Electricity Market Transformation - An Evolutionary Roadmap for Competitive Electricity Markets

Electricity markets sit on a long continuum. At one end is the vertically integrated state monopoly familiar to most of the industry's first century. At the other is the fully unbundled, multi-settlement wholesale market — day-ahead, intraday, balancing and capacity — coupled with retail choice and, increasingly, cross-border trade, exemplified by PJM in the United States, the Nordic and European day-ahead and intraday coupling, and Australia's National Electricity Market, among others. Between these two poles sits a well-trodden middle path: the single buyer, or principal buyer, model, in which a state entity centrally procures power from independent power producers under long-term power purchase agreements — still in use, in various forms, by Vietnam, Jordan, Malaysia and, until recently, most of the Gulf Cooperation Council.

This primer sets out that continuum as a practical roadmap: the sequence of legal, institutional, regulatory and technical reforms that carry a power system from single buyer toward genuinely competitive market structures; the risks that have derailed reform elsewhere, like — California in 2000–01, Texas in 2021, Jordan's mounting utility debt; the benefits realized where reform has been well sequenced, from the Philippines to the European Union's internal market; and the often-misunderstood, two-way relationship between market liberalization and national energy security. It closes with a set of principles for policymakers and state-owned utilities considering this journey, informed by NEOS Advisory's own experience supporting market reform, resource adequacy planning and institutional transformation across Europe, Central Asia, the Middle East and Southeast Asia.

EXECUTIVE TAKEAWAY

There is no single finish line. The right stopping point on the spectrum from single buyer to fully competitive market is a strategic choice shaped by resource base, institutional capacity and regional context — not a template to be applied uniformly.

1. A Sector at an Inflection Point

Electricity systems worldwide are under pressure from the same handful of forces: accelerating renewable and storage deployment, rising demand from electrification and new industries such as hydrogen, growing appetite for regional and cross-border power trade, and a rising bar for resilience against extreme weather and geopolitical shocks. Whatever a country's institutional starting point, these forces are pushing power sector institutions to take on functions a single, vertically integrated buyer was never designed to perform: balancing variable output, pricing flexibility and reserves, settling regional trades, and sending investment signals precise enough to attract private capital into generation, storage and network infrastructure.

Market design is the toolkit for making these functions work — but it is not a single template. It is a sequence of institutional choices, each dependent on the ones before it. Jumping stages, or opening markets before the institutions and price signals that make them safe are in place, has been the proximate cause of some of the most damaging episodes in the industry's history. Sequencing well, by contrast, has allowed countries as different as the Philippines and the member states of the European Union to move from crisis-prone monopolies toward markets that today attract private investment on competitive terms.

This primer is written for policymakers, regulators and state-owned utilities weighing that journey. It does not argue that every country should race toward a fully deregulated market — the evidence, in fact, argues against a one-size-fits-all approach. It instead lays out the spectrum of models in use today, the reforms that connect them, and the risks and benefits at each step, so the decision about how far and how fast to go can be made with open eyes.

2. The Market Structure Spectrum

Market transformation is far more than market design

Electricity market reform is often described as a sequence of legislative and structural changes leading from a vertically integrated utility to competitive wholesale and retail markets. In reality, market transformation is considerably more complex. It is a comprehensive sector-wide transition requiring simultaneous progress in governance, regulation, commercial sustainability, infrastructure, institutional capability and market design.

Experience from around the world demonstrates that reforms rarely fail because of the chosen market model alone. More often, they falter because one or more of these critical foundations have not evolved at the same pace. Introducing wholesale competition before utilities become financially viable, liberalizing prices without credible regulation, or implementing sophisticated market platforms before system operators and market participants have developed the necessary capabilities can create new risks while limiting the benefits that reform is intended to deliver.

Drawing on NEOS Advisory’s experience supporting electricity sector reform, market design, regulatory development and institutional transformation across Europe, the Middle East, Central Asia and other emerging markets, we have found that successful market transitions consistently balance progress across five interdependent pillars.

These pillars represent the essential building blocks of electricity market transformation. Together they provide a practical framework for assessing sector readiness, identifying reform priorities and sequencing implementation in a manner that preserves affordability, reliability, investor confidence and long-term energy security.

