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Russian electricity sector reform: Challenges to retail competition

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Abstract

The Russian power sector reform initiated in 2001 endeavored to introduce competition into major segments of the Russian electricity market. This paper examines how far the reforms have advanced in the retail electricity market and discusses social, political and technological barriers to market liberalization. Market shares of retailers are used as the main indicator to assess competition. The results indicate that the retail market is currently divided into inactive and sub-active markets. Future development of retail competition in the Russian electricity market needs to take into account the reasons for this market asymmetry.

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... Distinctly separated players at generation, distribution, and retailing are considered in the reference model of decentralized electricity markets. In vertically integrated electricity markets, power supply and network services are provided by the same utility as one service (Kuleshov et al., 2012), which contrasts to restructured electricity markets where the network activities and retailing businesses are separated. Vertical integration between generation and retailing is avoided in most of the competitive decentralized electricity market models (Finon and Boroumand, 2011). ...
... In many retail electricity markets, in order to introduce competition, the regional monopoly was dismantled and the distribution system operation and retailing business were separated (Kuleshov et al., 2012). In some cases, a Distribution System Operator (DSO) is allowed to engage in retailing businesses. ...
... In some cases, a Distribution System Operator (DSO) is allowed to engage in retailing businesses. The minimum requirement, in this case, is the separation of accounts for the competitive and monopolistic activities (Kuleshov et al., 2012). All suppliers should have access to the distribution network at regulated non-discriminatory rates (Littlechild, 2006b). ...
Article
The final step that Portugal is taking to reach a fully liberalized electricity market is the deregulation of the retail market by phasing-out regulated electricity prices and reducing the administrative burdens in this area. These attempts are done to promote the entrance of companies into the retailing business and to actively engage the end-users in the market. This analysis shows that despite high consumer switching rates during the 2013–2015 period, the retail market in Portugal is still highly concentrated. The retail rates are also not following the changes in the wholesale market price.
... The required capacity is defined by the System Operator (SO). Some other types of capacity compensation also exist in the Russian system, e.g., see Kuleshov et al., 2012;NP Market Council, 2012), but these are left outside the scope of this paper. ...
... The required total capacity is defined by the System Operator (SO). It can be noted that in the Russian system some other types of capacity compensation also exist (Gore, Viljainen, Makkonen, & Kuleshov, 2012;Kuleshov, Viljainen, Annala, & Gore, 2012), these however fall outside the scope of this paper. Wholesale market actors (buyers) are obliged to buy the defined total capacity at a weighted average price, defined for different zones (Russian electricity market is distributed into zones). ...
... During the last decade (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009), heating tariffs have increased many times in Russia and the rise in heating price has been steeper compared to other utilities (Nekrasov, Voronina, & Semikashev, 2012). Regulated tariffs for residential customers are subsidized and do not reflect the costs of producing electricity (Kuleshov, Viljainen, Annala, & Gore, 2012) nor heating (Korppoo & Korobova, 2012). ...
... Some estimates suggest that residential electricity prices may need to nearly double to reach cost-reflective levels (Cooke et al., 2012). Precise estimations of the financial value of crosssubsidization are problematic because its existence is partially denied by the state (Kuleshov et al., 2012). At the federal level, short-term (heat) price increases are a very sensitive issue and a serious obstacle to the implementation of energy efficiency and renewable energy initiatives (Boute, 2012). ...
... In addition, a recent study byŠtreimikienė (2014) highlights that demand for energy is generally quite price-inelastic. While price elasticity is important on free fuel markets, in the context of regulated residential tariffs for both district heating and electricity (Korppoo & Korobova, 2012;Kuleshov, Viljainen, Annala, & Gore, 2012), as is the case in Russia, it does not play a similar role. ...
... Typically, neither energy production nor consumption is metered in Russia (Korppoo & Korobova, 2012;Kuleshov et al., 2012). According to the Russian Federal Law No. 261-FZ from 2009 "On Energy Saving and Energy Efficiency. . ...
Article
This paper estimates the costs of adapting three different holistic energy renovation concepts both in the buildings and at the corresponding residential district in Moscow. The results represent a baseline for the decision makers when planning implementations of holistic energy renovations in Russian residential districts. In the buildings, the estimated costs included both mandatory less energy efficient repairs and suggested energy efficiency improvements. At the building level, the costs of different renovation packages varied between €125/m2 and €200/m2 depending on the selected renovation package. The estimated district renovation costs include both the renovation costs of the buildings and the costs of improving district energy and water infrastructure. At the district level, the costs of the main cases per inhabitant varied between €3,360 and €5,200. The net present values for different building and district level renovation packages for a 20-year period were also calculated using different interest rates and annual energy price growth rates. The results suggest that renovation of a district may be more feasible than renovation of individual buildings.
... It incorporates 14 sub-regions with a population of around 30 million; 70% of whom reside in urban areas. See Kuleshov, et al., 2012 for further details. ...
Research
Full-text available
The paper examines the key challenges affecting the development of competitive wholesale and retail markets in Russia including market structure, market design, pricing, investment and related regulation.
... Benefits of customers from electricity retail competition of US states are discussed in Su (2015). In another attempt (Kuleshov et al., 2012), the advancement of reforms in the Russian retail electricity market is studied in which the social, political, and technological challenges are discussed as well as market liberalization. The results indicate that the retail market is currently divided into inactive and sub-active markets. ...
