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International Handbook on the Economics of Energy

Edited by Joanne Evans and Lester C. Hunt

As an essential component for economic growth, energy has a significant impact on the global economy. The need to meet growing energy demand has prompted cutting-edge innovation in clean technology in an attempt to realise environmental and cost objectives, whilst ensuring the security of energy supply. This Handbook offers a comprehensive review of the economics of energy, including contributions from a distinguished array of international specialists. It provides a thorough discussion of the major research issues in this topical field of economics.
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Chapter 20: Natural Gas and Electricity Markets

W.D. Walls


W.D. Walls 1 Introduction The natural gas and electric power industries – once the classic examples of natural monopoly – are increasingly being open to market forces instead of public service commissions. The emergence of markets in the North American natural gas industry in the mid-1980s resulted largely from the failure of regulation, and a consequence of this regulatory failure was the separation of the energy commodity from its transportation. This simple change in the organization – where the energy commodity was unbundled from its transmission – provides the basis for restructuring natural gas and electricity markets. The natural gas and electricity industries are being transformed so that they more closely resemble a commodity market than a public utility in the move toward market-oriented allocation mechanisms for production, transmission, and distribution. 2 The Emergence of Markets Competitive markets for natural gas in the US emerged in the 1980s; since that time the natural gas and electric power industries in numerous countries around the globe have been transformed from a regulated structure to one based on markets, including those in Argentina, Australia, Canada, New Zealand, the US, and the United Kingdom among others. In the European Union (EU), a directive on opening up markets was adopted in 1998; however, nearly 10 years later, numerous countries – including France, Germany, Austria, Bulgaria, Cyprus, Greece, Luxembourg, Latvia and Slovakia – remain resistant to the full unbundling of energy production and transmission.1 In contrast to the energy market reforms being imposed on EU member states, the initial emergence of markets...

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