The end point of reform is not always clearly defined and reform often proceeds gradually. In addition, the implicit regulations that often pervade the old arrangements have to be made explicit in a process that takes time to complete. As a result, there may be considerable regulatory risk in the transition to competitive electricity markets. Regulatory risk, like other risks, may discourage investment. Although this effect is transitory, it may be significant, especially where additional investment is needed at the time of opening the market to competition.
Governments have a key role in minimising regulatory risk.
A credible and clearly defined regulatory framework for electricity markets is essential to facilitate investment. Power markets are unlikely to become fiercely competitive in the near future. Many countries have opted for gradual liberalisation. Nevertheless, governments still have an important role in this new environment to mitigate potential problems. Address market entry barriers to generation.