Chapter
Nowadays, the world is facing energy crisis and environmental issues. This is why the energy demand is increasing in different energy sections. The buildings as a large energy consumer are critical to face with these issues. To overcome these challenges, the conventional active buildings are moving toward the active building. Demand flexibility and self-generation are two characteristics of the active building. However, the main feature of such emerging buildings is related to their flexibility demand. Demand flexibility in active buildings is enabled by demand response programs. The change in energy consumption pattern by residents of buildings is the aim of implementing such programs. Demand response programs are designed and managed by aggregators in retail markets. In addition, the enabling technologies for implementing such programs are provided by aggregators. Therefore, the aggregators are important for developing acting buildings. Accordingly, in this chapter, the role of aggregators in demand flexibility of active buildings is outlined. Firstly, the concept of aggregators and retail electricity markets are presented. Then, the benefits, barriers, motivators, and challenges of demand response programs are discussed. Moreover, the existing demand response programs and enabling technologies for implementing such programs are described in this chapter.KeywordsActive buildingsAggregatorRetailerDemand responseDemand-side responseRetail electricity marketEnabling technologies for demand responsePrice-based demand responseIncentive-based demand responseEnergy managementEnergy efficiencyEnergy savingDemand flexibilitySmart buildingsDemand response challengesDemand response barriersDemand response drivers
... The liberalization of the electricity market begins with privatization of the state-owned electricity monopolies and breakdown the traditional vertically integrated structure (Joskow, 2008). And, it is finally done with separating participants as generator, distributor, and retailer (Kuleshov et al., 2012) aiming at intensifying competition not only on the generation/supply side, but also on the retail side of the corresponding Electricity Supply Chain (ESC) network. Such a decentralization strategy (Finon and Boroumand, 2011) in the long run leads to more efficient development and in the short term leads to more efficient use of available resources (Shen and Yang, 2012). ...
Article
This paper delivers an electricity supply chain coordination framework through the newsvendor model to provide an optimal contract design with the aim of maximizing profits. Given retailers' attitude towards the risk associated with the demand uncertainty, the framework optimally considers overage and underage costs, and discount policy to define the contract share and prices. A novel simulation-optimization approach has also been proposed to provide a global optimal solution for the model using the advantages of the linear transportation model. More analytically, the approach leads to some original and meaningful trade-offs among retailers’ and generation companies’ profits, markets share, overage and underage costs, and the all-unit discount given by retailers. By this means, an almost linear, positive relationship is found between the spot market share and the underage cost. On the contrary, retailers' sensitivity to overage cost is greater if the share of the spot market is low and the retailer is more risk-averse. In this way, the greater the overage cost, the higher the share of the spot market. And, the lower the overage and underage costs, the greater the retailers profit, and the lower the generation companies’ profit due to the lower retailers’ order quantity. The amount of the discount has a negligible effect on retailers’ order quantity, while lowering prices. However, an increase in the amount of the discount has a negligible but negative effect on the spot market share.
... As an example, bilateral contracts between power producers and customers with three rate tariffs are studied via a maximization of power producers' profits to determine both prices and future customers to be targeted (Liang et al 2013). Other types of studies on tariff-related topics include comparisons of already-existing prices -such as in Russia, where retail prices and regulated prices were compared (Liu et al 2015) -or comparisons of tariff schemes through self-generation scenarios (regarding solar photovoltaics (PVs) and battery storage) (Kuleshov et al 2012). ...
Article
The deregulation of Singapore’s retail electricity market in 2018 and the rapid adoption of solar rooftops have led to the emergence of a new type of energy transaction, wherein prosumers require flexible tariffs that reflect their willingness to respond to market price signals as well as new business models. The move toward community energy schemes, where prosumers can trade their surplus electricity locally, and the implications this has for tariff design motivates our study. We propose a portfolio of stylized retail tariffs for different market organizations. Among the proposed configurations are time-of-use (ToU), default vertical and peer-to-peer (P2P) tariffs, the last of which operates through a blockchain platform. In this study, each Singaporean district is balanced as a potential future microgrid. An iterative double-auction mechanism is designed to calculate a distributed P2P tariff, looking to maximize the benefit for stakeholders. This tariff is then cleared and compared with a bespoke retail ToU tariff as well as Singapore’s monopolistic regulated vertical tariff.
... Even though the planned major steps of the reform have finished, the Russian power sector is still going through changes. However, the papers on Russia's electricity market reform are rare (International Energy Agency, 2014;International Energy Agency, 2012;Shiryaeva, 2009;Boyko and Gubanov;Gore et al., 2012;Kuleshov et al., 2012;Cooke, 2013;Chernenko, 2013;Boute, 2013), specifically, there's no literature on the recent trends of the Russian power sector. This paper provides a comprehensive review of the reforms in Russia's electric power industry since 1992, describes its up-todate spatial and organizational structure, as well as the way markets, are operating. ...
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The power industry in Russia has undergone one of the most ambitious reform programs implemented in the world. This paper reviews the background, targets, and measures taken in the major stages of the reform, outlines the current state of the Russian power sector and analyzes the results of the reform. It is concluded that given the current economic situation to provide large investments, Russian authorities had to undertake some market intervention, which had some side effects on the competitiveness of the market. By 2018, the urgent need for the investment was removed. The authorities have improved some important regulations, while some of the key non-market mechanisms are still maintained.
