In the end of the 90s the European Union decided to liberalize and deregulate the power markets of its member states.

© EEX/Christoph Busse

The implementation of the EU single electricity market (1997) and the amendment of the Energy Industry Act (EnWG) in Germany set the conditions for opening the market and thus allowed for the accompanying deregulation.

Deregulation describes the abolishment of limiting provisions in order to increase possibilities for market-based actions, where more competition should achieve higher productivity.

The liberalization had the goal to improve the power market under the legal conditions set by the EU. It was however not primarily meant to increase the economic productivity in the first place, but to guarantee a high level of security of supply.

Another intention was to guide consumer prices to market levels by introducing more competition. Furthermore, the innovations at the market were expected to substantiate, in a similar manner as during the liberalization of the formerly state-controlled telecommunication sector. A further reason for liberalization has been the goal to achieve more environmentally-friendly energy generation and consumption patterns in the EU member states.

By introducing free competition in the areas of generation and retail, an anti-discriminatory trading market, open for all market participants was created.

Power was now seen as a commodity, which can be traded freely, and where the price and quantity is established by the interaction of supply and demand of many participants. From then onwards, power is not only generated and distributed, but the commodity power is now traded according to the price, the availability and credit rating of the market participants.

The grid operation, so all the sectors that are engaged in physically transporting and distributing electricity, is still designed as a monopolistic market, as the effort to build parallel grids on top of already existing ones, does not provide any macro-economic benefits.