1. Introduction
The political economy has been defined as having multiple dimensions characterised by the presence of economic actors, markets and institutions of different types. However, two main dimensions dominate the space of political economy, namely the economy and the polity. The interdependence between them reflects the continuous tension among groups that belong to either one or the other. More precisely, income groups, industrial sectors, state and local institutions, political parties, and associations all act in the space of political economy to pursue their interests. However, the boundary between the two is blurred, and it is not often clear whether their interests can be defined as purely economic or political (Pabst and Scazzieri, Reference Pabst and Scazzieri2023).
Policy reflects the economic and political interests expressed by the main actors in the space of political economy, including the balance of power among them. These actors operate in material economic structures such as industrial sectors, markets and parastatals. Therefore, policies should incorporate the interests emerging from these structures and represent their political demands. Nevertheless, policy outcomes are not always able to reflect the complexity of these dynamics. Often, the formation of policies depends only partially on the inputs from economic structures, while greater influence is exercised by the internal logics of policy processes and by the beliefs of policymakers and of the society at large, which may remain anchored to previous structural conditions of the economy (Sabatier, Reference Sabatier1998).
This paper contributes to this debate by examining how similar dynamics have evolved in two of the most advanced energy markets in the world, namely the United Kingdom and the United States. By reviewing their path to market liberalisation in the past decades, it reconstructs how their respective approaches to energy policy have considered the structural characteristics of their energy markets and how they have been evolving over time.
The United Kingdom and the United States followed quite different approaches in the development of their energy industry, especially after World War II, which was a phase of rapid development across the whole Western World. The United Kingdom established several state-owned monopolies, while the United States relied more on the private sector. Some contributions explain the use of public ownership in UK network industries as resulting from the limited size of the UK economy and the need to stimulate economic growth, while the scale of production of the United States did not require a similar input from the state. In addition, State-Owned Enterprises (SOEs) represented a tool of national defence needed in contexts of political division and geographical proximity with the enemies, which was the case for Europe until the end of World War II. The state’s push to develop defence technologies was less needed in the United States due to its natural advantage in case of attack, thanks to the presence of oceans on both sides (Millward, Reference Millward2011), although the US government has adopted alternative ways to fund large-scale innovation in the defence sector (Janeway, Reference Janeway2012).
Overall, the different choices adopted by UK and US policymakers in the first eight decades of the 20th century were driven by considerations related to structural features of the economy and the strategic relevance of some sectors. Starting from the 1980s and 1990s, the policy approaches of the two countries started to converge, despite structural differences. The new converging consensus was towards policy paradigms that favoured market competition through the liberalisation of energy markets and privatisation of national energy firms (Cardinale and Belotti, Reference Cardinale and Belotti2022).
One possible interpretation for this convergence is that both countries achieved significant advantages in the decades following World War II as compared to other world competitors in the domestic production and import of key commodities, including energy (Cardinale, Reference Cardinale2019a). Another interpretation concerns the sphere of policy beliefs, specifically the idea that liberalisations and privatisations lead to improvements in the operational efficiency of firms, which in turn should generate benefits for the economy and society, especially in terms of reduction in final prices for consumers (Cardinale, Reference Cardinale2019b; Cardinale et al., Reference Cardinale, Cardinale and Zupic2024).
Regardless of the reasons for the change in policy approach in both countries, we can observe both similarities and differences in the relationship between policy and economic structure. In terms of similarities, both countries were able to take advantage of liberalisation policies in periods of abundant domestic production of gas, thanks to the discovery and exploitation of national gas resources in some periods of their recent historyFootnote 1.
However, one difference was that while the United Kingdom had started to liberalise the natural gas market when large gas reserves in the North Sea were already discovered and in production, the United States had liberalised to untap unexploited resources hindered by price cap regulation, incentivising investments for additional gas production. In addition, the United States had launched state R&D programmes and investments for the exploitation and commercialisation of shale gas, which in a few decades led it to achieve a condition of self-sufficiency.