... Conditions of interconnection are crucial in the sectors under deregulation (Laffont & Tirole, 2001), and they are PADs according to our classification. The electricity and gas sectors in Russia recently survived deep though controversial reforms (Gore, Viljainen, Makkonen, & Kuleshov, 2012;Kuleshov, Viljainen, Annala, & Gore, 2012;Özdemir & Karbuz, 2015) accompanied by conflicts between incumbents and new entrants, but these conflicts are classified as PADs. There are also NPADs in these and other sectors of utility services, but those cases typically consider noncompliance with the rules on provision of services to households. ...
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This article provides evidence about the influence of performance measurement criteria on the choice of enforcement targets by law enforcement authorities, utilizing a rich dataset of decisions by the Russian competition authority in the period 2008–2015. The authors provide a comparative analysis of performance measurement by several competition authorities throughout the world. Then a hypothesis is tested suggesting that a competition authority, motivated by the criterion of “enforcement success,” tends to select relatively easy implemented enforcement targets, which lead to decisions with relatively low probability of being annulled if appealed. This is so, even though other enforcement targets would generate superior welfare effects. Thus, our analysis indicates that putting undue emphasis on “enforcement success” as a performance criterion may not lead to desirable welfare outcomes.
... Majority of the housing and communal services (HCS) in Russia are based on monopolies which in turn, lead to a constant increase in tariffs [33]. Regulated tariffs for residential customers are subsidized and do not reflect the costs of producing electricity [44] or heating [42]. Even if the tariffs are below the real costs, there is a large number of non-payers due to low income and inflated prices [33]. ...
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Full-text available
Several scientific articles discuss non-technical barriers and policy instruments related to energy efficient building renovation. However, they are seldom systematically categorized and hardly ever related to Russian context even if Russian housing provides remarkable potential for energy-efficiency improvements. This paper identifies non-technical barriers to building energy renovations and potential policy instruments to overcome these barriers. The study was carried out by using the following methods: first, we mapped the barriers and policy instruments addressed in renovation-related studies. Following this step, we studied the importance of barriers and the feasibility of various policy instruments in and with a few selected Russian experts. The outcome of the interviews indicates that standards, information dissemination and awareness raising are the most efficient instruments to promote energy renovations of buildings in Russia. Both students and the interviewed Russian experts shared the view that the role of the Government is highly important regarding introduction of these instruments.
... For example, Woo, Lloyd analyzed the electricity market reform failures that had already taken place in the UK, Norway, Alberta and California, stating that an electric market reform can be extremely risky, and may lead to disastrous outcomes (Woo et al., 2003). Kuleshov, Viljainenexamined how far the reforms have advanced in the Russian retail electricity market and discussed social, political and technological barriers to market liberalization (Kuleshov et al., 2012). By studying the Greek electricity market reform, Danias, Swales pointed out that fundamental political economy issues need to be further addressed in order for liberalization to progress, to which the financial crisis in Greece added extra challenges (Danias et al., 2013). ...
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To mitigate the serious conflicts between market-driven coal prices and state-administered electricity prices in China, two kinds of mechanism of coal-electricity price linkage (CEPL) policies were proposed by the Chinese government in 2004 and 2012, known as CEPL-2004 and CEPL-2012 respectively. The present study proposes a Stackelberg game model to investigate the profit changes of two CEPL mechanisms caused by different production strategies of coal mining enterprises and coal-fired power plants when coal prices rise. The findings show that CEPL policy is conducive to reducing profit loss during coal price rises for coal-fired power plants. However, the equilibrium profit of coal mining firms will decrease without CEPL policy if coal prices rise. Furthermore, the equilibrium profit of the coal-fired power plants will decline when coal prices rise by 5?10% but profit decline is less than in the case of maintaining electricity production.
... The required capacity is defined by the System Operator (SO). Some other types of capacity compensation also exist in the Russian system, e.g., see Kuleshov et al., 2012;NP Market Council, 2012), but these are left outside the scope of this paper. ...
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Russian renewable energy policy, introduced in May 2013, is a capacity mechanism-based approach to support wind, solar, and small hydro power development in Russia. This paper explores the effect of the new mechanism on the profitability of new renewable energy investments with a numerical example. The sensitivity of project profitability to selected factors is studied and the results are compared ceteris paribus to results from a generic feed-in premium case. Furthermore, the paper gives a complete and detailed presentation of the capacity price calculation procedure tied to the support mechanism.
... The required total capacity is defined by the System Operator (SO). It can be noted that in the Russian system some other types of capacity compensation also exist (Gore, Viljainen, Makkonen, & Kuleshov, 2012; Kuleshov, Viljainen, Annala, & Gore, 2012), these however fall outside the scope of this paper. Wholesale market actors (buyers) are obliged to buy the defined total capacity at a weighted average price, defined for different zones (Russian electricity market is distributed into zones). ...
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Renewable energy has become an actively developing sector in many emerging economies and there are various incentive mechanisms. Russia has implemented a unique incentive policy for renewable energy investments, based on two separate mechanisms that reduce the risks of investments into renewable energy generation. This study presents a short analysis of the two Russian RE incentive mechanisms, illustrates the profitability effect of the capacity mechanism for investments into renewable energy on the wholesale energy market, and analyzes shortly the results from two past capacity auctions to shed light on how well the renewable energy incentive mechanism is functioning in reality.
