Economics of Electrical Grids

The electrical grid connects generators and customers. Without it, no electricity market is possible. For enabling competition among generators and retailers, third party access to the electrical grid must be assured on terms that are transparent and nondiscriminatory. From an economic point of view, electrical grids represent both a natural monopoly and an essential facility. This confers a dominant market position upon vertically integrated utilities and power grid operators that may be abused. To prevent this and the concomitant welfare losses, power grids need to be regulated. Another issue is the network characteristic of the electrical grid. For reasons of economic efficiency, it links many countries on the European continent. The associated grid externalities require grid operators to provide system services according to common rules and standards, among others control power (also called regulation power) to keep demand and supply in continuous balance. This chapter addresses the following questions: What are the economic reasons motivating grid integration? What are economically efficient approaches to the provision of grid services? What are economically efficient grid tariffs? What are the economic benefits and costs of unbundling? How should interconnectors be efficiently managed?