tariff. Although this provides for an increase in total funding for energy efficiency activities compared to 1990 (before the new Energy Act was established), the range of activities in which the industry is engaged has been reduced. The creativity and enthusiasm which existed within the distribution companies before 1991 have disappeared and only the minimum

Electricity market liberalisation and environmental performance: P O Eikeland

activity required by the new Energy Act is currently carried out. According to Norwegian electricity supply industry representatives, there is today scant incentive for engaging in any form of ‘voluntary’ activities. The statutory requirements are in fact linked to the monopoly part of the business — the operation of the grid. As long as there is sufficient capacity in the grid (which is the fact in most of the country even during peak load periods), there is no incentive for demand-side investments. According to the new Energy Act, revenues collected cannot be used for activities connected to marketing of energy-efficiency packages or demand-side investments, since cross-subsidisation of distribution and supply is banned (unbundled accounts are required). Demand-side investments have to be funded by profits earned from the competitive part of business. The companies have so far regarded such an employment of profits too risky, since customers are free to change supplier whenever they want. Only a few large suppliers have carried out small pilot demand-side projects. Norwegian distribution companies have even been encouraged by the Norwegian Water Resources and Energy Administration to hand over activities required by statute (information and advice on energy efficiency options) to newly established regional energy-efficiency centres; reducing the role played by distribution companies to being only collectors of customer charges. By pursuing such a policy, the regulator seeks to prevent the extra charge on distribution tariffs from being used for marketing. Most of the distribution companies have acted on the advice, and cut their own energy-efficiency activities. Since the regional centres are still new, there is little information on their operation. Whereas British industry was privatised, Norwegian companies remained basically public (55% of generationand most distribution companies in municipal and county ownership, about one third of generation capacity owned by the state company). A majority of Norwegian distribution companies have been made into public limited companies and thus, received more independence from public authorities. Nevertheless, many companies feel squeezed between different roles; to be competitive and to maximise short-term profits, as will be expected from a commercial company, or to take responsibility for pursuing long-term political objectives, such as environmental management. Which role to choose is contingent on municipal shareholders’ perceptions of whether the company should be instrumental for generating large dividends to fund general public programmes or act as an agent in pursuing public objectives directly. The more dividends extracted, the more difficult will it be for companies’ to pursue the latter role. Dividend policy is currently being discussed in many municipal counties. The result will be highly important for companies’ future strategic choice. In the privatised UK industry, we have already seen large dividends being extracted to shareholders to avoid the success of hostile bids for take-over.

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A continued ‘drain’ of company profits may well be counterproductive for further ‘greening’ of industry. In Norway, electricity prices made a sharp jump in 1995/96, after the tapping off of hydro reservoirs. Although the situation is temporary, it has created an atmosphere favourable to either, additional development of hydro-power and natural gas-fired power, or, energyefficiency investments and development of new renewable energy. Electricity companies have already signalled favouring further development of capacity in order to increase their market potential in the larger Nordic market when precipitation again returns to normal.

Consumers Is such a strategy in line with consumer preferences? Up till now, it seems that the bulk of Norwegian consumers have emphasised abundance of cheap electricity and quietly accepted new development. A recent opinion poll show, however, that more than 90% of respondents regard development of wind, solar and biomass energy as important. Another poll showed that a majority favoured energy savings to development of natural gas-fired plants. We may then ask whether signals provided by consumers actually will guide the industry in a direction of improved environmental performance? Furthermore, we may ask whether new market institutions, created as part of the reforms in Norway and the UK, will function adequately for environmentally conscious consumers wishing to signal that they prefer energy options benign to the environment. No massive consumer action has yet taken place in Norway or the UK. However, with less Norwegian watercourses left pristine, and increased focus being paid to the fact that power flows freely in the greater Nordic market (coal and nuclear power are now an integrated part of the Norwegian and Nordic power balance) one would expect increased interest from consumers in making an environmental quality judgement of their electricity consumption. An interesting project, relevant to Norwegian producers in the common Nordic market, has been launched in Sweden. The Swedish Association for the Protection of Nature in November 1995 launched a ‘green labelling’ programme for bilateral electricity contracts. The demand for these ‘green’ contracts has been massive; large corporations such as MacDonalds and Electrolux have already signed their supply contracts under the new labelling scheme. Among the consumers are also large finance corporations, the pulp and paper industry (who must use ‘green’ electricity in the production process in order to receive a green label on their products) and, mostly of symbolic value, the Swedish King: 17% of total Swedish electricity supplies is currently sold on green contracts with a substantial price mark-up. Around 40 Swedish companies currently supply electricity within the green labelling system.

