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.

Appendix A: Model Technical Description

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


LIBEMOD (LIBEralization MODel for the European Energy Markets) is an economic computable equilibrium model for Western European natural gas and electricity markets. The model also includes world markets for oil and international tradable types of coal, as well as domestic markets for lignite and biomass. In one version of the model, all markets are competitive, including markets for transportation of energy goods and markets for reserve power capacity, whereas in another version of the model, there is imperfect competition in all markets, except the markets for reserve power capacity. There are seven goods in the model (steam coal, coking coal, lignite, natural gas, oil, electricity and biomass) that are produced, traded and consumed in each of the 16 model countries (Austria, Belgium (including Luxembourg), Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom (UK)). In addition, there is production, trade and consumption of steam coal, coking coal and oil in all exogenous countries. While fossil fuels are traded in annual markets, electricity is traded in period markets (summer versus winter, six periods during a 24-hour cycle) because power cannot be stored (except in limited-capacity hydro-reservoirs). In each model country, there are a number of technologies available for supplying electricity. These are (steam) coal power, lignite power, gas power, oil power, biomass power, nuclear, pumped storage hydro, reservoir hydro, waste power and wind power. We distinguish between the short-run version of the model and the longrun version. In the short-run version, the capacities...

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