... However, wide adoption of biomass generation is not yet observed in the country or region. The reasons are likely to lie in electricity market imperfection, including factors such as price regulation (Boute and Willems 2012, Boute 2014, Trubaev, Gorodecskayu et al. 2014, market entrance boundaries (WB and IFC 2008), dominance by large generators (Kuleshov, Viljainen et al. 2012), and information asymmetry (IEA 2010). Although these factors are expected to be overcome with electricity reform and further development of the energy market, the existing competitive advantage of biomass generation demonstrated by the LCOE should not be overlooked. ...
Article
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Russia is frequently referred to as a country with substantial energy efficiency and renewable energy potential. In 2000–2008 energy-gross domestic product (GDP) ratios were improved by 35%, however, the contribution of technological progress accounts for only 1% of the energy-GDP ratio reduction. At the same time, although new policy mechanisms to stimulate renewable energy development have been recently introduced, renewable technology deployment has not yet taken off. Economic theory suggests that there is no better incentive for industry development than cost signals. This paper adapts the levelised cost of energy methodology to examine the cost structures associated with electricity generation by conventional and new technology types for a Russian region (Moscow). The model, run for two fuel price scenarios, allowed us to conclude that the regional energy supply system is heavily dependent on the natural gas price and that the diversification provided by technology development will be beneficial for the energy security of the region. We conclude that new and renewable technologies become cost-effective for electricity generation as domestic natural gas prices reach parity with export prices. However, strong political and financial support is needed to boost technological development and renewables application in Russia.
... Second, Russia's electricity sector is in the midst of massive reform, or restructuring, which started about a decade ago [18][19][20][21]. As part of this reform process, generation assets have been unbundled and privatized, and new investment mechanisms have been integrated. ...
Article
Coal use—and thus investment—is expected to grow considerably in the Russian Federation over the next few decades. Projections suggest that at least $200 billion of investment will be needed to modernize existing coal-fired power plants by 2030, but the bulk of this financing is to come from the private sector or foreign enterprises. This study asks: what are the possible investment risks and rewards of pursuing this expansion of coal in the Russian power sector? To provide an answer, the study uses a mixed methods approach consisting of elite semi-structured interviews and a review of English and Russian peer-reviewed literature. The study provides a brief overview of the Russian electricity sector before discussing five distinct rewards to investing in coal such as low production costs, competitive returns on investment, rural modernization, expansion of exports, and the acceleration of innovation. These benefits however are offset by five risks: inferior performance to investments in oil and gas, development challenges, air pollution and climate change, social degradation from mining, and a tradeoff with existing policies incentivizing renewable energy and energy efficiency. The study concludes by analyzing what these disparate risks and rewards mean for policymakers and energy analysts.
... By the beginning of the Russian power industry restructuring it has accumulated a large number of unresolved issues, significantly restricting the development of both the industry and the entire national economy. Among these problems are the rapid growth of consumer non-payment for supplied products, the lack of incentives for energy companies to improve the efficiency of production, lack of transparency in the operation of energy companies, the decline in investment in the energy sector and, as a result, an ever-increasing level of deterioration of generating capacity (Engoian, 2006;Kuleshov, Viljainen, Annala, & Gore, 2012). All this has led to the fact that by the most important technological indexes, including specific fuel consumption for power generation, the average efficiency of the equipment, operating power of Russian energy companies stations significantly lag behind the foreign companies. ...
Article
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... In the day-ahead market, Russia applies a nodal pricing model. The dispatching of the power plants is carried out as central optimization, and the market is cleared with about 8000 nodal prices (or locational marginal prices, LMPs) (Kuleshov et al, 2012). In addition to the day-ahead market revenues that depend on the hourly output, the electricity generators receive payments through the CRMs that depend on their availability to produce. ...
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A new governmental plan for the next round of reforms calls for the gradual deregulation of the generation sector, with truly competitive markets to be introduced after 2004.
Article
Russia commenced liberalization of electricity prices in 2007 increasing the liberalization rate by 10–25% every six months. It was planned to reach full liberalization by 2011. Currently, the degree of liberalization is uncertain because of intense price regulation and a highly concentrated market in the hands of four large generating companies. Increased regulation and further consolidation may drive the market towards its pre-reform state. This paper analyses the competitive landscape of the Russian electricity market by assessing the ownership structure of electricity generation, price drivers, and government involvement in the electricity wholesale market in Russia. The main research question is why the targeted level of market liberalization has not been fully achieved in the Russian electricity market.
Article
This chapter provides an overview of the German electricity market, the investment incentives of energy policy, and how this affects competition, the environment, and supply adequacy. The potential ramifications of a variety of energy policies are examined in the context of three important energy policy goals- preservation of the environment, provision of supply adequacy, and fostering competition. On July 13, 2005 a new Energy Act entered into force implementing the European Union (EU) Directive of 2003. The key point of the new Energy Act was to remove negotiated Third Party Access (TPA) and instead establish regulated TPA. The support schemes and network connection arrangements for renewables (RES) and combined heat and power (CHP) are generous and should be expected to support further new investment. Generation assets in Germany are old and replacement and modernization are required soon. Investment activity is definitely picking up again. Challenging the conventional wisdom that gas will dominate the future, it seems that hard coal has a brighter future than sometimes thought. Environmental policy has a strong focus on promoting RES, outside of the electricity market. The new European emissions trading scheme is shown to have a strong influence on future development.
