Electricity Reform in Europe

Electricity Reform in Europe

Towards a Single Energy Market

Edited by Jean-Michel Glachant and François Lévêque

The realisation of a European internal market for energy is still a work in progress. Written by leading European scholars and discussed with major energy stakeholders, this book presents a thorough analysis of the motives and methods needed to achieve a single European energy market.

Chapter 4: Harmonizing an Effective Regulation in Europe

Einar Hope and Balbir Singh

Subjects: economics and finance, competition policy, energy economics, industrial economics, public sector economics


95 Europe primarily relies on conduct regulation involving economic incentive mechanisms (price-cap, revenue-cap, rate of return models, and so on). The main guiding principle in the design of conduct regulatory mechanisms is the creation of a system of incentives rewarding efficiency and affecting the economic conduct of the regulated entities. What distinguishes these mechanisms is the regulatory effort required to implement them and the strength of the incentives for costs economy, which are inherent in the different mechanisms. The traditional rate of return involving a form of cost-plus regulation can be considered as the least desirable of these mechanisms since it embodies micro-management from the regulators’ side and, in addition, creates weak incentives for costs economy. On the other end of this spectrum is the pure price-cap regulation, which involves capping the prices charged by the regulated entity, who is allowed to increase prices in line with some general price index minus a factor X so that its customers have guaranteed prices that fall by X in real terms over time. In between these two extremes there is a flora of mechanisms, the socalled ‘performance-based mechanisms’ that can be specified to ensure efficiency. There are various alternatives for the formulation of performance-based mechanisms, which may differ in accordance with factors such as the target variable that is capped (price and/or revenues), the duration of the scheme, variables that are used in determining the target values, and. However, irrespective of the formulation and structure...

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