Assignments

1. Read, translate and give the gist of text 11.

2. Answer the questions.

1. What is the main purpose of electricity reforms?

2. What benefits have reforms delivered in the countries linked to the corporatisation and privatization of the utilities?

3. How have lower costs influenced electricity prices in many OECD countries?

4. What is a key issue for the progress of reforms?

5. What has had a significant impact on the benefits of reforms?

3. Speak on the impacts of reforms on the ESI efficiency.

Text 12. International Electricity Trade

International electricity trade is increasing in many regions of the world including the EU and North America. In these regions the ESI is rapidly evolving from a set of national markets to become a much broader regional market. A similar process is taking place in federal countries such as the US and Australia, where more integrated national markets are growing out of previously separate state markets. The development of regional electricity markets brings some important benefits. In addition to the direct benefits of trade resulting from lower overall costs, regional competition may compensate for high concentration in domestic markets and encourage the competitiveness of national electricity firms.

However, lack of harmonization among national regulations may result in barriers to trade. First, if some countries are more open than others within a common trade area, there may be reciprocity concerns that could make international electricity trade more difficult. Second, nationally set environmental standards (e.g. post-Kyoto commitments to reduce CO₂ emissions) may not be effective once international electricity trade is engaged. Third, differences in taxation may also distort and discourage trade. A prominent illustration of how lack of harmonization may result in market fragmentation is provided by the EU internal electricity market.

Extensive international cooperation to deal with these issues is needed. There are signs that it is increasing. The efforts made in the context of the EU Electricity Directive to set common rules, the “flexibility” mechanisms included in the Kyoto Protocol and the incipient analysis of trade of energy services in the context of the General Agreement on Trade and Services (GATS) are examples of increasing international cooperation.

A difficult issue that needs to be addressed in the development of international electricity markets is the management of transmission. In practice, the development of international electricity trade depends on market players having access to international transmission capacity and raises similar issues to those raised by domestic transmission. The development of the EU internal electricity market provides an example of these two problems and of the need for common rules to overcome them. Developments in the natural gas market also have to be taken into consideration as gas and electricity markets are increasingly interrelated. The opening of gas markets and the related changes in gas prices have a potentially large effect on the ESI.

Gas prices have a short-term impact on the generation mix that is dispatched. In the long-term, investment decisions in generating capacity are also affected. The fuel inputs to the generation of electricity will result from the combined action of changes in both gas and electricity markets. In addition, gas companies are actual or potential competitors in the electricity market. A wider energy sector perspective is important in assessing the institutional and other changes that are taking place in the ESI. A competitive market provides incentives for investors to choose the least cost alternatives. For instance, fossil fuels such as gas often provide electricity at least cost. This, of course, may conflict with national policies that give preference to other fuels (e.g. nuclear promotion in some countries and closing of nuclear plants in others) or that would favour a different fuel mix.

Governments can, to some extent, continue to implement fuel policies in a competitive market. For instance, governments can restrict fuel choices for new entrants or can establish subsidies for generation based on certain fuels. However, this approach may have a significant impact on market performance, as it distorts entry and investment decisions. Ultimately, regulations on entry are likely to conflict with the efficient operation of the market and reduce the efficiency gains that were the primary objective of reform.