What’s holding back competition in energy markets?

Electricity and natural gas markets power modern economies. They fuel industrial production and transportation services, enable digital infrastructure, and meet households’ everyday energy needs. Because electricity and gas are inputs needed in almost every economic activity, how these markets perform matters beyond the energy sector itself.

By Cassie Castle, OECD Economics Department

A large body of evidence shows that well-designed, competitive energy markets can discipline prices, strengthen investment incentives, and support innovation. Competition forces firms to improve efficiency, adopt new technologies and respond to consumer needs. When competition is weak, those pressures fade (OECD, 2022). The result is not only higher energy bills, but wider consequences for businesses, households and economic performance.

According to a new OECD working paper based on the OECD Product Market Regulation (PMR) indicators, countries have already undertaken significant reforms to support competition. For much of the 20th century, electricity and natural gas sectors were mostly organised as vertically integrated state-owned monopolies, with limited incentives for efficiency or innovation. A major wave of liberalisation reforms, particularly during the 1990s, transformed this model. Many countries made significant steps to unbundle monopoly networks, regulate third-party access to infrastructure and open generation and retail markets to new entrants.

Despite this progress, important gaps remain. The new OECD working paper examines the current state of the regulatory framework in the electricity and natural gas markets across 50 countries. It evaluates the extent to which these frameworks support competition by lowering entry barriers, ensuring non-discriminatory access to monopoly network services and reducing switching costs across the supply chain. Drawing on the latest update of the OECD PMR indicators, the paper shows that while legal liberalisation is widespread, key regulatory shortcomings continue to limit the full benefits of competition (see Figure 1).

The PMR Sector Indicator for Energy: Latest results

Indicator values range between 0 and 6 with higher values indicating less competition-friendly regulatory frameworks

Four issues stand out:

First, in some countries the monopoly network infrastructure — transmission and distribution grids — remains weakly separated from competitive activities like generation, storage and retail supply. In electricity, around 10% of surveyed countries impose only accounting separation or no separation at all. In natural gas, this rises to around 16% of countries. Where vertical integration persists, firms have both the incentive to favour their own affiliates and restrict rivals’ access to essential networks. Stronger forms of unbundling, such as legal or ownership separation, provide more robust safeguards and are widely recognised as best practice.

Second, a number of countries continue to restrict households and small businesses from choosing their retail energy supplier and maintain broad retail price regulation beyond targeted support for vulnerable households. This is usually the case when the market is not yet fully competitive. Where entry barriers persist, switching costs are high, or wholesale markets do not function effectively, premature liberalisation can lead to poor outcomes for consumers. However, concerns about price volatility may offer an additional explanation for why regulated retail tariffs remain in place, sometimes alongside market-based offers, particularly following the 2021-2023 energy crisis. Sharp price swings prompted some countries to extend or maintain retail price regulation for small consumers, even in otherwise well-developed markets. The paper explores this tension further. While price controls can provide stability in periods of stress, open-ended measures risk distorting price signals, weakening competitive pressures over time and reducing the benefits of open markets.

Third, even where consumers are free to choose, many lack the tools to engage effectively in retail markets. Retail competition can only deliver meaningful benefits if consumers have access to the information needed to make informed decisions when choosing their supplier. Most countries require suppliers to provide detailed consumption and cost data in monthly bills, but only a few also offer independent price comparison tools. The low rate of roll-out of smart meters also limits the information available to consumers to understand their patterns of consumptions and select the most suitable tariff. Without active support to help consumers make informed choices, the time and effort required to compare offers and change supplier acts as a barrier, even when cheaper offers exist. Lowering these switching costs is essential to making competition work in practice.

Fourth, in electricity markets, demand-side flexibility is increasingly important for grid stability and cost efficiency, helping manage peak demand and integrate variable renewables. However, explicit demand response is not universally available. Around 21% of the countries surveyed do not allow these programmes, and among those that do, roughly one-third restrict participation to industrial users, leaving smaller consumers, in particular households, largely excluded. Expanding household participation requires smart meter deployment to enable time-of-use and dynamic tariffs, alongside regulatory frameworks that permit dynamic pricing and aggregator participation. When these conditions are in place, households can shift consumption away from peak periods, reducing their energy bill, while limiting system costs and strengthening grid stability.

These findings point to an unfinished reform agenda. Legal liberalisation has advanced considerably, yet structural gaps still limit countries from enjoying the benefits of effective competition. Closing these gaps is becoming more urgent as energy systems shift toward higher shares of renewable and decentralised generation. Integrating variable supply requires greater flexibility through responsive demand and clear price signals. Competitive markets are key to delivering these adjustments efficiently. Completing the reform process is therefore not only about improving outcomes within the energy sector, but about supporting a more resilient energy system that underpins productivity and growth across the wider economy.

References

Castle, C. and C. Varriale (2026), “Building competitive energy markets: Regulatory insights from the OECD PMR indicators”, OECD Economics Department Working Papers, No. 1863, OECD Publishing, Paris, https://doi.org/10.1787/f47862f5-en.

OECD (2022), “Competition in Energy Markets”, OECD Roundtables on Competition Policy Papers, No. 290, OECD Publishing, Paris, https://doi.org/10.1787/e2e1b9be-en.

For more information, please visit the OECD Product Market Regulation (PMR) webpage: https://www.oecd.org/en/topics/product-market-regulation.html