Restructuring Russia’s electricity sector: Towards effective competition or faux liberalisation?

Russia in 2003 embarked on the restructuring of its electricity sector. The reform is intended to introduce competition into electricity production and supply, leaving dispatch, transmission and distribution as regulated natural monopolies with non-discriminatory third-party access to the networks. The ultimate aim of the reform is to create conditions that will encourage both investment in new capacity and greater efficiency of both production and consumption. The overall approach embodied in the reform is promising. However, there remains a serious risk that its aims could be subverted by
special-interest lobbying during the lengthy implementation phase. If the reform is to succeed, the marketised segments of the sector must be characterised by real competition based on economically meaningful prices. There are two dangers here. The first is that private-sector interests will secure strategic holdings that allow them to exercise market power or even
local monopoly power. The second is that, even after the wholesale market is liberalised, the state will retain considerable capacity to hold down electricity prices, if it so chooses, and it could do so in ways that unduly distort the signals the market is sending and deter the very investment that the reform is meant to attract.