A Holistic Approach to Market Reform

The five pillars are mutually reinforcing and should evolve together throughout the reform process.

Commercially viable utilities cannot emerge without credible regulation. Competitive markets cannot function without modern metering, settlement systems and digital infrastructure. Independent regulators cannot deliver investor confidence without transparent governance and effective enforcement. Likewise, sophisticated market rules provide little value unless system operators, utilities, regulators and market participants possess the institutional capability required to implement and manage them.

For this reason, NEOS Advisory views electricity market reform not as a series of isolated legislative milestones, but as a coordinated transformation program in which progress across each pillar remains broadly aligned. The pace of reform is therefore less important than maintaining balance between these interdependent elements. Countries that advance one pillar significantly ahead of the others often experience fiscal pressures, operational inefficiencies or declining system reliability that ultimately delay the broader reform agenda.

Applying the Framework Across the Market Evolution

The market models presented in this paper describe where a country sits along the spectrum of electricity market development. The NEOS Market Transformation Framework explains what must evolve in order to move successfully from one stage to the next.

Five broad stages recur across the countries and regions surveyed for this primer. Each is a real, currently operating model somewhere in the world, not a theoretical construct, and each carries a distinct allocation of risk between the state, generators, and consumers.

2.1 Stage 0 — Vertically Integrated Monopoly

A single state-owned utility owns generation, transmission and distribution, and sets tariffs administratively, often with significant cross-subsidy. Investment, fuel price and demand risk all sit with the state. This model dominated the industry globally until the 1980s and remains the default in parts of the developing world; Indonesia's state utility is a commonly cited present day example of a fully integrated single-buyer system, while Thailand operates a “ring-fenced” variant that separates the buyer function without fully unbundling ownership.

2.2 Stage 1 — Single Buyer (Principal Buyer) with IPP Participation

The state utility, or a newly created dedicated entity, retains the exclusive right to purchase and resell electricity but opens generation to private investment through independent power producers under long-term power purchase agreements, usually awarded through competitive tenders. This is the model in place, in various forms, in Jordan, in Peninsular Malaysia (where a formally designated “Single Buyer” entity manages procurement under the Electricity Supply Act), in Vietnam, and until recently across most of the Gulf, where state utilities buy from a small number of IPPs at regulated prices.

The single-buyer model was always understood — including in the World Bank's own foundational analysis of the model in the early 2000s — as a transitional device: a way to bring private capital and least-cost generation into a system before the full institutional and technical apparatus of a wholesale market exists. It has succeeded at that narrow task in many places. But it also concentrates enormous financial risk on a single balance sheet. Jordan's National Electric Power Company illustrates the danger clearly: locked into largely take-or-pay contracts for both fuel and power, the company has struggled to adjust its purchasing as cheaper renewables have entered the system, and by 2026 its accumulated losses have become a material contributor to Jordan's public debt — prompting an IMF-linked reform program that includes new time-of-use tariffs and a stated intent to move beyond the single-buyer structure.

Recent research complicates the simple case for abandoning this model, however. A 2025 study examining sixty-three emerging and developing countries between 2010 and 2022 found that competitive markets did not, on average, outperform single-buyer markets on renewable energy share or emission intensity — a reminder that institutional and regulatory context, not the market model in isolation, often determines outcomes. The single-buyer model is not inherently anti-clean-energy, and abandoning it is not, by itself, a guarantee of better results unless surrounding capability is built at the same time.

2.3 Stage 2 — Transitional Wholesale Market

Bilateral contracts between generators and distributors or suppliers begin to coexist with a limited, centralized spot or balancing market, typically operated by an emerging independent system operator. Contracts remain the dominant mechanism for volume; the spot market exists mainly to settle imbalances and establish a reference price. Vietnam sits close to this stage today, described in regional literature as an “unbundled single-buyer system with nascent wholesale competition,” and several Gulf commentators have recently argued for exactly this kind of intermediate step as a precursor to a fuller regional market.

2.4 Stage 3 — Full Wholesale Competition

A genuine multi-settlement market emerges: day-ahead auctions clear the bulk of energy twelve to thirty-six hours ahead of delivery; intraday markets allow trading closer to real time as forecasts firm up; a balancing or real-time market and ancillary services markets (frequency response, reserves) are run by an independent system operator; and, in many designs, a separate capacity market or strategic reserve addresses the so-called “missing money” problem — the tendency of energy-only prices to under-reward the investment needed for long-term reliability.