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Electricity market liberalisation and environmental performance: P O Eikeland

The criteria for supply contracts to be accepted as green, or ‘environmentally sound’, are strict. Only hydro-power developed before 1996 will be accepted. Nuclear power and fossil-fuel-based power are excluded. Biomass is accepted, provided that utilisation is not in conflict with sound forest and land management practices, and that ashes from combustion are returned to the ecosystem. Combustion of peat is not considered a renewable activity. There are strict criteria for power production from waste burning (The Swedish Association for the Protection of Nature, 1995). The Swedish ‘green labelling programme’ is one of a number of new arrangements in several countries in which electricity suppliers guarantee their customers power from renewable energy sources. The projects often involve an extra duty paid by the customers, which in turn will fund new investment in renewable energy capacity. In the USA, four utilities are running schemes in which domestic consumers support renewable energy projects, either by a premium of 5—23% on electricity bills, or by lump sum payments. Up to 10% of the population has agreed to take part. In the Netherlands, two electricity companies started offering renewable power in 1995. One scheme, run by PNEM has around 5000 customers signed up to buy power from wind turbines at a premium. In the other, EDON is aiming to have 10 000 customers signed up by the end of 1996 to buy power from a range of sources including wind turbines and incinerators (ENDS Report 254, March 1996, p. 27) Supposing consumers adopt a high environmental awareness, such new arrangements, employing the force of the market mechanism, may be instrumental in changing current energy systems. The traditional top-down approach, in which governments have decided instruments and timetables for environmental policies may have reached a deadlock — exemplified by the problems of establishing joint CO — taxes in Europe. The  bottom-up approach, in which the market-mechanism is put at work, may cause far more rapid and dramatic changes. Even the possibility for such changes to occur, may lead to a serious reconsideration of power company strategies. The Swedish ‘green labelling’ system is a newcomer in the joint Swedish—Norwegian market. Norwegian hydro-power producers may gradually appreciate and be more active in marketing their valuable assets. In the UK, no parallel arrangements have so far been developed. There are, however, companies which plan to start marketing green electricity once the market is fully liberalised in 1998. In March 1996, the Renewable Energy Company, a small firm based in Gloucestershire, won a licence to supply electricity from renewable sources. A UK consultancy, Ecotec, has surveyed the willingness of UK businesses to pay a premium price for renewable electricity. More than 10% of respondents said they would be prepared to pay a 7% premium. A much larger proportion was prepared to pay a premium when re-

minded that the 10% nuclear levy on electricity bills will shortly come to an end, or if they thought that their competitors were likely to do so (ENDS Report 254, March 1996, p. 27). For information on more surveys, see eg Fouquet (1998). Despite these new arrangements being established, we may ask whether the reformed electricity systems also have characteristics inhibiting environmentally conscious consumers. A central institution of the marketbased trading systems is the power pool — the system of organised markets. The pool consists of a spot market and contract markets. The Swedish example of incorporating environmental criteria into power contracts, shows that there is in principle no problems in standardising environmental contracts — although the arrangements have been made outside the organised market place. In the spot market, on the other hand, there is currently no possibility for customers to control that their short-term purchases have been produced by environmentally benign energy sources. Electricity is here treated as a homogeneous product — not as a product made up of different environmental qualities. Hence, the only option for consumers wishing to be totally ‘clean’ is to avoid spotmarket trading. This has led UK firms to explore the possibility of establishing an alternative ‘green pool’ (ENDS Report 254, March 1996, p. 27). More could be expected to happen in this area when information about new arrangements to push environmental options gets spread around. To round up, reform has dispersed responsibility for conducting the electricity supply industry long-term environmental development. On the other hand, if consumers continue to show a high environmental awareness, the reform may have provided them with new opportunities to press industry investments towards environmentally benign options.

