An Economic Analysis
Chapter 4: Long-Run Effects of Liberalization
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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