The different approach resulted in different outcomes for both countries. In the United Kingdom, gas reserves declined over time, while the liberalisation reform framework remained in place. As import dependence grew, price formation in the UK became increasingly shaped by global market conditions, with short-term contracting arrangements intensifying exposure to external shocks. This combination of import dependence and market design helps explain the record-high prices reached in the UK NBP gas hub starting from 2021Footnote 2. By contrast, the US approach to liberalisation, accompanied by various forms of state intervention, has succeeded after decades in generating a structural change consisting of a large-scale expansion of the gas production base, which is currently protecting the country from fluctuations in international gas markets. In addition, this condition of permanent abundance ensures the effective functioning of its liberalised market, thanks to the persistence of low prices and an excess of supply.
Besides the specific cases analysed in this paper, a general explanation of the mismatch between policy approaches and economic structures is that quick changes in the latter are not easily translated into changes in the former, particularly when it comes to policy paradigms and governance structures, which not only are costly and technically complex to implement but also involve conflicts with existing interests and require consensus across the economy and society.
The paper is structured as follows. Section 2 analyses the liberalisation of the UK natural gas market and the major market trends that occurred in the transition from abundance to partial dependence on imports. Section 3 analyses the US natural gas liberalisation and the drivers of a structural condition of abundance. Section 4 compares the two approaches and brings the paper to a close.
2. Liberalisation in the United Kingdom
Starting from the mid-1980s, the United Kingdom undertook a process of large-scale liberalisation and privatisation of the natural gas sector with the aim of introducing market competition and increasing private investments in a sector dominated by the state for decades. With the Gas Act of 1986, the privatisation of British Gas started, followed by the establishment of the national regulator, the Office of Gas Supply (Ofgas), which was required to safeguard consumers’ interests in the transition to a private monopoly. At the same time, British Gas was also restructured in its main businesses—upstream, transport, downstream—in view of unbundling it, and open to competition the market segments that were not characterised by a private monopoly.
In the following years, starting from the 1990s, the main objective of the regulatory authorities was to reduce the market power of British Gas with sales reduction targets of 70,000 kilowatts per year or below (Heather, Reference Heather2010). This entailed that British Gas had to progressively dismiss production units to competitors, especially in the downstream. Important changes also occurred in the midstream, as the national gas network was unbundled and the subsidiary Transco became in charge of its management. Subsequently, the Monopolies and Mergers Commission suggested that Transco would be divested from British Gas to become an independent operator. This was another step towards a fully competitive market, in which gas operators would receive equal treatment in terms of capacity booking and tariff rates.
It was the Gas Act of 1995 that translated this programme into law and defined in more detail how the unbundling process would lead to full liberalisation of the gas market. The law introduced substantial changes to the licensing system in the most important parts of the gas supply chain. In the upstream, it envisaged the assignment of licenses for the exploration and production of oil and gas fields via auctions. In the midstream and downstream sectors, licensing systems were introduced for the management of national and local networks, and incentives were introduced for the entry of new operators into the wholesale and retail market. In the same year, Transco was sold to National Grid to create a state-owned electricity and gas network management group (Heather, Reference Heather2010).
The introduction of the Network Code in 1996 marked the completion of the transition, at least at the regulatory level, to a liberalised market model. The introduction of the Network Code created formal rules for access to transmission capacity, limiting the ability of network operators to favour particular suppliers over others. As a consequence of these reforms, British Gas rapidly lost its dominant position, with its share of the market falling over the first half of the 1990s, reaching less than one-third of total supply by 1996. In addition, in just two years from 1995 to 1997, the new measures led to an increase in the number of energy firms operating in the wholesale market from 15 to more than 50 and to a decrease in the share of long-term contracts over short-term or spot contracts, marking a reduction in the market power of dominant players. The demise of long-term contracts could be explained by a 30% price difference with shorter contractual alternatives (Heather, Reference Heather2010).