References Collier, U (1995) Electricity Privatisation and Environmental Policy in the ºK: Some ¸essons for the Rest of Europe, EUI Working Paper RSC No. 95/2, European University Institute, Florence, Italy Eikeland, P O (1995) Norway and the ºK: A Comparative Institutional Analysis of Competitive Reforms in the Electricity Industries. EED Report 1995/3, The Fridtjof Nansen Institute, Lysaker, Norway ENDS Report 254, March 1996 Energidata (1994) En~k-unders~kelsen 1994, En~k-arbeidet i norske everk perioden 1990—1994 (Energy Savings Survey 1994, Energy Savings Ventures in Norwegian Electric Utilities 1990—1994). Energidata Report ED-94-279, Trondheim, Norway Fouquet, R (1998). The United Kingdom demand for renewable electricity in a liberalised market. Energy Policy, 26(4), 281—293 Midttun, A and Thomas, S (1998). Theoretical ambiguity and the weight of historical heritage: a comparative study of the British and Norwegian electricity liberalisation. Energy Policy, 26(3), 179—197 Norwegian Ministry of Industry and Energy (1995) ¹he Energy Sector and ¼ater Resources in Norway — Fact Sheet 1994. Ministry of Industry and Energy, Oslo Norwegian Ministry of Oil and Energy (1985) Norges framtidige energibruk og-produksjon (Norway’s Future Energy Consumption and Production). St.meld. no. 71, 1985/86 (White Paper no. 71 1985/86), Oslo

Electricity market liberalisation and environmental performance: P O Eikeland Norwegian Ministry of Oil and Energy (1979) Norges framtidige energibruk og-produksjon (Norway’s Future Energy Consumption and Production). St.meld. no. 54 1979—80 (White Paper no. 54, 1979—80), Oslo Norwegian Ministry of Oil and Energy (1988) Om energisparing og energiforskning (On Energy Savings and Energy Research). St.meld no. 61, 1988—89 (White Paper No. 61, 1988—89), Oslo Norwegian Water Resources and Energy Administration (1992) ENØK-guiden 1992 (The Guide to Energy Savings, 1992), issued in co-operation with the Information Campaign for Energy Savings and the Norwegian Association of Energy Utilities, Oslo OFFER (1995b) Regulation of the Electricity Supply Industry in the ºK — A Chronology. Office of Electricity Regulation, Birmingham, UK OFFER (1992) Energy Efficiency. ¹he ¼ay Forward, Office of Electricity Regulation, Birmingham, UK, October 1992

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OFFER (1995a) ¹he New Electricity Market: ¹he Regulatory Context, Speech given by C. Peter Carter, Deputy Director General, Office of Electricity Regulation, 17 February 1995. Office of Electricity Regulation, Birmingham, UK OFFER (1991) Energy Efficiency — Consultation Paper. Office of Electricity Regulation, Birmingham, UK Skea, J (1993) Ownership, Market Structure and Environmental Strategy: Electricity Generation in Britain. Paper presented at The European Association of Environmental and Resource Economists Fourth Annual Conference, Insead Fontainebleau, 30 June—3 July 1993 Swedish Association for the Protection of Nature (1995) Bra Miljo( val pas elmarknaden. (Sound environmental choice in the electricity market). Stockholm Thomas, S (1996) ¹he History of Nuclear Power in Britain Prior to Privatisation. Presentation at Seminar Series Nuclear Power in Europe, the Fridtjof Nansen Institute, Norway, 28 February 1996