Divorce comes at a price: An ex ante welfare analysis of ownership unbundling of the distribution and commercial companies in the Dutch energy sector

Vertical unbundling in the electricity sector is a hot political topic in the European Union. The European Commission has decided that the ownership unbundling of transmission networks from other stages in the value chain is the most effective way to ensure fair network access and infrastructure investment. While this European unbundling debate has not ended yet and most countries still do not have an independent transmission system operator (TSO), the Dutch government has already taken one step further. In 2008, it decided that distribution companies should be completely separated from commercial activities that are part of the same holding (generation, trade and supply). This governmental decision has been fiercely debated. Although the goal is to improve competition as well as security of supply, these benefits are uncertain. Nevertheless, it is certain that ownership unbundling comes at a cost. In this paper we present an ex ante cost-benefit analysis of the Dutch unbundling act. We conclude that it is unlikely that this act is welfare enhancing: divorce comes at a price.     

The unbundling regime for electricity utilities in the EU: A case of legislative and regulatory capture?

Theory and empirics suggest that by curbing competition, incumbent electricity companies which used to be, and here are referred to as, Vertically Integrated Utilities (VIUs), can increase their profitability through combined ownership of generation and transmission and/or distribution networks. Because curbing competition is generally believed to be welfare-reducing, EU law requires unbundling (separation) of the VIU networks. However, the EU allows its member states the choice between incomplete (legal) and complete (ownership) unbundling. There is tantalizing anecdotal evidence that VIUs have tried to influence this choice through questionable means of persuasion. Such means of persuasion should be more readily available in countries with a more corrupted political culture. This paper shows that among the old EU member states, countries which are perceived as more corrupt are indeed more likely to apply weaker forms of unbundling. Somewhat surprisingly, we do not obtain a similar finding for the EU member states that acceded in 2004. We provide a conjecture for this observation.     

The effect of the German and British environmental taxation reforms: A simple assessment

This article implements a simple econometric approach to assess the effect of the environmental tax reforms introduced in Germany and the UK. Despite the very simple econometric approach adopted in this paper, in the case of the energy demand, our results do not differ markedly from those obtained from complicated multi-sectoral econometric models. In the case of the labour demand, our results differ from the estimates obtained from econometric models where the employment level is not directly influenced by the energy price. On the other hand, our results are more similar to those obtained from models where the level of employment is directly influenced by the energy price. Confirming the findings of Bosquet [2000. Environmental tax reform: does it work? A survey of the empirical evidence. Ecological Economics 34, 19–32] and OECD [2004. Environment and Employment: An Assessment Working Party on National Environmental Policy OECD, Paris], we conclude that environmental tax reforms can deliver substantial reductions in energy consumption while having small effects on the level of employment, effect which can be positive, depending on the size of the reduction in the labour costs and the value of cross-price elasticities.     

Incentive regulation of electricity distribution networks: Lessons of experience from Britain

This paper reviews the recent experience of the UK electricity distribution sector under incentive regulation. The UK has a significant and transparent history in implementing incentive regulation in the period since 1990. We demonstrate the successes of this period in reducing costs, prices, and energy losses while maintaining quality of service. We also draw out the lessons for other countries in implementing distribution sector reform. We conclude by discussing the place of incentive regulation of networks within the wider reform context, the required legislative framework, the need for appropriate unbundling, the importance of quality of service incentives, the regulatory information requirements, and the role of sector rationalisation.     

Impacts on investments,and transmission/distribution loss through power sector reforms

This study analyses original panel data from 86 countries between 1985 and 2006. Econometric methods were used to identify the effects of different policy devices of power sector reforms on performance indicators (installed capacity per capita, transmission and distribution loss) in the countries analyzed. The research findings suggest that reform variables such as the entry of independent power producers (IPPs), unbundling of generation and transmission, establishment of regulatory agencies, and the introduction of a wholesale spot market are the driving forces of increasing generation capacity, as well as reducing transmission and distribution loss in the respective regions. In this study, we can assume that, firstly, different electric industry’s reform policies/measures have different impacts on geographically and economically diverse countries. Secondly, a country’s state of economic development has a different impact on policy effects of reforms. Thirdly, coexistent with independent regulatory agencies, reform policy becomes more powerful in realizing sector performances.     