Following the completion of liberalisation reform, natural gas prices in the United Kingdom witnessed a progressive reduction. From 1991 to 1996, the national average had halved for industrial consumers, while in the same years, prices in the major European gas markets remained stable. It should be noted that European countries were far behind the United Kingdom concerning market liberalisation, as they still relied on the traditional model based on the state-owned monopoly.
However, to provide a complete picture of the factors that have influenced price developments in the United Kingdom since the reform years, it is necessary to consider trends in supply levels and infrastructure development (Cardinale, Reference Cardinale2023). In particular, it is possible to note that the sharp decrease in prices in the 1990s corresponds to a peak in gas extraction in the North Sea. In fact, in the same years, domestic production of gas doubled, while slowly declining in the 2000s following this peak (IEA, 2020).
Liberalisation reforms favoured higher levels of domestic production, as potential investors in the upstream market could benefit from the presence of a wider range of downstream gas buyers and from the liberalisation of the electricity market, which also allowed thermoelectric power plants to be supplied. In other words, liberalisation allowed the extracted gas to be sold at higher prices than those traditionally imposed by the single buyer British Gas. However, when gas production started to decline, prices increased again, reaching the levels prevailing in the other countries (Helm, Reference Helm2007).
The 2000s witnessed new surges in prices for industrial consumers, increasing fivefold from the historic lows of the mid-1990s. The decrease in supply and the growth of prices were also accompanied by a notable decrease in short-term transactions. Several market players relied increasingly on medium- and long-term contracts, often ranging from 8 to 12 years, while spot contracts witnessed a sharp decline (Heather, Reference Heather2010).
As a result of the decline in domestic production, imports grew significantly. The connection of the United Kingdom with European countries eased this trend, particularly with the development of the subsea gas pipelines ‘UK Interconnector’ in 1998 and the ‘Langeled Pipeline’ in 2006, connecting the United Kingdom with Belgium and Norway, respectively. The development of several LNG import terminals on the UK coasts further favoured the diversification from existing gas imports (Stern and Rogers, Reference Stern and Rogers2014).
By the 2010s, the United Kingdom witnessed a return to a condition of abundance and lowering price, although this condition was realised mainly thanks to gas imports. The United Kingdom had connected itself well between northern gas resources and continental consumers, benefiting from the advantages of gas hubs. As in other phases of abundance, short-term transactions started to increase again, reflecting the confidence of market players to take advantage of the new favourable conditions (Stern and Rogers, Reference Stern and Rogers2014).
However, the energy crisis of 2021 revealed important limitations in reliance on a fully liberalised market model. It became evident that in a context of increasing dependence on imports, heavy exposure to flexible contracts and high fragmentation, the market is likely to witness high volatility in price and supply (Cardinale, Reference Cardinale2023). As in other European countries, prices in the UK gas hub reached record highs, with devastating consequences for the economy and society. Even though in subsequent years prices have declined again, they are still significantly higher than before and as compared to other major gas markets such as the United States.
3. Liberalisation in the United States
The oil shocks of the 1970s marked a turning point in U.S. gas regulation. Till then, natural gas prices in the United States were regulated by a price cap that safeguarded industrial and household consumers from the effects of market concentration in the upstream and midstream. However, with the oil shocks and the advent of an era of prolonged scarcity, the regulatory authority Federal Power Commission (FPC) (later Federal Energy Regulatory Commission, FERC) deemed it important to untap domestic reserves to face the crisis. This was done by relaxing federal price controls in the upstream so that prices could respond more directly to market conditions. Despite the short-term social and economic risk of a higher price, in the medium and long term, this measure attracted considerable investments in US gas production.
However, the competition among upstream producers that was led by price deregulation resulted in imbalances in the rest of the supply chain, which was not yet subjected to measures of liberalisation. In particular, pipeline companies operating in the midstream—connecting upstream producers with downstream companies and consumers—accrued their market power considerably, also due to the monopolistic power that often characterises the infrastructure business (Watson, Reference Watson1992; Sutherland, Reference Sutherland1993).