Article
The California electricity market reform promised to deliver reliable service at low and stable prices. Frequent capacity shortages and the ensuing rolling black-outs, price spikes, and large price volatility since Summer 2000 raise a simple but substantive question: what went wrong? The answer to this question will help countries contemplating electricity market reform not to commit similar mistakes. We find the answer by identifying the major factors that have turned the California dream into a nightmare. Such factors include poor market design, market power, sustained demand growth not matched by new capacity, rising marginal cost, and financial insolvency. Proposed remedies include an alternative market settlement process, long-term contract, fast licensing and siting process for new generation and transmission, conservation and energy-efficiency, distributed resources, rate options, and debt restructuring. The California experience suggests that a reversible regulatory reform is a safe alternative to an irreversible market reform.
Article
Electricity suppliers in the Nordic countries have access to an integrated Nordic wholesale electricity market. The wholesale prices vary only to a limited extent across regions. Retail markets are still national and retail electricity prices vary more across national markets than wholesale prices do. In particular, passive customers with a standard (default) contract face different prices. We estimate the relationship between wholesale and standard retail electricity prices to households for Norway, Sweden and Finland. In Denmark, the default electricity supply price is regulated according to the three month forward electricity price. We find some asymmetry in the adjustment of standard retail prices to wholesale price changes. Retail prices are adjusted sooner when wholesale prices increase than when wholesale prices fall. Norwegian retail prices follow wholesale prices closely with a low margin, while Swedish retail prices react more slowly to wholesale price movements and exhibit a larger margin than in Norway. Finnish retail prices adjust even slower and for long time periods Finnish retail prices are below the wholesale price level. Thus, Finnish suppliers do not seem to view the wholesale price as the opportunity cost of their sales to retail customers to such an extent as Norwegian and Swedish suppliers do.
Article
During the twentieth century, the privately-owned electric utility was regulated as a natural monopoly. Under the natural monopoly paradigm, a vertically-integrated electric utility provides generation, transmission, and distribution services under the rubric of a single firm serving a geographic service territory. While it is allowed to operate as a monopolist, this firm also has certain responsibilities: it submits to price regulation and assumes obligations to extend service to all customers within its geographic service territory and to continue providing service, once service has commenced. With the advent of deregulation, it is assumed that markets will largely displace price regulation, but little discussion focuses on the implications of deregulation for utility service obligations in the electricity industry. Today, electric utilities' extraordinary service obligations - often collectively referred to as the duty to serve - face their largest challenge ever. Can vigorous retail competition of the type public utility deregulation envisions coexist with extraordinary obligations to serve customers? If so, at what costs? Who will bear these costs? These questions are central to an emerging law and economic analysis known as the jurisprudence of networks, of paramount importance as regulators and courts implement competition in traditional public utility industries, including electricity, where the natural monopoly model is being abandoned or reformed. After summarizing how the duty to serve was implemented in the electricity industry under natural monopoly regulation, this article addresses whether traditional service obligations can coexist with retail competition. A rationale often given for universal service obligations in the telecommunications industry is that universal service, by promoting interconnectivity, enhances network system benefits for all customers. While the network economies argument may have worked to sustain universal service in the face of telecommunications deregulation, it is tenuous when applied to the natural gas and electricity industries. Many reformers look askance at the duty to serve in competitive retail utility service markets, often pointing to conflict between retail competition in electricity and the duty to serve. This article argues, however, that application of extraordinary service obligations to distribution companies in a competitive retail framework can coexist with improved efficiency in retail power markets, although the abandonment of the natural monopoly framework challenges regulators to articulate new rationale for service obligations and to devise new ways of paying for them.
Article
Over the last twenty years several network industries that evolved historically as either private or state-owned regulated vertically integrated monopolies have been privatized, restructured, and some vertical segments deregulated. These industries include telecommunications, natural gas, electric power, and railroads. The reform program typically involves the vertical separation (ownership or functional) of potentially competitive segments, which are gradually deregulated, from remaining vertical segments that are assumed to have natural monopoly characteristics and continue to be subject to price, network access, service quality and entry regulations. In several countries, an important part of the reform agenda has included the introduction of “incentive regulation” mechanisms for the remaining regulated segments as an alternative to traditional “cost of service” or “rate of return” regulation. The expectation was that incentive regulation mechanisms would provide more powerful incentives for regulated firms to reduce costs, improve service quality in a cost effective way, stimulate (or at least not impede) the introduction of new products and services, and stimulate efficient investment in and pricing of access to regulated infrastructure services.
Conference Paper
Development of market mechanisms is an important element of power industry liberalization. A new legislative base in the area of electricity supply has opened new perspectives for further market improvement. The paper presents technical and economic transformations in the Russian power industry, depicts main features of the electricity market model and describes the status of market development. Some quantitative characteristics of the wholesale and retail markets are given.
Conference Paper
An in-depth analysis of the restructuring processes in individual market areas requires knowledge of the initial physical and organizational state of the electricity markets. The differences in these initial states lead to a significant divergence in the restructuring processes between the different market areas. There are general textbook models for electricity market restructuring; however, more specific tools are required for a detailed analysis of the divergent market structures and restructuring mechanisms in individual market areas. To illustrate the differences in the restructuring processes, this paper provides a review of four different electricity markets; the introduced electricity markets include Russia, the Nordic countries, the France-the Netherlands-Belgium interconnection (known as the Trilateral Market Coupling area, TLC), and the Pennsylvania-New Jersey-Maryland interconnection (PJM). The Nordic countries and the TLC represent two different European market structures. Russia and the PJM market area in the US, on the other hand, are examples of different approaches in terms of pricing models and market structures compared with the ones commonly applied in Europe. In this paper, the development paths of the electricity markets in these target areas are analyzed taking into account the initial situation in each of these areas.
