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Energy policies and risks on energy markets; a cost-benefit analysis

Listed author(s):
  • Jeroen de Joode
  • Douwe Kingma


  • Mark Lijesen


The key question dealt with in this report is whether and how governments should be involved in taking measures regarding security of energy supply. In order to answer this question, we developed a framework for cost-benefit analysis and applied this framework to a number of policy options. Read also the press release and accompanying document ' Increasing the reliability of electricity production: a cost-benefit analysis '. The options chosen vary from government investments in strategic oil stocks to financial incentives for consumers to reduce their consumption of electricity. The set of options comprises several types of governmental action, including subsidies, regulation and government investments. Moreover, the selection includes measures meant to address risks on all three major energy markets: oil, natural gas, and electricity. The general picture following from the cases studied is that security of supply measures are hardly ever beneficial to welfare: benefits of policy measures do generally not outweigh costs. From an economic point of view, therefore, it would be often wiser to accept consequences of supply disruptions than to pursue security of supply at any cost. This implies that governments should exercise caution in imposing measures regarding security of supply. If serious market failure is detected, careful attention should be paid to the design of the corrective measure. Establishing and maintaining well-functioning markets appears to be an efficient approach in realising a secure supply of energy. That approach would include removal of entry barriers, securing equal access to essential facilities and increasing transparency of markets.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Special Publication with number 51.

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Date of creation: Mar 2004
Handle: RePEc:cpb:spcial:51
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  1. Tishler, Asher, 1993. "Optimal production with uncertain interruptions in the supply of electricity : Estimation of electricity outage costs," European Economic Review, Elsevier, vol. 37(6), pages 1259-1274, August.
  2. Serra, Pablo & Fierro, Gabriel, 1997. "Outage costs in Chilean industry," Energy Economics, Elsevier, vol. 19(4), pages 417-434, October.
  3. Machiel Mulder & S. Speck, 2003. "Competition on European energy markets: between policy ambitions and practical restrictions," CPB Document 33, CPB Netherlands Bureau for Economic Policy Analysis.
  4. Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
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