Electricity Reform in Europe
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Electricity Reform in Europe

Towards a Single Energy Market

Edited by Jean-Michel Glachant and François Lévêque

The realisation of a European internal market for energy is still a work in progress. Written by leading European scholars and discussed with major energy stakeholders, this book presents a thorough analysis of the motives and methods needed to achieve a single European energy market.
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Chapter 2: Refining Market Design

David Newbery

Extract

2. Refining market design1 David Newbery INTRODUCTION The goals of market design include, as a precondition of continued popular and therefore political support, confidence in security of high-quality supply at sustainably competitive prices. Sustainability here refers both to the ability of the sector to finance and deliver efficient and reliable electricity supply and in the environmental sense of reducing greenhouse gas emissions. Efficiency requires that energy, capacity and ancillary services are at least-cost but at prices that allow adequate investment to be financed by the private sector. This in turn requires that the markets provide price signals for entry of new generating capacity that is efficient in location, timing, scale and fuel choice, and for dispatch that minimizes social costs, including environmental costs. Market integration in turn means that European costs are minimized, trade takes place guided by comparative advantage, importing competition into more concentrated markets. Before 1990, almost every electricity supply industry was vertically integrated with a captive franchise market, either state-owned (the majority case) or under regulated private ownership (particularly in the United States, but also in Germany). In both cases the form of regulation was effectively cost-of-service regulation.2 Electricity liberalization starts from the premise that while transmission and distribution networks are natural monopolies requiring regulation, generation and supply (or retailing) are potentially competitive activities. Effective competition is superior to regulation in providing incentives for efficiency that are then passed on to consumers in lower prices. Vertical unbundling also allows...

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