Complexity of Electricity Markets and their Regulation: Insights from the Turkish Experience

Electricity pricing models were designed at a time when technology was relatively stable. The natural monopoly model was based on a uni-directional pricing mechanism. Electricity was generated at one end and transferred to the other end. Pollution was not a big issue. There were no solar panels over the houses of consumers. Many contemporary issues of the ecosystem of electricity were not relevant. The tariff model was meant to be a simple one, even though it included many variables. It was not a complex system. This paper argues that a model that was designed within a simple system cannot efficiently adapt to a multidimensional and interdependent system. The use of the old regulatory model within a complex system creates rents and inefficiencies. This paper evaluates the electricity tariff model in Turkey under the light of recent technological advances and changes in the structure of electricity markets. The changes in the institutional environment of the market bring electricity markets closer to a complex system. We argue that the tariff mechanism should also be revised accordingly. We use the Turkish electricity industry as an example, as it reflects the issues in a developing country.