This situation did not initially lead to regulatory changes in the midstream markets, probably due to the lobbying power of pipeline companies and the risks associated with entirely redesigning this crucial sector. The trigger for change was another market trend, namely the oil price countershock of the mid-1980s. This caused gas prices to reach record lows and, in some cases, become uncompetitive as compared to rival energy sources such as oil and coal. This trend led pipeline companies to experience losses and a subsequent crisis, due to the difficulty to honour ‘take-or-pay’ contracts with upstream producers, while struggling to make sufficient incomes in downstream markets.
The crisis justified state intervention, particularly in the form of introducing infrastructure unbundling regulatory provisions that prevented gas pipeline companies from buying and selling gas, while allowing them only to apply transport tariffs to traders. This was a key step in the process of market liberalisation, as this measure prevented pipeline companies from benefitting from the market power of assets characterised by natural monopoly and regulating these assets to serve as public goods available to competing market players.
Unbundling of pipeline companies led to a reduction in their market power and an increase in competition among them, leading to a reduction in transport tariffs and gas prices for final consumers. The liberalisation of licenses in both inter- and intra-state gas transportation markets was decisive in favouring market competition among pipeline companies (Dahl and Matson, Reference Dahl and Matson1998).
These reforms were completed in 1992, with the liberalisation of the midstream market as one of its most ambitious aspects. However, gas prices did not drop following the completion of reforms but grew progressively, especially in the 2000s, as they tripled and reached a peak. However, they returned to low levels in the 2010s, showing that reforms took decades before showing their results, which is often interpreted as resulting from the resistance of leading companies in giving up their market power (Arano and Blair, Reference Arano and Blair2008; Makholm, Reference Makholm2012).
However, it is worth noting that sustained price declines in the U.S. gas market only materialised once domestic output expanded substantially, driven by the widespread commercial deployment of unconventional extraction technologies. This suggests that the transition to a condition of gas abundance was crucial for the drop in gas prices. In addition, gas abundance has decreased the price correlation of the US gas with gas in other hubs worldwide, as well as with alternative energy sources in the United States, such as oil.
Other elements suggest that the liberalisation reform was not the determinant driver of the reduction in gas prices. This is shown by the contractual strategies adopted by the industry, whose rationale followed more ongoing market trends rather than regulatory changes (Cardinale, Reference Cardinale2023). For example, between the 1980s and 1990s, despite several measures to liberalise and deregulate the markets, the industry often relied on long-term supply contracts and on strategies of vertical integration in periods of market uncertainty that could jeopardise security of supply and stability of price.
Although in the short term the market might provide greater incentives than the regulation, it is also true that the regulation is key to accompany market trends and to benefit from them (Cardinale, Reference Cardinale2023). In the case of the United States, liberalisation reforms have arguably contributed to even more ambitious objectives, namely structural changes that ensure permanent reductions in prices. Some scholars go on to argue that liberalisation reforms and R&D support for shale gas were both determinants to overcome previous constraints to gas abundance, including the price ceiling regulation (Makholm, Reference Makholm2012; Joskow, Reference Joskow2013).
However, it is also true that other specific factors, not always present in the European or Asian contexts, have contributed to the success of the US competitive market model. These include legislation that does not run counter to the production of hydrocarbons for environmental reasons; the possibility to realise economies of scale, thanks to the large size of the domestic market; and the possibility to connect production sites with end markets with relative ease, thanks to the lack of challenging natural barriers such as deep seas or geopolitical risks.
4. Concluding remarks
Structural changes in the UK and US energy sectors have gone in opposite directions in the past decades. The United States has experienced a transition from a condition of scarcity to one of abundance, while the opposite occurred in the United Kingdom. However, the policy approach has remained unchanged and has been inspired by market liberalisation in both countries.
