Regulation and electricity market integration: When trade introduces inefficiencies

Billette de Villemeur, Etienne and Pineau, Pierre-Olivier (2012): Regulation and electricity market integration: When trade introduces inefficiencies. Published in: Energy Economics , Vol. 34, : pp. 529-535.

Abstract

Electricity markets vary greatly across jurisdictions, in terms of regulatory institutions, cost levels and environmental impacts. Integrating such different markets can lead to significant changes. This paper considers two jurisdictions - one with a regulated monopoly selling at average cost and one with a competitive market - and compares three different institutional regimes: autarky, a mixed-market structure with trade and a fully integrated market, where electricity is sold at marginal cost. We show that, in the second regime, the regulated monopoly always exports toward the jurisdiction pricing at marginal cost, up to inducing productive inefficiencies. By contrast, a shift from the second to the third regime, i.e. "integrated deregulation" yields a decrease in overall consumption. We identify the exact conditions under which the shift from one regime to the other results in environmental gains.

• Item Type: MPRA Paper
• Language: English
• Keywords: Market Integration; Regulation; Electricity Trade; Environmental Impacts
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Adoption and Costs ; Distributional Effects ; Employment Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L94 - Electric Utilities; L - Industrial Organization > L5 - Regulation and Industrial Policy > L50 - General

References

Anesi V. (2006) "Earmarked taxation and political competition", Journal of Public Economics, vol. 90, 679-701.

Anesi V. and De Donder P. (2008) "Secondary Issues and Party Politics: An Application to Environmental Policy", No 6774, CEPR Discussion Papers.

Aune F.R., Golombek R., Kittelsen S.A.C. and Rosendahl K.E. (2004) "Liberalizing the energy markets of Western Europe - a computable equilibrium model approach", Applied Economics, vol. 36, 2137--2149.

Bates R. and Fraser N. (1974) Investment decisions in the nationalised fuel industries, London: Cambridge University Press.

Benjamin R. (2007) "Principles for Interregional Transmission Expansion", The Electricity Journal, vol. 20 (8) 36-47.

Bernard J.-T. and Chatel J. (1985) "The Application of Marginal Cost Pricing Principles to a Hydro-Electric System: The Case of Hydro-Quebec", Resources and Energy, vol. 7, 353-375.

Billette de Villemeur, E. and Pineau, P-O. (2010) "Environmentally Damaging Electricity Trade", Energy Policy, vol. 38 (3) 1548-1558.

Blumsack S. (2007) "Measuring the Costs and Benefits of Regional Electric Grid Integration," Energy Law Journal, vol. 28 (1) 147-184.

Brusco S. and Hopenhayn H. (2007) "Deregulation with consensus", Economic Theory, vol. 32, 223-250.

Bye T. and Holmøy E. (2010) "Removing Policy-based Comparative Advantage for Energy Intensive Production: Necessary Adjustments of the Real Exchange Rate and Industry Structure", The Energy Journal, vol. 31 (1) 177-198.

Chen Y. (2009) "Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover", Energy Economics, vol. 31 (5) 667-675.

Davidson C. Matusz S.J. and Nelson D.R. (2007) "Can compensation save free trade?", Journal of International Economics, vol. 71, 167-186.

Dixit A. and Norman V. (1986) "Gains from Trade without Lump-Sum Compensation", Journal of International Economics, vol. 21, 111-122.

EIA (2011) Electric Power Annual 2009 - State Data Tables, Washington D.C.: Energy Information Administration, Department of Energy.

Finon D. (2008) Does electricity market integration benefit to consumers?, EU Energy Policy Blog, web page accessed February 10, 2009. http://www.energypolicyblog.com/?p=116

Haaparanta P. (2004) Electrified Trade, Discussion Paper No. 5., Helsinki: Helsinki School of Economics and HECER.

Hooper E. and Medvedev A. (2009) "Electrifying integration: Electricity production and the South East Europe regional energy market", Utilities Policy, vol. 17 (1) 24-33.

ICF Consulting (2002) Economic Assessment of RTO Policy, prepared for the Federal Energy Regulatory Commission, Fairfax: ICF International.

Joskow P.L. (2008a) "Lessons Learned From Electricity Market Liberalization", The Energy Journal, Special Issue. The Future of Electricity: Papers in Honor of David Newbery, vol. 29 (Special Issue #2) 9-42.

Joskow P.L. (2008b) Challenges For Creating A Comprehensive National Electricity Policy, Working Paper, Technology Policy Institute.

Kahn A.E. (1988) The Economics of Regulation - Principles and Institutions, Cambridge: MIT Press.

Krapels E.N. and Flemming P. (2005) Impacts of the PJM RTO Expansion - A Report Prepared for PJM, Wakefield: Energy Security Analysis Inc. (ESAI)

Meeus L. and Belmans R. (2008) " Electricity Market Integration in Europe," PSCC 2008, 16th Power Systems Computation Conference, Glasgow, Scotland, July 14-18, 2008.

Müller-Jentsch D. (2005) Deeper Integration and Trade in Services in the Euro-Mediterranean Region - Southern Dimensions of the European Neighbourhood Policy, Washington, D.C.: International Bank for Reconstruction and Development / The World Bank.

Newbery D.M. (2000) Privatization, Restructuring, and Regulation of Network utilities, Second Printing, Cambridge: The MIT Press.

Pineau P.-O. (2008) "Electricity Sector Integration in West Africa", Energy Policy, vol. 36 (1) 210-223.

Pineau P.-O. (2009) "An Integrated Canadian Electricity Market? The Potential for Further Integration", in Governing the Energy Challenge: Canada and Germany in a Multilevel Regional and Global Context, Eberlein B. and Doern B. (eds.), Toronto: University of Toronto Press.

Pineau P.-O. and Lefebvre V. (2009) "The Value of Unused Interregional Transmission: Estimating the Opportunity Cost for Quebec (Canada)", International Journal of Energy Sector Management, vol. 3 (4) 406-423.

Sauma E.E. and Oren S.S. (2009) "Do Generation Firms in Restructured Electricity Markets Have Incentives to Support Social-Welfare-Improving Transmission Investments?", Energy Economics, vol. 31 (5) 676-689.

Stoft S. (2002) Power Systems Economics: Designing Markets for Electricity, Piscataway: IEEE Press and New York: Wiley-Interscience.

UN (2006) Multi Dimensional Issues in International Electric Power Grid Interconnections, Department of Economic and Social Affairs, Division for Sustainable Development, New York: United Nations

van den Hoven A. and Karl Froschauer (2004) "Limiting Regional Electricity Sector Integration and Market Reform : The Cases of France in the EU and Canada in the NAFTA Region", Comparative Political Studies, vol. 37 (9) 1079-1103

von der Fehr N.-H. M. and Sandsbråten L. (1997) "Water on Fire: Gains from Electricity Trade", The Scandinavian Journal of Economics, vol. 99 (2) 281-29.