PJM's Reliability Pricing Model in the United States, introduced in 2007 after PJM's own experience showed that energy, capacity and ancillary revenues together were not incentivizing enough new generation, is the leading example of a forward capacity auction layered onto an energy-only base. The Philippines' Wholesale Electricity Spot Market, commercially operating since 2006 and now a five-minute real-time market, shows the same broad architecture successfully adapted to an emerging-market context. ERCOT in Texas and Australia's National Electricity Market illustrate the alternative, pure energy-only design — a choice with its own well-documented risks, discussed in Section 4.

2.5 Stage 4 — Retail Competition and Regional Integration

The final stage extends competition to the retail tier — end-users, or increasingly smaller commercial and industrial consumers, gain the right to choose their electricity supplier — and knits national wholesale markets together across borders through market coupling. The Philippines reached retail competition in 2013 and has progressively lowered the demand threshold for eligibility, down to 100 kilowatts from mid-2026, extending consumer choice further down-market. Europe's Single Day-Ahead and Single Intraday Coupling, which today link most of the continent's national exchanges — Nord Pool, EPEX Spot, OMIE, GME and others — through a shared clearing algorithm, represent the most advanced expression of this stage: national borders effectively disappear from the perspective of price formation, subject only to physical transmission constraints.

3. The Roadmap: Foundational Reforms That Connect the Stages

There is no universal pathway to electricity market reform, nor is there a single destination that every country should pursue.

The appropriate market structure depends on each country’s resource endowment, institutional maturity, policy objectives and regional context. Successful reform is therefore not defined by how quickly a country introduces competition, but by whether each stage is supported by the commercial, regulatory, technical and institutional foundations required for it to operate effectively.

Countries rarely struggle because they adopt the wrong market model. They struggle because they move to the next market model before they are ready.

No country skips from Stage 0 to Stage 4 in a single step, and the reforms below recur across almost every successful transition studied for this primer — they are only re-sequenced depending on a country's starting point.

3.1 Legal and structural unbundling

Separating generation, transmission, distribution and supply — first on an accounting basis, then functionally, and eventually into ownership-separated entities where a wholesale spot exchange is planned — creates the transparency a regulator, and eventually a market, needs to see and price each part of the value chain on its own merits. The Philippines' 2001 Electric Power Industry Reform Act sequenced this explicitly: tariff unbundling and privatization of the state generation company's assets preceded the 2006 launch of its spot market by several years.

3.2 An independent, technically credible regulator

A regulator empowered to set tariffs, license participants and enforce market rules independently of both the treasury and the incumbent utility is the precondition for private investors to trust that returns will be respected. The Philippines created its Energy Regulatory Commission alongside its 2001 reform law; Jordan's Energy and Minerals Regulatory Commission, established in 2001–02, plays the same role.

3.3 Cost-reflective tariffs and subsidy reform

Markets cannot send credible price signals over a floor of politically administered, below-cost tariffs. The Gulf states' 2015–16 round of subsidy reform — which brought UAE and Saudi electricity, gas and water tariffs closer to cost-reflective levels — is frequently cited as a precondition for the region's more recent interest in market mechanisms. Progress has since slowed in several member states, a reminder that tariff reform, once begun, needs to be sustained rather than treated as a one-off event.

3.4 Market rules, codes, and a credible market operator

Grid codes, market rules covering bidding and settlement, and a market operator empowered to run auctions transparently must all be built and tested — usually through a formal trial-operations period — before real money changes hands. The Philippines ran a multi-year trial-operations program on its Luzon grid before its spot market went commercial in 2006, then repeated the same approach when extending the market to the Visayas grid in 2010 and Mindanao later. The lesson generalizes: pilot first on the best-prepared part of the system, prove the rules work, then extend geographically.

3.5 Metering, settlement, and market IT infrastructure

Granular metering, a settlement system able to reconcile contracted and spot volumes, and, as markets mature, platforms capable of increasingly fine time resolution — Europe's day-ahead coupling moved from hourly to fifteen minute settlement in 2025 — are unglamorous but essential. Jordan's current reform package can only introduce time-of-use tariffs because smart meters have now been rolled out to roughly ninety-five percent of consumers.