Article
This paper discusses the electricity reforms in California and in England and Wales. In both cases, a centralised spot market played a major role, and both markets have now been abolished. This paper argues that their disappearance is not evidence that future electricity restructuring should avoid the use of spot markets. Instead, the problems in England and Wales were largely due to market power. In California, problems arising from market power and a tightening demand-supply balance were turned into a disaster because the spot market had not been backed up by hedging contracts.
Article
Since about 1990, many developing and transition countries have undertaken market-oriented reforms in their electric power sectors. Despite the widespread adoption of a standard policy model, reform processes and outcomes have often failed to meet expectations. Drawing on an extensive literature review and case studies in Asia, Africa, Latin America, and Eastern Europe, this paper describes common features of non-OECD electricity reform and reappraises reform policies and underlying assumptions. Comparison with the sector-focused policy goals of deregulation in OECD countries highlights the importance of national fiscal crises, macroeconomic reforms, and persuasion by multilateral lenders in shaping non-OECD reforms. It also makes clear reform's dependence on attracting foreign capital, and consequent vulnerability to volatile international financial conditions. Case studies of Bolivia, Ghana, India, Poland, and Thailand illustrate reform's diverse pathways and problems in different settings. A broad range of non-OECD reform experiences indicates that disappointing results have often resulted from a narrow focus on finance and cost recovery, inflexibly applied. The paper concludes that improving reform will require emphasizing a broader set of objectives, including service provision, public benefits, effective regulation, and social/political legitimacy. Above all, reforms must be based on realistic assessments of national needs and capabilities.
Article
This paper argues that effective competition in reformed wholesale electricity markets can only be achieved if the following six prerequisites are met: (1) separation of the grid from generation and supply; (2) wholesale price deregulation; (3) sufficient transmission capacity for a competitive market and non-discriminating grid access; (4) excess generation capacity developed by a large number of competing generators; (5) an equilibrium relationship between short-term spot markets and the long-term financial instruments that marketers use to manage spot-market price volatility; (6) an essentially hands-off government policy that encompasses reduced oversight and privatization. The absence of any one of the first five conditions may result in an oligopoly or monopoly market whose economic performance does not meet the efficiency standards of a competently managed regulated electrical utility.
Article
In Argentina, prior to the macroeconomic crisis of early 2002, power sector reforms had proven successful in delivering low electricity tariffs and increasing private investments. This had been achieved through the unbundling of electricity supply businesses and the introduction of competition, paying due attention to the lessons learned by forerunners in power sector reform, including neighbouring Chile. The reforms that had been implemented in Argentina were therefore deemed to have been a success. However, in the wake of the macroeconomic crisis and the devaluation of the peso, generators and gas suppliers found themselves in critical financial straights, which caused a halt to additional investment. The current challenge facing reforms in the Argentine power sector is to rebound from the financial ramifications of peso devaluation and to promote private investment. Given these basic facts, this paper traces the history of reforms in the Argentine electricity sector, assessing the progress that has been achieved and suggesting lessons for developing countries. It is often the case in developing countries that the unbundling of vertically integrated state-owned industries into privatised enterprises requires efforts to improve infrastructure as a prerequisite for the introduction of competitive practices. Bearing this in mind, this paper lays out measures that would be useful to consider for electricity sector reforms in developing countries from the following three perspectives: (1) Transition from a state-owned power companies to private enterprises; (2) Development of conditions required to promote infrastructure projects; and (3) Development of conditions for the establishment of a healthy and fair competitive environment, assuming that liberalisation is achieved once the conditions in (1) and (2) are met.
Article
The process of liberalising European electricity markets, encompassing a wide range of restructuring activities, has mainly been spurred by the attempt to increase the economic efficiency of the whole sector. This process might be used to trigger a development towards a sustainable power sector by increasing the use of renewable energy sources and enhancing energy efficiency on the supply and demand side. However, by taking a closer look at the current trends of the European electricity markets, it becomes obvious that the liberalisation not only implies opportunities but also risks for the creation of a sustainable power sector. Many of these risks are due to market distortions and imperfections caused by the delay in creating a fully functional single European market. Thus, in the short-term, the market liberalisation tends to constitute more risks than opportunities without government actions to prevent these risks. In the long run, though, the efficiency gains of the sector and the appearance of new market factors are likely to bring forth the opportunities of liberalisation and actively foster a transformation towards a sustainable electricity sector.