The UK case shows that, with the reduction in gas reserves in the North Sea in the late 1990s, prices have started to increase again in the 2000s in line with those of other European countries. In some phases, this trend has been partially offset by the creation of numerous import infrastructures and the establishment of the National Balancing Point (NBP) virtual hub, which have, respectively, contributed to recreating the conditions of gas abundance (albeit from imports) and to encouraging trade through a platform open to sellers and buyers, generating a competition mechanism that reduces prices. However, these benefits were only temporary because they were generated by a provisional condition of international gas abundance. With the decline in global upstream investments and the rise of new gas importers in Asia in the 2010s, which led to a condition of international shortage, since 2021 the United Kingdom started to experience severe supply scarcity and record-high prices.
In the United States, the liberalisation of the gas market started in the late 1970s, continued across the 1980s and did not lead to the desired results until the end of the 2000s, when price reduction became a structural component of US gas markets. This result was driven primarily by the large-scale production of shale gas, which has directed the United States towards self-sufficiency and to become the world’s largest producer of hydrocarbons. Liberalisation policies have played a role in this structural change, by contributing to untapping existing reserves. For example, wellhead price deregulation in a period of high gas demand incentivised upstream investments and discovery of new gas wells. In addition, this regulatory framework shows a high level of suitability with the current condition of domestically generated gas abundance in the United States, as flexible contractual forms and high market fragmentation increase competition and reduce prices without compromising energy security. This has been evident in the past few years, with the United States remaining almost unaffected by the energy crisis experienced in several other advanced economies.
In summary, when policy approaches do not consider changes in economic structures, problems may arise. From the UK and US experiences, we observe that (i) competition policies have succeeded in reducing energy prices only in periods of excess supply; (ii) in the case of strong dependence from imports, price deregulation and abandonment of long-term contracts in favour of spot markets lead to price volatility and energy security risks; and (iii) a structural reduction in prices is achieved only when the abundance of gas derives largely from internal production.
Considering these experiences, and in recent times the occurrence of similar dynamics in Europe, it is possible to conclude that while liberalisation policies can be effective tools for reducing prices in periods of gas abundance, they do not represent a long-term solution if the abundance is created artificially, namely from imports. In other words, as soon as the international excess supply comes to an end and prices increase, the benefits of a competitive market will decrease and energy companies will increasingly rely on vertical integration, including acquisitions and stipulation of long-term contracts.
Therefore, as structural changes occur, policy approaches should also consider how to suit newly emerged structural conditions. However, prevailing policy paradigms often persist despite the underlying economic conditions that justified them have changed. This can be explained by the difficulty to change established policy frameworks or by the resistance of influential market players. In addition, an important role is played by policy and societal beliefs, which support existing policy paradigms and are reinforced by them, often irrespective of the success of policies and the changes in the material conditions of economic structures. In fact, this mismatch might persist even when the gap between prevailing policies and material conditions in the economy causes major disruptions, such as the current energy crisis, with significant economic and social implications.
Zooming out from the specific trends of the energy sector, it is possible to note how the relationship between policy approaches and economic structures does not always offer predictable patterns. In some contexts, such as in the United Kingdom, policy paradigms remained in place despite quick structural changes, while in others, such as the United States, policies seem to be thought to generate structural changes.
These differences reflect diverse pathways to the constitution of political economy in each national context. In the United Kingdom, the mismatch between policy approaches and economic structure can be interpreted as resulting from the difficulty to change established policy frameworks that are supported by a wide consensus in the institutions and society, and for which the United Kingdom has been a pioneer worldwide. The mismatch has also certainly characterised the United States across different phases. However, the United States has also shown a vision of public and private players in the energy market who have pushed for structural changes, allowing them to carve out strategic advantages in both the economic and political spaces. One should also consider how geographical, industrial and institutional specificities in the United States might allow for a greater scale of change, making it easier for domestic players—winners, losers and neutrals—to accept these changes.
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