3.6 Institutional capability and phased sequencing

Perhaps the least tangible, but most consistently cited, ingredient is capability — the trading, risk-management, system planning and regulatory skills a state-owned single buyer typically does not need, yet a market operator absolutely does. Every successful transition surveyed for this primer built that capability deliberately and in advance of full market opening, generally through international partnerships, staged pilots, and the recruitment of experienced market and system operators — precisely the intersection of market design and organizational transformation that determines whether reform succeeds on paper or in practice.

EXECUTIVE TAKEAWAY

The sequence — unbundle, regulate, re-price, build market rules and pilot, then scale and couple regionally — matters more than the pace. Every durable transition surveyed here followed roughly this order; none reversed it.

4. Risks Along the Journey

4.1 Market power and manipulation

Partial or poorly monitored liberalization can be worse than no liberalization at all. California's 2000–2001 crisis is the canonical case: a restructured market with retail price caps but no matching wholesale discipline created conditions for aggressive economic withholding — most notoriously by Enron — that a federal investigation later concluded caused tens of billions of dollars in damage and contributed to the near-collapse of one of the state's major utilities. The lesson was not that markets fail, but that flawed design paired with inconsistent rules made manipulation possible, and that monitoring and anti-gaming provisions must be built in from the outset, not added after a crisis has already occurred.

4.2 Under-investment in reliability and price volatility

Energy-only markets — those without a separate capacity mechanism — rely on scarcity prices during a small number of extreme hours each year to reward investment in generation that may otherwise run rarely. ERCOT and Australia's National Electricity Market are the two most prominent examples of this design. In February 2021, Winter Storm Uri exposed the risk starkly: a simultaneous surge in demand and collapse in supply, driven in large part by unwinterized gas infrastructure and generation, pushed prices to the market price cap of roughly nine thousand dollars per megawatt-hour for days, contributed to more than 4.5 million Texans losing power, and led directly to a two-phase market redesign together with new mandatory weatherization rules. Whether energy-only design was the root cause, or whether the crisis was fundamentally a resource-adequacy and cross-sector coordination failure that any market design would have struggled with, remains debated among energy economists — but the episode is now the standard reference point for the trade-off between energy-only markets' lower average costs and their exposure to extreme event price and reliability risk.

4.3 Contingent liability concentrated in a single balance sheet

The single-buyer stage, precisely because it is designed to attract private capital while insulating IPPs from market risk, transfers volume, fuel price and demand risk onto the offtaker's balance sheet. Jordan's experience shows how this can compound: take-or-pay fuel and power contracts signed to secure supply became a fiscal drag once cheaper renewables displaced the contracted thermal output the offtaker was still obligated to pay for, with utility debt now equivalent to a meaningful share of the country's total public debt. Any government retaining a single-buyer or principal-buyer structure for an extended period should treat this concentration of risk, and the design of its power purchase agreements — indexation, take-or-pay terms, curtailment rights — as a first-order strategic question, not a back-office contracting detail.

4.4 Premature liberalization outrunning institutional capacity

The opposite risk is equally real. Vietnam, where the Ministry of Industry and Trade has recently signaled intent to finally retire its state utility's single-buyer role after years of delay, illustrates how reform can stall for a decade or more when institutional, regulatory and IT foundations are not built in step with policy ambition. A market opened before its rules, monitoring capability and settlement systems are ready tends to produce exactly the manipulation or under-investment problems described above; one that never opens because the foundations are not prioritized leaves the state permanently exposed to the fiscal and operational risks of the single-buyer model.

4.5 Social and political risk of tariff reform

Cost-reflective pricing is a precondition for market signals to work, but it is also, almost everywhere, the most politically sensitive element of reform. The slowdown in Gulf subsidy reform since its 2015–16 high-water mark, driven by public sensitivity to price increases, is a reminder that this risk does not disappear once initial reforms are enacted; it has to be managed continuously.

