Is electricity more important than natural gas? Partial liberalizations of the Western European energy markets

The European Union has introduced directives that aim to liberalize and integrate electricity and gas markets in Western Europe. While progress has been made, there have also been setbacks, partly because of concerns about national interests and security of supply. This may call for an EU medium-term strategy to implement and enforce liberalizations in only selected parts of the energy industry. We use a numerical model to assess what types of liberalization – electricity vs. natural gas; domestic markets vs. international trade – are most influential in decreasing prices and increasing welfare in Western Europe. As part of identifying effects of different types of liberalizations, we present a method for calibrating the magnitude of deviations from the hypothetical competitive outcome in different parts of the energy industry in Western Europe. We find that a liberalization of electricity markets has greater quantity and welfare effects than a liberalization of gas markets, and that liberalizations of domestic energy markets have (overall) greater effects than liberalizations of trade in energy between Western European countries. Finally, the short-run effects essentially parallel the long-run effects, though they are significantly smaller.