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 7: Energy Liberalization in Russia

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


In previous chapters, Russia was one of a few non-model countries with exogenous net exports of natural gas to Western Europe: the market share of Russian gas in Western Europe was slightly above 20 per cent in 2000. According to IEA (2002f, g), Russian exports of gas to Western Europe may increase in the order of 150 Mtoe from 2000 to 2020, roughly tripling exports. More generally, gas exports from Russia may change over time because of major changes in its economic structure, as well as shifts in the costs of extracting and transporting Russian gas to Western Europe. In Section 5.2, we studied the effects of changing the export of gas from Russia, keeping Russia as a non-model country. That is, we did not consider why Russian exports increased. The purpose of this chapter is to examine the potential for Russian gas exports to Western Europe in 2010, focusing on the importance of the economic system in Russia, which over the last 10–20 years has moved from a command-and-control economy towards a market economy. In this chapter, we first provide a short background of the Russian economy (Section 7.1). We then use an export supply function for Russian gas, developed by Russian experts, together with LIBEMOD (LIBEralization MODel for the European Energy Markets) to study the potential for Russian gas exports (Section 7.2). The export supply function has been constructed assuming rather strong economic development in Russia. In Section 7.3, we turn Russia into a model country, treating...

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