Article
Technological innovation and the decreasing costs of wireless and other technologies, combined with progressive policy and regulatory environments, have resulted in the provision of telecommunication services in remote areas thought unserviceable by incumbent telcos in Latin America, Central Europe, and Asia. In line with the increasing number of success stories in other parts of the world, the South African government, as part of the policy of "managed liberalization" of the telecommunications sector, lifted the monopoly provision of telephone services in under-serviced areas by permitting smaller-scale entrants into the telecommunications market.Emerging from the second round of telecommunications policy reform in 2001, following the initial reforms to the sector in 1996, it was anticipated that these special operators would be licensed in 2002. Although licenses were finally granted following several licensing delays in June 2004 to seven applicants (three conditionally) from the ten areas demarcated in the first round, further delays in the final issuing of these licenses meant these licensees were only able to become operational in 2005.With the Ministry of Communications' latest policy directives on further liberalization of the market, which allows for some of the services previously reserved for Under-Serviced Area Licensees (USALs) to be more widely available from February 2005, just prior to the underserviced area licensees coming on stream, the window of opportunity for these small-scale new entrants may have closed.This paper assesses the degree to which policy and regulatory conditions promote the viability of these operators and facilitate their evolution as business and developmental models. Drawing on international experience, the policy and regulatory framework for these licenses is assessed.-super-2 The paper focuses specifically on other jurisdictions where similar regimes have been introduced as part of a national policy rather than on
Article
The paper discusses the Russian power sector reform plan, approved by the government in July 2001, which outlines the framework for competition and changes in ownership structure. The paper focuses on the following issues related to the plan: price reform; restructuring of regional energos and large generating companies; restructuring of transmission and system operation; the mechanism for introducing competition; competition for residential consumers; and reform sequencing. One key message of the paper is that price and regulatory reform is central to success of market liberalisation. A second key message is that the restructuring of energos should not create companies with market power. Ideally, local generation and distribution companies would be owned separately with multiple generators in each region. At a minimum, commonly owned companies should keep separate accounts, with regulation of generation a possibility where there is market power. Regarding transmission and dispatch, common ownership would not be a problem given that transmission and generation are separately owned. On competition, a fully fledged pool may not be appropriate in the case of Russia, with the alternative of a market based on bilateral contracts with a balancing pool functioning better in a context of non-payment and constrained institutional capacity, and providing security for investments. Regarding competition for residential consumers, this is not a priority in the short to medium term. Lastly, on sequencing, it is better that structural and institutional change takes place before competition begins.
Article
The last decade has witnessed efforts throughout the world to deregulate the electricity industry, with varied results. While there have been a few qualified success stories, many challenges of deregulation have come to light. These challenges can lead to negative, even disastrous, outcomes. Based on a comprehensive literature review, this paper catalogues problems experienced in various deregulation efforts, and considers the application of the lessons learned from this history to Israel, which is considering deregulation. Failings of deregulation are found to center around the following problems: high set-up cost; complicated market design; inevitable spot price volatility; market power abuse; inefficient investment; difficulty in reducing generation cost; dysfunctional input markets; stranded cost; unequal distribution of benefits. We find that many of these problems are exacerbated by the particular circumstances faced by Israel, and advise any country or region considering deregulation to carefully consider these obstacles to success.
Article
Although the Nordic countries were among the first to develop competition in the electricity industry, it took a long time to make retail competition work. In Norway and Sweden a considerable number of households are actively using the market but very few households are active in Finland and Denmark. One problem has been institutional barriers involving metering, limited unbundling of distribution and supply, and limited access to reliable information on contracts and prices.
Article
The Russian Federation has begun restructuring its electricity sector, following the standard restructuring model of complete vertical separation of generation from transmission, with the aim of creating competition in regional generation markets. This paper examines the structure of the six principal regional generation markets that are in their early stages of development and argues that they are likely to be characterized by high levels of market power on the part of individual privatized generation companies, especially during the peak winter demand season. These levels—considerably higher than those that caused competitive problems in California—seem to create a serious risk of price spikes in deregulated wholesale electricity markets, and thus of significant price increases to consumers of electricity.
Article
In 1990, Britain reorganised its electricity industry to run on competitive lines. The British reforms are widely regarded as successful and the model used provides the basis for reforms of electricity industries worldwide. The main reason for this perception of success is major reductions in the real price of electricity with no reduction in service quality. This paper examines whether the reputation of the British reforms is justified. It concludes that the reputation is not justified and that serious fundamental problems are beginning to emerge. The central question is: have the British reforms resulted in the creation of efficient wholesale and retail markets? On this criterion, the reforms have failed. The wholesale market is dominated by obscure long-term contracts, privileged access to the market and self-dealing within integrated generator/retailers, leaving the spot markets with minimal liquidity and unreliable prices. The failure to develop an efficient wholesale market places the onus on consumers to impose competitive forces on electricity companies by switching regularly. Small consumers will not do this and they are paying too much for their power. For the future, there is a serious risk that the electricity industry will become a weakly regulated oligopoly with a veneer of competition.
Article
Developing countries have had to reform technically and financially less efficient electricity sectors than developed countries with less resources and weaker institutions. This paper examines the reform experience and lessons in these countries. The paper reviews private participation and key reform steps such as restructuring, competition, and regulation. The role of contextual factors such as system size, institutional endowment, and international organizations are then discussed. It then argues that there is a need for redefining the role of the state rather than a full withdrawal from the sector and that many countries should adopt simpler reform models and gradual implementation.
Article
In many countries, where the electricity industry is being exposed to market liberalization, it is found that the hardest part of the market to reform is retail supply to small business and domestic consumers. There are two main alternatives for promoting consumer choice, metering and load profiling. Notable developments are occurring in the United Kingdom, the United States, Scandinavia and New Zealand. Significant legal difficulties are encountered with such reforms. Among them are contract law, energy-sector regulation, competition law, privacy and individual rights, and consumer protection. The disaggregation of the industry, especially at the retail end, imposes special demands on contract and industry self-regulation.
