Towards a Single Energy Market
Edited by Jean-Michel Glachant and François Lévêque
Chapter 2: Refining Market Design
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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