Academic journal article European Journal of Sustainable Development

Market Monitoring and Analysis: Electricity Sector

Academic journal article European Journal of Sustainable Development

Market Monitoring and Analysis: Electricity Sector

Article excerpt

1. Introduction

1.1 Background

1.1.1 The reasons for liberalization of the electricity industry

The motivation for electricity liberalization differs slightly between countries; however most of the countries share common ideological and political reasons regarding disaffection with the vertically integrated monopoly model of the past and a strong belief that the success of liberalization in other industries can be repeated for the electricity industry. The introduction of competition in the electricity industry has been justified by the perceived benefits of introducing market forces in an industry previously viewed as a natural monopoly with substantial vertical economies. Therefore the motivation behind electricity liberalization is to promote in the long run efficiency gains, to stimulate technical innovation and to lead to efficient investment.

Liberalization requires that the market is not dominated by natural monopoly characteristics. Changes in generation technologies (Hunt, 2002) and improvements in transmission (Stoft, 2002) have removed the natural monopoly character of the wholesale power market.

The case of the electricity industry is especially interesting because since the beginning of the nineteen nineties economies of scale have ceased to be the rule in the generation portion of the industry. For many years, the generation part of the electricity industry was considered to be a natural monopoly because of the economies of scale that could be obtained by using large power plants, and until the early nineteen eighties, the optimal size of generating units increased continuously. Indeed, for some fifty years the trend was for larger power plants. Then, it came new technologies like the combined cycle gas turbine and the optimal plant size for electricity generation fell dramatically. These smaller and cheaper generating units have removed the natural monopoly characteristics of generation and allowed the introduction of competition at the wholesale level. This revolutionary change has had a central and important impact on the barriers to entry in this industry, which has led to changes on its industrial organization.

Even if the changes in generation technology have reduced significantly the minimum efficient scale of generators, the improvements in information technologies with respect to transmission operation have played the most important role in creating a separate competitive wholesale market. Indeed, technological progress in aggregating physical flow and in the operation of large networks dispersed over wide geographic areas with a very high level of accuracy has played the most important role separating generation to transport.

1.2 The liberalization process in Europe

The objective of the European liberalization process is to open gradually electricity markets to competition to improve the general efficiency of the electricity industry, which in turn will improve the efficiency of the European economy as a whole. The electricity industry is one of the most important of Europe's industries. This sector is critical since it has an impact on all other sectors because electricity is vital for all economic activity. Hence, in a competitive world context, the competitiveness of European industry is strongly linked to the competitiveness of its electricity industry.

Liberalization of the electricity industry was part of the tools chosen by the European Community to ensure its energy policy objectives, i.e. security of supply, competitiveness and environmental protection. The origins of this approach go back to the Treaty of Rome (1957) which instituted the common market, and to the Unique Act (1986). The opening to competition of the electricity industry happened later than in other industries, where the aim was to create a single EU market by 1992. The liberalization process really started in Europe in 1997 with the Directive 96/92/EC and the Directive 2003/54. …

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