Article
The reform of the Russian electricity industry represents one of the largest and most technically complex post-Soviet era industrial restructurings. This paper presents the framework, status, and perspectives for the Russian electricity sector liberalisation. Uncertainties regarding the effective implementation of the reform are specifically examined. Ultimately the critical analysis of the reform questions the feasibility and adequacy of the recommended measures in the specific Russian context. Current theories fail to answer a fundamental issue, namely how to promote investment in an obsolete electrical infrastructure and, more generally, whether a pure free market model is compatible with physical constraints posed by the electricity sector. A careless deregulation of the Russian electricity system could hinder the country's stable and sustainable development, as its economy and the population's service have traditionally been closely linked to the electricity industry.
Article
The continuation of China's remarkable economic growth will depend on continued increases in electricity supply. China has commenced a program of electricity sector restructuring, with the announced aim of relying on markets and competition to provide incentives for attracting private investment and encouraging efficiency. However, a close examination of the generation markets being created suggests that truly free wholesale prices are likely to be both high and volatile. This may be the reason that these prices have not yet been freed — and it may not bode well for true market liberalization in the future.
Article
John Kwoka is the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University. His areas of specialization are industrial organization, regulation, and antitrust economics. His research covers a range of topics, but most recently has focused on the effects of various restructuring policies in the electricity industry. He is also a Research Fellow of the American Antitrust Institute and a member of the Board of Directors of the Industrial Organization Society, and has previously served at the Federal Trade Commission, the Federal Communications Commission, and the Antitrust Division of the Justice Department. He can be contacted at j.kwoka@neu.edu
Article
The introduction of competition into retail electricity supply gave rise to great expectations. However, to date, its performance has proven less than stellar, owing primarily to the theoretical concepts underpinning this reform, which draw heavily on the Austrian school. Neither consumers' decision processes nor this sector's technical paradigm were adequately accounted for, leading to an uncorrect estimation of the expected impact of opening to competition. Short- and medium-term prospects for the evolution of retail markets must be reconsidered from the perspective of greater stability: not a generalization of competition, but rather a persistent segmentation between active and inactive clients; not a large and rapid diffusion of radical innovations in commercialisation, with the potential for undermining the incumbents' positions.
Article
Electricity systems present complicated challenges for public policy. In many respects these challenges are similar to those in other network industries in providing a balance between regulation and markets, public investment and private risk taking, coordination and competition. As with other such industries, naturally monopoly elements interact with potentially competitive services, but electricity has some unusual features that defy simple analogy to other network industries. Following a reversal of a long-term decline in real electricity prices, the last two decades of the twentieth century were for the United States a time of reform, reaction, and reforms of reforms in electricity systems, moving slowly towards greater reliance on competition and markets. Changing technology, new entrants in the generation market, and a legislative mandate to provide access to the essential transmission facility accelerated a process that required major innovations in institutions and operations. Complete laissez faire competition is not possible, and the details of an efficient competitive electricity market are neither obvious nor easy to put in place. The benefits of reform may be substantial, but they require careful attention to market design. A review of the past identifies some choices on the road ahead. Copyright 2002 by Kluwer Academic Publishers
Article
The experience of liberalized electricity markets’ ability to allocate scarce energy resources has been mixed. In this paper, we analyze how liberalized markets allocate power in the short and long run through the interaction between the spot and end-user markets. We show that totally inelastic demand in the spot market does not necessarily result in market failure in a shortage situation, as long as price incentives are transferred to the end-user markets. We argue that the market does not have to run optimally to handle a shortage situation, and that problems with short- or long-run allocation of power arise when price restrictions in end-user markets results in a higher demand than that which may sustain the energy situation over time.
Article
As retail electric and gas markets deregulate, market share measurement becomes critical for marketers, regulators, and incumbent utilities. Yet traditional market share measures miss important features of these network industries. In this paper we model provider choice in network industries and develop two alternate market share measures—The Active Market Share (AMS) and the New Mover Market Share (NMMS), that are based on ‘active demand’. These measures are shown to provide more accurate real-time measures of market activity. The NMMS is a special case of the AMS which is easy to measure empirically. Numerical simulations are used to provide comparisons between each measure over time. Both the AMS and NMMS will be important tools for anyone interested in measuring the competitiveness of deregulating markets.
Conference Paper
This paper describes the basic properties of nodal pricing mechanism that is strongly affected by the network configuration. The islanding phenomena of nodal price and other interesting features appear in the nodal pricing properties at heavy demand condition. The numerical examples are included in order to demonstrate the theoretical property of nodal price in the weakly tied network. Demand curve characteristics can be included in the calculation of nodal price.
Article
South America is facing important challenges in electricity supply to allow for future economic development. Current electricity market designs are being reviewed to avoid supply difficulties and couple the existing outlook of primary energy resources and the investment interest by the private sector. While Brazil and Chile progress into a second stage of reforms with public power purchase agreement (PPA) auctions in a private environment, Argentina makes a backward movement to significant state intervention, as in the times previous to reform. This paper discusses the approaches to be used by each country to ensure sufficient capacity and investment to reliably serve their growing economies.
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The British Electric Industry 1990e2010: The rise and demise of competition
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Active Market Share: measuring competitiveness in retail energy markets. Utilities Policy 8 Rpiojyo9f R9olj ;mfltrp;ofrGjj: Phjeaoj> j Rfamjj (Retail markets of electric energy: expectations and realities) Proceedings of: 6th Professional Energy Forum
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The Structure of the Russian Power Industry and Competitive Relations: The Present and the Future
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How to Liberalize a Thousand TWh Market? e Restructuring the Russian Power Sector. Helsinki, BOFIT e Institute for Economies in Transition System Operator of United Energy System of Russia
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