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Regulation and electricity market integration: When trade introduces inefficiencies

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  • Billette de Villemeur, Etienne
  • Pineau, Pierre-Olivier

Abstract

Electricity markets vary greatly across jurisdictions, in terms of regulatory institutions, cost levels and environmental impacts. Integrating such different markets can lead to significant changes. This paper considers two jurisdictions - one with a regulated monopoly selling at average cost and one with a competitive market - and compares three different institutional regimes: autarky, a mixed-market structure with trade and a fully integrated market, where electricity is sold at marginal cost. We show that, in the second regime, the regulated monopoly always exports toward the jurisdiction pricing at marginal cost, up to inducing productive inefficiencies. By contrast, a shift from the second to the third regime, i.e. "integrated deregulation" yields a decrease in overall consumption. We identify the exact conditions under which the shift from one regime to the other results in environmental gains.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41251.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:41251

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Keywords: Market Integration; Regulation; Electricity Trade; Environmental Impacts;

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  1. Sauma, Enzo E. & Oren, Shmuel S., 2009. "Do generation firms in restructured electricity markets have incentives to support social-welfare-improving transmission investments?," Energy Economics, Elsevier, vol. 31(5), pages 676-689, September.
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  6. Pineau, Pierre-Olivier, 2008. "Electricity sector integration in West Africa," Energy Policy, Elsevier, vol. 36(1), pages 210-223, January.
  7. Sandro Brusco & Hugo Hopenhayn, 2007. "Deregulation with Concensus," Department of Economics Working Papers 07-01, Stony Brook University, Department of Economics.
  8. Chen, Yihsu, 2009. "Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover," Energy Economics, Elsevier, vol. 31(5), pages 667-675, September.
  9. Dixit, Avinash & Norman, Victor, 1986. "Gains from trade without lump-sum compensation," Journal of International Economics, Elsevier, vol. 21(1-2), pages 111-122, August.
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  11. Hooper, Elizabeth & Medvedev, Andrei, 2009. "Electrifying integration: Electricity production and the South East Europe regional energy market," Utilities Policy, Elsevier, vol. 17(1), pages 24-33, March.
  12. Vincent Anesi & Philippe De Donder, 2011. "Secondary issues and party politics: an application to environmental policy," Social Choice and Welfare, Springer, vol. 36(3), pages 519-546, April.
  13. Davidson, Carl & Matusz, Steven J. & Nelson, Douglas R., 2007. "Can compensation save free trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 167-186, March.
  14. Anesi, Vincent, 2006. "Earmarked taxation and political competition," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 679-701, May.
  15. von der Fehr, Nils-Henrik M & Sandsbraten, Lise, 1997. " Water on Fire: Gains from Electricity Trade," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 281-97, June.
  16. Pineau, Pierre-Olivier & de Villemeur, Étienne, 2009. "Environmentally Damaging Electricity Trade," IDEI Working Papers 592, Institut d'Économie Industrielle (IDEI), Toulouse.
  17. Benjamin, Richard, 2007. "Principles for Interregional Transmission Expansion," The Electricity Journal, Elsevier, vol. 20(8), pages 36-47, October.
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Cited by:
  1. Billette de Villemeur, Etienne & Pineau, Pierre-Olivier, 2013. "Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules," MPRA Paper 55619, University Library of Munich, Germany.
  2. Nikandrova, Arina & Steinbuks, Jevgenijs, 2014. "Contracting for the second best in dysfunctional electricity markets," Policy Research Working Paper Series 6955, The World Bank.

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