Scenarios and Policy Implications
The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development
Edited by Anil Markandya, Andrea Bigano and Roberto Porchia
Chapter 2: Electricity Supply Externalities: Energy Security
Steven Arnold, Arno Behrens, Christian Egenhofer, Alistair Hunt, Anil Markandya, Adriaan van der Welle and Bob van der Zwaan 2.1 INTRODUCTION Energy security is defined by the IEA as being the ‘availability of regular supply of energy at a reasonable price’ (IEA, 2001). For European policy makers, energy security is an important issue as private decisions on energy use may not fully take into account the costs of energy insecurity. Disruptions in supply and dramatic price increases cause macroeconomic impacts that individuals/firms do not consider. Furthermore, agents tend to underestimate the risks of disruption and the subsequent price adjustments, and there are other less tangible effects such as the psychological costs of people feeling insecure about their energy supplies. Therefore, it is important from a policy perspective to estimate the size of the external costs of energy arising from energy insecurity. There is some debate, however, about the magnitude and importance of the costs of energy security and insecurity. This chapter therefore takes a critical look at the various aspects of energy security costs in relation to electricity supply and distribution in the EU. Where relevant, predictions have been made to 2030. The chapter is organised as follows. Section 2.2 looks at the value of lost loads (VOLL), the costs incurred by interruptions in the electricity supply. Based on international published research, this section presents how these costs vary across regions and sectors, and predict how these values will change in 2030. The next two sections of this chapter develop...
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