The Economics of Electricity Markets

The Economics of Electricity Markets

Theory and Policy

The Loyola de Palacio Series on European Energy Policy

Edited by Pippo Ranci and Guido Cervigni

The Economics of Electricity Markets provides a cutting-edge analysis of the critical issues involved in the design and operation of electricity markets, as well as an assessment of alternative institutional arrangements that have either been implemented or are under discussion in Europe and the US.

Chapter 6: Retail competition

Anna Creti and Clara Poletti

Subjects: economics and finance, energy economics, industrial economics

Extract

At the initial stages of the liberalisation process, most of the design and regulatory effort was typically focused on creating efficient wholesale electricity markets. In most European countries, and many jurisdictions in the US, retail markets are still in their infancy. In several jurisdictions of the United States the incumbent utility still acts as the monopoly supplier for small consumers, procuring electricity in the wholesale market and retailing it at regulated prices. In Europe, despite the introduction into law of retail competition, in some countries entry barriers have not yet been completely removed and retail price controls are still enforced. A dynamic retail market may be beneficial to the wholesale market, increasing the responsiveness of demand to price and contributing to the development of the long-term forward electricity market. Since retail costs account for only a small share of the total cost of the electricity service, the potential for retail competition to lower consumers’ bills by reducing retail costs is limited. Therefore, most of the benefits of retail liberalisation are related to the ability of competitive retailers to provide services that are tailored to consumer preferences.

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