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European
Economic Perspectives 24
Changing
Currents
Can
the European Union achieve a single market for electricity? A new Report
examines the policy choices facing the regulators at both national and
supranational levels.
All
current members of the EU and many of the accession countries are
liberalizing their electricity markets. A few, notably Sweden and the
UK, started the process some years ago and have already accumulated
significant experience. Others, spurred into action by the European
Commissions Electricity Directive, which was issued in February 1997
and targeted for implementation by February 1999, have just begun to
implement a new regulatory framework.
A
new Report, the second in the Monitoring
European Deregulation series published by CEPR and the Swedish
Center for Business and Policy Studies (SNS), explores the obstacles to
a single European market for electricity and the policy choices facing
national and EU regulators. The Report combines analyses of key issues
in electricity market integration and liberalization with evaluations of
practical experiences in the UK, the Nordic countries, Germany, Spain,
France and Hungary. These experiences suggest one important lesson,
according to the Report: liberalized electricity systems do work the
technical breakdowns predicted by the sceptics just have not happened in
the EU.
There
has been great variety in different national experiences of
liberalization in terms of the degree of concentration in generation,
the stringency of unbundling requirements, the design of market
mechanisms, and the extent and nature of public ownership and regulatory
institutions. But, by combining theory with empirical evidence, the
Report is able to use these very diverse national experiences to reach a
number of significant conclusions and make several bold policy
recommendations. The Report draws a distinction between observations
relevant to the design of national electricity systems and those that
are of particular importance to the emergence of a single European
market for electrical power.
At
the national level, the Report unambiguously calls for:
Reducing concentration in
generation. Whenever market size and the minimum efficient scale of
existing power plants allow, a redistribution of generation assets is
the preferred approach. The distribution of ownership appears to matter
more than its public or private character.
Separating ownership between
natural monopoly elements of the system and other activities.
Accounting or even legal separation are not sufficient.
Placing ownership of the
transmission system in the hands of the transmission system operator.
Where the whole transmission system is under one owner, there are
advantages in having systems operation in the hands of the transmission
system operator. This
ensures the solvency of the transmission system or operator, which can
then be made subject to powerful incentive schemes. In the case of
several grids under separate ownership, transmission system operation
should be independent.
Introducing regulated third party access to networks. This
is more transparent and hence preferable to both negotiated third party
access and the single-buyer model, which gives vertically integrated
transmission owners the power to delay the transactions of their rivals.
They are also likely to result in stranded contracts, which would hamper
further liberalization of the market.
Meeting universal service requirements and environmental policy
objectives through a combination of licensing requirements, taxes and
emission permits.
In a liberalized market, such goals are achievable using these
instruments.
Not
all aspects of regulatory reforms, however, lend themselves to such bold
recommendations. It is, for example, too early to evaluate fully the
effect of liberalization on investment incentives. Nevertheless, it
appears that explicit incentives, such as capacity payments, are needed
and that tender auctions might be the most efficient way of securing
non-financially viable renewable generation or even some ancillary
services. It is also a little too early for a thorough evaluation of the
benefits of retail competition. The evidence so far is that retail
competition based on metering does not work. On the other hand,
competition based on profiling and with caps on transaction fees might
be effective.
Finally,
there are aspects of market design for which there is no clear choice.
For example, generation contracts with decentralized dispatch can, in
theory, achieve overall system efficiency provided that transmission
tariffs are adjusted continuously and all agents react rationally to
price changes. In practice, however, transmission tariffs are bound to
be imperfect so that the coordination function of a mandatory pool with
centralized dispatch becomes valuable. In this regard, the proposed
reform of the trading arrangements in England and Wales, with a move
from a mandatory gross pool to a balancing pool, could provide some
useful evidence.
If
the single European market for electricity is to become reality, it must
be as easy to trade electrical power between countries as between
different parts of the same country. Access charges are the key to an
integrated electricity market, the Report argues. Europe needs a
transmission pricing system with the following characteristics:
Access charges that are simple, transparent and only depend on the point
of connection.
An allocation of charges between entry and exit points that is uniform
across jurisdictions and allocates at least a small share to the entry
point.
Some geographic differentiation of access charges to provide incentives
to relieve congestion and reduce overall transmission loss.
A scheme for financial compensation between transmission system
operators for transit and loop flows.
The
Report concludes with an agenda for the European Commission, in 2000 and
beyond. The Commission should consider supplementing the Electricity
Directive with additional measures:
A required separation of ownership between generation and
transmission/distribution.
Strict competition policy oversight of integration between generation
and retailing (supply).
Harmonizing non-tariff conditions for access to transmission and
distribution networks.
The promotion of international transmission pricing rules based on the
principles described above.
The creation of a body responsible for identifying the need for new
interconnection facilities, allocating the cost of these facilities
between participants and drawing up compensation schemes that ensure a
fair and efficient recovery of these costs.
The organization of a system of trading permits for emissions.
This
article summarizes A
European Market for Electricity? Monitoring European Deregulation 2
by Lars Bergman, Gert Brunekreeft, Chris Doyle, Nils-Henrik M von der
Fehr, David M Newbery, Michael Pollitt and Pierre R้gibeau.
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