Did the liberalization of gas markets deliver the intended results? May 28, 2009
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Christian van Hirschhausen, Technische Universität Dresden Fakultät Wirtschaftswissenschaften Lehrstuhl für Energiewirtschaft
The process of liberalizing gas markets started about a decade ago in continental Europe, even earlier in the U.K. and the US. Do we have reasons to be satisfied with the outcome? On April 23 2009, an Energy Economics Policy Seminar, jointly organized by TILEC, the Netherlands Bureau for Economic Policy Analysis (CPB), the Dutch Ministry of Economic Affairs (EZ) and the Netherlands Competition Authority (NMa), took place in the Hague. The event, which aimed at assessing the impact of liberalization on prices and investments, was extremely well-attended. Christoph Riechmann (Frontier Economics) argued that prices at the wholesale and retail level continued moving in line with oil prices in the medium- and long-run while the short-run gas price is determined to a larger extent by parameters which are specific for the gas market. Christian van Hirschhausen (DIW, Berlin) argued that the conventional opposition between liberalization, with its focus on improving static efficiency, and investment incentives was over-emphasized in the gas market, where investments in regazification and pipeline infrastructure were forthcoming both in the US and in Europe (although some specific, publicly-sponsored investments might be needed in Eastern Europe).
Energy investment; a balancing exercise April 28, 2009
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Investments in energy infrastructure are essential for the creation of the European internal energy market. However, these investments are quite costly and often require support of the State, in particular in the form of State aid.
Paradoxically, State aid is, in principle, prohibited by European competition law unless it contributes to clearly defined objectives of common interest, such as environmental protection or security of supply. State aid must therefore be notified to the Commission in order to be assessed for exemption from the State aid prohibition. The need to balance different objectives in the State aid assessment leaves Member States with great uncertainty about how to design their State aid measures to get Commission’s clearance. In her recent discussion paper, TILEC member Natalia Fiedziuk tries to clarify the approach of the European Commission to State funding of energy infrastructure, and in particular what significance it attaches to different objectives of the European energy policy in the final decision making. One of the conclusions of the paper is that the leniency of the European Commission vis-à-vis State funding of energy infrastructure will depend on the extent the infrastructural project delivers priority objectives of common interest set in the European energy policy.
Assessing gas market liberalization March 30, 2009
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On April 23 2009, TILEC will organize an Energy Economics Policy Seminar in The Hague, in cooperation with the Netherlands Bureau for Economic Policy Analysis (CPB), the Dutch Ministry of Economic Affairs, and the Dutch competition authority (NMa). As the process of liberalizing gas markets started about a decade ago in continental Europe, and about two decades ago in the U.K. and the US, it is now time to assess the results. Christoph Riechmann (Frontier Economics) will discuss the factors driving gas prices, such as scarcity, resource rents, market power and the relationship with oil prices. He will also address the relationship between different geographic market platforms for gas such as TTF and NBP and between spot and bilateral contract markets for gas. Christian von Hirschhausen (TU Berlin and DIW) will discuss whether liberalization has improved the efficiency of investments in transportation and storage infrastructure or whether it has, one way or another, created new obstacles. Using evidence from the U.S. and the E.U. he will draw lessons for the future. Attendance to the seminar is free but advance registration is required.
Renewable energy sources, renewed concerns March 2, 2009
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Energy has come to the forefront of the public debate in the past decade. Renewable energy certificates (RECs) are instruments that allow countries to promote energy generation from renewable sources and can be part of domestic policies aimed at climate change mitigation and adaptation. In a recent TILEC discussion paper TILEC member Panagiotis Delimatsis
discusses the issues raised by the nature of RECs, which can be traded in secondary markets. Concerns arise from the General Agreement on Trade in Services (GATS) and the multilateral regulation of trade in financial services, notably in the case where World Trade Organization (WTO) Members undertook sweeping commitments in financial services which equally apply to trade in RECs. The alleged dichotomy between trading in emission allowances and trading in RECs may also be problematic. The paper argues that WTO Members may be interested in considering whether a unified approach regarding energy-related services and trading of related financial instruments (such as RECs or emission rights) makes sense in the medium term. Indeed, as things now stand with the current classification system, Members may ultimately realize that they have already undertaken commitments in energy-related sectors,
e.g. in financial services, that they had not intended to liberalize. The paper is to appear in the World Trade Review.
