www.ceners.org
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Internal Energy Market
Filip Černoch
cernoch@mail.muni.cz
Is energy a „special“ commodity?
• Crucial imput to the economy (strategic in economic and military terms).
• Highly capital intensive (entry barriers, difficult operation).
• Dependency on fixed networks (natural monopoly).
• Limited number of suppliers.
= substantial economies of scale, benefits of co-ordination of production,
transmission and distribution = tendency to vertical and horizontal
monopolization, politicization of the sector.
Traditional (pre-liberalization) paradigm
• Model of government - energy industry relation that emphasizes stability, reliability of
supply, and public service, it is a model of technical organization involving the central
control over a synchronized network.
• The certain way of organizing government relations with electricity and gas industries,
a set of ideas about the scope of competition and the appropriate legal and
institutional methods to achieve public policy aims.
• Role of a consumer is limited.
Traditional (pre-liberalization) paradigm
Essential characteristics
• Exclusive rights to build and operate networks.
• Closure to competition.
• Detailed regulation.
• Remuneration based on historical costs.
• Centralized control over planing.
• Limited participation of consumers.
Ownership model of utilities
State-owned or privately owned but regulated monopolies
• Taxpayers bear most investment risks. Overinvestment, security of supply.
• Poor accountability to consumers or shareholders, low sensitivity to customers needs,
limites incentives to improve services. No customer choice.
• Limited incentives to engage in (technology) innovations.
• Price subsidies.
• Politicization of utilities – social, environmental aims, linkage to the governments.
• Risks borne by consumers.
• (In growing economies governments with no sufficient resources).
(Economic) liberalization
• Fewer govt. regulations and restrictions in the economy in exchange for greater
participation of private entities.
• Greater efficiency and effectiveness that would provide greater profit for everybody.
• Removal of controls, to encourage economic development.
(Economic) liberalization
Expected effects of liberalized (= competitive) market:
• Allocative efficiency – the resources invested in direction preferred by consumers.
To reduce the risk of low or non-existing demand.
• Innovation - adjustment to changes of consumer preferences.
• Cost reduction – to keep the costs and prices down.
• Progress – country commited to competition enjoys advances in efficiency and
utilisation of resources.
Drivers of change in regulatory paradigm
• Ideology and politics.
• Sympathetic regulators.
• Technology (gas turbines, now RES).
• Public debt.
• Inadequate investment in infrastructure.
• Poor accountability.
• Decentralized decision-making.
Liberal paradigm
• Stresses a greater reliance on markets.
• It sought to introduce competition whenever possible, encouraging openness,
decentralized production with network access, and profit based on the market prices,
not costs (regulation for competition).
• Some basic characteristic:
• Separation of activities to facilitate the competition (unbundling).
• Freedom of entry and investment into competitive activities, instead of a centrallyplanned
approach.
• Freedom of contract and competitive formation of prices.
• Access to the network and infrastructure.
• Supervision of the model by an independent regulator.
Liberalization – pros and cons
• Prices are set by the market and competition drives prices lower vs market pricing
(manipulations with prices).
• Prices are ´real´, reflects the costs, demand and supply vs. inability of some customers
to buy them (public service obligation).
• Stress on profit (effective alocation of sources) may weaken the incentives to some
investments vs. long-term stability, reliability and security of supply.
• Sources are not wasted on non-profitable projects vs. private utilities don´t reflects the
interests (social, environmental) of state.
Specific features of gas and electricity industry
• Network (grid) = natural monopoly.
• Some specific characteristic of electricity:
• Lack of storage potential.
• High cost of outages.
• Volatile production.
• Lack of import dependence (in the EU) – but interconnectors are poor and
missing.
• Some specific characteristic of gas:
• Geopolitics.
• Gas chain.
• Storage.