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 5: Robustness Analyses and Alternative Future Scenarios

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


The purpose of this chapter is twofold. First, Section 5.1 presents the results of a range of robustness analyses. Obviously, a simulation model like LIBEMOD (LIBEralization MODel for the European Energy Markets) consists of many more-or-less uncertain parameters, including the price responsiveness of energy demand and the cost of transporting energy. In the two preceding chapters, we presented the results of analyses based on what we consider to be the best estimates of these parameters. In this chapter, we investigate the degree to which the main conclusions drawn in the preceding chapters hold when some of the more important, but uncertain, parameters are changed. That is, will a liberalization of the energy markets of Western Europe provide the same main outcomes, irrespective of any assumptions (within reasonable limits) regarding the parameters? These robustness analyses are based on the energy situation in the base year, i.e., the year 2000. The second purpose of this chapter is to explore the effects of alternative assumptions about the external conditions of future energy markets in Western Europe; see Section 5.2. For instance, the global crude oil price has increased dramatically since 2000 when the average price of Brent Blend was US$29 per barrel. The international price of coal has also increased significantly since this time. Moreover, the import of natural gas to Europe is a matter of great concern, and it is of interest to examine the effects of a possible fall in gas imports. Finally, economic growth is the major driving force...

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