Liberalizing European Energy Markets
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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.
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Chapter 2: The LIBEMOD 2000 Model

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


2.1 CHOICE OF DIMENSIONS AND STRUCTURE In order to analyse the effects of a full liberalization in the energy markets of Western Europe, it is essential to recognize the strong market linkages that exist. These linkages operate between the markets for different fuels within each country, as well as between the markets in different countries. Changing conditions in, e.g., the United Kingdom (UK) natural gas market will then have potential consequences for the UK electricity market, the Belgian natural gas market, and potentially all other markets. These linkages work primarily through three mechanisms: international trade, substitution in demand, and the transformation of fuels to electricity. These mechanisms are therefore the main building blocks of LIBEMOD (LIBEralization MODel for the European Energy Markets) and also determine the dimensionality of the main sets. The structure of the model centres around the markets for each energy commodity j ∈ J in each country m ∈ M . The main sets of the model are described in Table 2.1, while the full details of each set and its subsets are described in Appendix A. Countries and Trade The geographic dimension is essential for some commodities. While international trade in oil and coal is mainly based on relatively cheap sea transport, trade in natural gas and electricity is almost entirely dependent on the existence of a physical transportation network. These networks of natural gas pipelines and electricity transmission lines depend on geographic neighbourhoods and distances, entail large investment costs, and may, if unregulated, give market power to the...

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