Liberalizing European Energy Markets

Liberalizing European Energy Markets

An Economic Analysis

Finn Roar Aune, Rolf Golombek, Sverre A.C. Kittelsen and Knut Einar Rosendahl

This book presents an economic analysis of the main effects of liberalizing the electricity and natural gas markets across Western Europe. It is based on a state-of-the art detailed numerical simulation model that takes account of the interlinkages between different energy markets. Short-run and long-run effects are identified and the robustness of results is tested. Separate chapters discuss climate policy, renewable energy and the role of Russia. A key finding is that liberalization lowers energy prices and increases consumption, particularly in the electricity markets where prices fall by 25 per cent on average in the short run. Effects are somewhat stronger in the long run, as investment options are utilized. The welfare benefits of liberalization are considerable in the long run. However, liberalization increases emissions of CO2. The welfare costs of fulfilling Western Europe’s Kyoto obligations depend highly on the policies implemented, but are at least as large as the benefits of liberalization.

Chapter 4: Long-Run Effects of Liberalization

Finn Roar Aune, Rolf Golombek, Sverre A.C. Kittelsen and Knut Einar Rosendahl

Subjects: economics and finance, energy economics, public sector economics, environment, environmental economics


In Chapter 3, we examined the short-run effects of a liberalization of the electricity and natural gas markets in Western Europe. We now move to an examination of the long-run effects. Thus, whereas all capacities were given in Chapter 3 (equal to their observed 2000 values), in this chapter, we allow for investment. There are (mainly) three types of capacities in LIBEMOD (LIBEralization MODel for the European Energy Markets): (i) power plants, (ii) international electricity transmission lines, and (iii) international gas transmission pipelines. We now allow for investment in new power plants and international transmission. Investment in these three sectors is determined by profitability. Hence, if it is profitable to set up, say, a new power plant, such investment will take place. A key question in the present chapter is: what types of investments are profitable? For instance, is it profitable to set up new gas-fired thermal power stations, and if so, in which countries will there be investment in this technology? Furthermore, is it profitable to increase the capacity in international transmission of electricity (or gas) between two countries, or even to build an international line (or pipe) between two countries that were not directly connected in 2000? Additionally, if the price differences between two countries are ‘large’, there is no idle capacity between the two countries (for example, because there was no line between these two countries in 2000), and if investment costs are sufficiently low, it may be profitable to invest in transmission capacity. When international transmission...

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