4.6 Cybersecurity and operational risk in more decentralized systems

As markets add settlement platforms, granular metering, cross-border data exchange and a wider set of participants — traders, aggregators, flexibility providers — the attack surface for cyber and operational risk grows accordingly. This is increasingly cited in Gulf regional market design proposals, alongside more conventional risks such as differing subsidy regimes and public sensitivity to price volatility, as a reason to sequence regional market integration carefully rather than pursue a single, fast-moving launch.

5. The Benefits of a Well-Sequenced Transition

When undertaken well, the benefits of this transition are considerable, and certainly justify the effort required:

• Efficiency and price discovery — a functioning day-ahead and intraday market dispatches the system at genuinely least cost, hour by hour, and produces transparent price signals a single buyer's bilateral contract book cannot.
• Mobilizing private capital and de-risking the state — shifting generation investment risk from a sovereign offtaker onto a diversified base of market participants, while retaining targeted mechanisms such as capacity payments for genuinely strategic needs, reduces the kind of contingent-liability concentration Jordan's experience illustrates.
• Better integration of renewables, storage and flexibility — granular, closer-to-real-time markets are better suited to variable output than administratively dispatched systems, and let storage and flexible demand monetize services a single-buyer PPA book has no natural mechanism to price.
• New commercial models and revenue streams — once market functions exist, they can become services: settlement and administration fees, regional coordination, market intelligence, and environmental products such as guarantees of origin.
• Regional trade value — modeling of a prospective Gulf-plus-Egypt-Jordan-Iraq power pool, using an hourly market-coupling design out to 2030, found it could reduce the region's annual generation costs by roughly 1.6 percent on average, avoid around 35 percent of renewable curtailment, and cut carbon dioxide emissions by about 8 million tonnes in 2030 relative to today's largely bilateral, in-kind trading arrangements.

6. National Energy Security: A Two-Way Relationship

Energy security is often invoked on both sides of the market reform debate, and both invocations have merit — which is precisely why the relationship deserves careful treatment rather than a slogan.

Markets can strengthen energy security. Deep, liquid wholesale markets diversify supply away from a small number of long-term contracts and toward a broad pool of generators, storage operators and, where interconnected, neighboring systems — pooling reserve margins in the way regional interconnection authorities already do on an emergency basis, but with the added benefit of routine, commercially transparent trade rather than only crisis-mode support. Ancillary-services and reserve markets give the system operator tools to manage the reliability challenges that rising renewable and variable load shares create, rather than relying solely on administrative directives. Transparent, forward-looking price signals — including a capacity or resource adequacy mechanism layered onto an energy market — can attract exactly the diversified, flexible investment a stressed system most needs: batteries, demand response, interconnection, fast-start generation.

Markets can also introduce new security risks if poorly designed. The central lesson of Winter Storm Uri, and of the parallel debate over Australia's National Electricity Market, is that an energy-only market relying purely on scarcity-hour pricing risk under-delivering resource adequacy exactly when it matters most, particularly where the market interacts with other constrained infrastructure and interconnection with neighboring systems is limited. California's 2000–01 crisis shows a second, distinct risk: a market structure that is internally inconsistent — retail price caps without matching wholesale discipline, incomplete unbundling, weak monitoring and surveillance — creates space for manipulation that can itself become a security event, not merely a pricing anomaly. And a more open, digitally settled, multi-participant market by construction has a larger cyber and operational attack surface than a single, tightly controlled state utility, a genuine consideration as markets add remote metering, cross-border data exchange and third-party trading platforms.

The practical resolution, visible in almost every mature market surveyed here, is not to choose between market and security but to build resource adequacy mechanisms into the design deliberately: forward capacity auctions, strategic reserves, or explicit reliability standards sitting alongside the energy market, rather than assuming energy prices alone will deliver adequacy. For any country designing this from scratch, the sequencing question is not whether to have a resource adequacy backstop, but which form it should take and how early in the reform sequence to introduce it — ideally before, not after, an energy-only market is exposed to its first genuine stress event.

EXECUTIVE TAKEAWAY

Market design and energy security are not opposing goals. The evidence favors building the resource-adequacy backstop in from day one, rather than retrofitting one after a crisis has already occurred.

