Energy

In the past the energy sector has been thought to consist of “natural monopolies”, where efficiency in production could only be achieved through reliance on public or private monopoly suppliers under strict government regulation of prices, entry and investments. This led to major market deficiencies and hence a loss of consumer surplus:

  • There was no mechanism that spurred the firms to minimize costs, no open spot market existed which could ensure that all the available resources were used for energy production.
  • Large price differences existed between the prices paid by different consumer groups, creating a large potential for misallocation of resources.

Energy market reforms

Dramatic changes have taken place over the past few years, leading to improved competition and a reformation of regulation within the sector. Increasingly these changes occur at an international level, thereby integrating national energy markets into wider regional networks. The lessons from these trends indicate that: 

  • Only if energy producers, wholesalers and suppliers vigorously compete with one another, are buyers able to fully reap the benefits of an integrated energy market.
  • These benefits rely on the fact that, among other things, market participants cannot be allowed to engage in illegal activities such as market manipulation or insider trading on both a national and international level.
  • International cooperation in competition policy should follow the level of market integration. Competition policy on the wholesale market should therefore be executed internationally.
  • The integration of markets leads to a more efficient utilization of available production and network capacity.
  • Increased competition on the wholesale market leads to lower wholesale energy prices which, if the retail markets are competitive enough, leads to lower prices for consumers.
  • Finally, a large number of producers in an integrated market will help security of supply.

Sustainability and market forces

While striving for competition within the energy market, long term effects of this competition on the sustainability of energy usage might be overlooked. Competition is however also the major driving force behind innovation in energy usage. This causes a challenge for competition policy

  • Competition policy should encourage innovation in energy usage, while keeping an eye on the long term developments of existing energy usage.
  • The sustainability problem is one which the market is not expected to solve. The solutions to this problem are however still to be found in competition principles.
  • Increasingly competitive markets in emission credits or rights can be created in order to foster the use of innovative ways of energy usage.

In developing a sustainable competition policy within the energy market, the special characteristics of the market should be taken into account:

Network effects

Network effects of interest arise because of physical limits to competition within markets. In the energy sector generation and retailing are most likely to be competitive, but monopolies tend to remain in the transmission and distribution sectors of the business and in long distance transmission.

The high costs for expansion, replacement and adjustment of the infrastructure, combined with the requirement of continued high levels of reliability of the energy networks, lead to the question of how the additional room that is offered to renewable energy sources can be kept affordable. Having effective regulation, which, on the one hand, protects buyers that are dependent on providers, and, on the other hand, enables network operators to recoup their efficient investments and services, continues to be crucial.

Predictability

The increase in wind and solar energy already means that energy supply has become more unpredictable and variable. Guaranteeing security of supply will therefore make new demands on the regulation of energy markets. Variability also means that additional efforts are needed to maintain voltage quality on the grid. At the same time, network operators are faced with major investments in order to connect the new production sites and also to facilitate small-scale distributed generation. In order to guarantee equal competitive conditions in the energy markets, the increased market integration also increasingly calls for international coordination, for example for harmonizing stimulation schemes for sustainable energy.

 

Resources:

Competition and welfare: The Norwegian experience, konkurransetil synhet, 2006

http://www.konkurransetilsynet.no/iKnowBase/Content/416052/COMPETITION_AND_WELFARE.PDF

Restructuring, competition and regulatory reform in the US electricity sector, Journal of economic perspectives, 1997

http://www.jstor.org/discover/10.2307/2138188?uid=3738736&uid=2&uid=4&sid=21103374822281

Network effects as infrastructure challenges facing utilities and regulators, The regulation of infrastructure in a time of transition Tenth ACCC Regulatory Conference, 2009 https://www.accc.gov.au/system/files/Tim%20Brennan%20-%20keynote%20paper.pdf

Feed in or certificates, competition or complementarity? Combining a static efficiency and a dynamic innovation perspective on the greening of the energy industry, energy policy, 2007

http://www.sciencedirect.com/science/article/pii/S0301421506001856

Market outlook, The Netherlands Authority for Consumers and Markets, 2013

https://www.acm.nl/en/publications/publication/11305/Market-Outlook-Authority-for-Consumers-en-Markets/