On the way to a pan-European energy market? October 30, 2008
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Last month, the European Commission proposed a third legislative package for the energy sector. Further integration of the European energy markets is one of the main objectives. An Agency for the Cooperation of National Energy Regulators (ACER), with binding decision powers, would be created to facilitate cross-border energy flows. The second Energy Economics Policy Seminar, jointly organized by TILEC, the Dutch competition authority (NMa), the Netherlands Bureau for Economic Policy Analysis (CPB), and the Dutch Ministry for Economic Affairs in The Hague last month, discussed the remaining
obstacles on the way towards integration. Boaz Moselle (The Brattle Group) argued that the third liberalisation package does not go far enough, as full unbundling of the high-voltage transmission network is not imposed, and the ACER will not have sufficient powers. Mette Bjørndal (Norwegian School of Economics and Business Administration, Bergen) talked about the difficulties of setting up an integrated energy market when the physical aspects of the network are not fully taken into account during the market design phase. She further showed that different congestion mechanisms can create large externalities for other networks and that the incentives of the different network operators are therefore not aligned.
From cost efficiency to the promotion of investment September 26, 2008
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In the last two decades, the central focus for network industry regulators has been to reduce tariffs for end-users by stimulating cost savings in former monopoly utilities. After the harvest of low-hanging fruits, further efficiency savings and tariff reductions are becoming harder and harder to achieve. At the same time, many networks dating from the 60s and 70s need replacing, while they are expected to serve new purposes such as providing access to decentralized production. All these challenges require a regulatory framework that is forward-looking and provides incentives for innovation and investment. On 3 December 2008, TILEC organizes the workshop “Energy regulation going forward: from cost efficiency to innovation and investment”. Four prominent speakers will discuss the issue. Gert Brunekreeft (Bremen) will look at the link between regulation and the timing of investments by a monopolist. Per Agrell (Louvain) will present the effects of regulatory competition on
transmission network investments. Michael Pollitt, (Cambridge) will draw lessons from telecommunications regulation. Jos Blommaert (Essent NV) will communicate a market participant’s view on how to implement a new regulatory framework. The event will take place at Tilburg University. Attendance is free but registration is required.
How to integrate European electricity markets? September 1, 2008
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The integration of national electricity markets is an important policy goal of both national governments and the European Commission. Integration is believed to improve competition as well as create additional trade benefits. Despite many improvements in interconnection, markets are still poorly linked to one another. On 9 October 2008, TILEC will organize a half-day Energy Economics Policy Seminar devoted to this topic, in cooperation with the Netherlands Bureau for Economic Policy Analysis (CPB), the Dutch Ministry of Economic Affairs, and the Dutch Competition Authority (NMa). The event will take place in The Hague and will feature two energy experts. Mette Bjørndahl (Norwegian School of Economics and Business Administration) will talk about the lessons learned in the integrated Scandinavian electricity market and discuss the benefits of, and incentives for, close co-operation between the different network operators.
Boaz Moselle (The Brattle Group) will talk about incentives for regional integration and the interrelation between market power and cross-border transmission capacity. Lessons from international experiences will be drawn. After both lectures, discussants will kickoff the discussion with the public. Attendance is free but registration is required.
Will Dutch windmills bring stormy weather to electricity markets? February 28, 2008
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A new seminar series on energy economics was launched on 14 February 2008 in The Hague. TILEC created this discussion platform for Dutch energy economists together with the Dutch national competition authority (Nma), the Dutch Ministry for Economic Affairs, and the Netherlands Bureau for Economic Policy Analysis (CPB) in order to bridge the gap between policy-makers and academics. The first meeting focused on the large-scale introduction of wind energy in a future low carbon-intensive economy and featured Karsten Neuhoff (Cambridge University) and Xander van Tilburg (Energy Research Center of the Netherlands). Karsten Neuhoff explained that, due to the stochastic nature of wind output, future electricity prices will be more volatile. As a result, the future energy system will rely less on large-scale base-load power plants and more on flexible peak-load power plants. If incumbent generators have market power, the price volatility will increase even further, with insufficient investments in wind energy as a result. This will force the competition authorities to think again about the alternative strategies to address market power in the electricity sector. The speakers’ presentations can be found on TILEC’s website. To receive an invitation for future seminars in the series, please send your contact information to the TILEC secretariat.
Should access to the electricity grid be traded on a market? December 20, 2007
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Should European policy-makers wishing to improve the allocation of resources in the electricity sector content themselves with providing market-based incentives? A recent TILEC discussion paper by Gerd Küpper (KU Leuven) and Bert Willems (TILEC) studies the welfare implications of using market mechanisms to allocate transmission capacity in recently liberalized electricity markets. It addresses the issue as to whether access to this essential facility should be traded on a market, or whether the incumbent should instead retain exclusive usage rights. They show that granting exclusive use to the incumbent might be optimal if the capacity of the grid is small and the incumbent can reduce production costs by taking advantage of interregional production-cost differences. This result runs counter to the intuition that arbitrage leads markets to function better. The reason is that when competition is imperfect, arbitrage may reduce productive efficiency. Thus, market mechanisms for the allocation of electricity transmission capacity should be introduced only if sufficient investment in the network is guaranteed or if the market power of the incumbent is curtailed in at least one of the regional markets in which it operates.
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