7. A Regional Lens: The Gulf at a Crossroads

The Gulf Cooperation Council states illustrate almost the full spectrum described in this primer within a single, closely related region. Most members still operate a form of single-buyer model, with small volumes of private generation sold to a state offtaker at regulated prices; only Oman has moved to a genuine wholesale market, launched in March 2022. The GCC Interconnection Authority, established in 2001 and fully connecting the six member grids by 2011 via a 400 kV HVDC backbone, today functions largely as a reserve-sharing and emergency-support mechanism rather than a commercial trading platform — in 2021, the great majority of cross-border exchange was settled in-kind rather than in cash, and total intra-GCC trade amounted to a small fraction of one percent of regional generation, versus roughly five percent for intra-EU trade.

That picture is now shifting. New interconnections — a Saudi–Egypt link, a planned connection into southern Iraq expected in the first half of 2026, and growing electricity imports into Kuwait to address chronic shortages — are pulling regional electricity trade further into the commercial mainstream, and 2026 industry commentary has explicitly floated the case for a genuine GCC-wide power market: a shared operator or expanded mandate for the existing interconnection authority, transparent congestion management and pricing rules, and a regional regulatory coordination body loosely modelled on Europe's Agency for the Cooperation of Energy Regulators. Modeling of a wider regional pool extending to Egypt, Jordan and Iraq suggests meaningful gains are available — lower generation costs, less renewable curtailment, lower emissions — if market coupling replaces today's largely bilateral, ad hoc trading.

At the same time, informed regional commentary is consistent in cautioning against a single, fast-moving launch: differing subsidy regimes, fuel cost disparities across member states, legitimate national energy-security sensitivities, and public sensitivity to price volatility all argue for the same careful, staged sequencing this primer describes at the national level — applied now at a regional one. For state-owned utilities and principal buyer institutions across the Gulf, the practical question is no longer whether market functions such as resource adequacy coordination, reserve and flexibility markets, and regional trade participation will eventually matter, but how to build the institutional, regulatory and technical foundations to be ready when the wider regional market opens.

8. Principles for Policymakers: A NEOS Advisory Perspective

Drawing on the evidence surveyed in this primer, and on our own advisory experience — supporting market reform in the EU and Energy Community countries, as well as the Gulf, cross-border market coupling and power exchange development in the Western Balkans, resource adequacy and flexibility assessments and energy security-driven institutional transformation in countries such as Moldova — we would highlight six principles for any government or state utility weighing this journey.

1. Treat sequencing, not speed, as the primary design variable. Every well-regarded transition in this primer — the Philippines above all — unbundled, regulated and re-priced before opening a spot market, and piloted that market on one grid before scaling it nationally.
2. Build the resource adequacy backstop into the market design from the outset, not after the first crisis. Whether it takes the form of a forward capacity auction, a strategic reserve, or explicit reliability standards, retrofitting adequacy mechanisms after a stress event is far costlier than designing them in from day one.
3. Treat cost-reflective tariffs as a continuous backbone measure, not a one-off milestone — and pair reform deliberately with social protection for the households and sectors most exposed to the transition.
4. Size and structure single-buyer power purchase commitments with the same balance sheet discipline as any other sovereign contingent liability, given how quickly take-or-pay contracts can become a fiscal burden once market conditions, or cheaper renewables, shift.
5. Invest in institutional capability — trading, risk management, system planning, market monitoring — ahead of, not alongside, market opening; this is consistently the least visible and yet a decisive ingredient in the transitions that succeed.
6. Where regional integration is on the table, as it increasingly is across the Gulf, treat it as an extension of the same sequencing discipline rather than a separate, faster-moving track — the benefits are real, but require the same institutional foundations as national reform.

None of this argues for uniformity. The evidence assembled here is a caution against treating full liberalization as an  immediate end in itself. The right stopping point on the spectrum described in this primer is a strategic choice for each country, informed by its resource base, institutional starting point and regional context — not a predetermined destination.

About NEOS Advisory

NEOS Advisory is a boutique consultancy specializing in energy, water and utilities, with offices in Los Angeles and the UAE. Our team combines strategic advisory with hands-on utility leadership, regulatory and market-design experience gained across more than forty countries — supporting clients through market reform, resource adequacy planning, institutional transformation and implementation, from concept through execution.

For more information, visit www.neosadvisory.com or contact info@neosadvisory.com.