Effects of regulatory reforms in the electricity supply industry on electricity prices in developing countries

Electric power sector reforms in the electricity supply industry have had an impact on industrial and household prices in developing countries in Latin America, the former Soviet Union, and Eastern Europe. Using original panel data for 83 countries during the period from 1985 to 2002, we examine how each policy instrument of the reform measures influenced electricity prices for countries in the above regions. We found that variables such as entry of independent power producers (IPP), unbundling of generation and transmission, establishment of a regulatory agency, and the introduction of a wholesale spot market have had a variety of impacts on electricity prices, some of which were not always consistent with expected results. The research findings suggest that neither unbundling nor introduction of a wholesale pool market on their own necessarily reduces the electric power price. In fact, contrary to expectations, there was a tendency for the price to rise. However, coexistent with an independent regulator, unbundling may work to reduce electricity prices. Privatization and the introduction of foreign IPP and retail competition lower electricity prices in some regions, but not all.     

Distributed generation and distribution market diversity in Europe

The unbundling of the electricity power system will play a key role on the deployment of distributed generation (DG) in European distribution systems evolving towards Smart Grids. The present paper firstly reviews the relevant European Union (EU) regulatory framework: specific attention is paid to the concept of unbundling of power distribution sector in Europe. Afterwards, the focus is on the current state of penetration of DG technologies in the EU Member States and the corresponding interrelations with distribution features. A comparison between the unbundling of the distribution and supply markets using econometric indicators such as the Herfindahl–Hirschmann (I_HH) and the Shannon–Wiener (I_SW) indices is then presented. Finally, a comparative analysis between these indices and the current level of penetration of distributed generation in most EU is shown; policy recommendations conclude the paper.     

Transaction costs,institutional rigidities and the size of the clean development mechanism

Transaction costs and institutional rigidities will reduce the attractiveness of the Kyoto Protocol flexibility mechanisms compared to domestic greenhouse gas abatement options. The clean development mechanism (CDM) in particular is likely to entail considerable costs of baseline development, project registration, verification and certification. The activities implemented jointly pilot phase and the prototype carbon fund programme give indications about these costs. There is evidence that projects with high implementation costs have high transaction costs as well. Moreover, CDM projects have to be approved by host country institutions, and so far only a small share of host countries has been able to set up these institutions. Several of the larger host countries intend to only approve projects if the market price is above a certain threshold. Some governments will also levy fees to finance costs of approval bodies. We assess these issues using a quantitative model of the Kyoto Protocol permit market. We conclude that while changes in demand from Annex B countries remain the crucial factor, the size of the CDM will depend to a significant degree on transaction costs and institutional barriers in host countries.     

Unbundling cars to daily use and infrequent use vehicles—the potential role of car sharing

Car sharing is seen as an alternative to car ownership; however, for many households, this option may be unthinkable. In this study, we explore the idea of combining car sharing and vehicle ownership in order to change car purchase behavior to improve the environmental performance of the fleet. We consider the personal vehicle as a bundle of attributes. We look at the distinction between “daily use” and “infrequent use” attributes. “Infrequent use” features are those that are only needed occasionally, e.g., a larger trunk, all-wheel drive, seating for 7, and long vehicle range. If the vehicle attributes could be unbundled, the personal vehicle would include only those features needed on a daily basis, with car sharing providing the “infrequent use” features. We qualitatively explore what the car-sharing service would need to look like to cover the “infrequent use” needs and analyze if the existing services can provide these needs. We base our analysis on literature and interviews with experts and representatives from car sharing and rental car companies in California and Sweden. We find that car sharing today does not cover the needs for unbundling the vehicle. There are not enough “infrequent use” vehicles available in these services. However, new business models and the growth of peer-to-peer car sharing are already begun to widen the vehicle models available.     

A cross-country analysis of electricity market reforms: Potential contribution of New Institutional Economics

The paper explores whether the question of why some countries are able to implement more extensive reforms is closely related to the question of why some countries have better institutions than others. We analyze this question by using an empirical econometric model based on Poisson regression with cross-section data covering 51 states in the US, 13 provinces in Canada and 51 other countries. In the course of the study, we check the validity of three important arguments of New Institutional Economics (NIE) for the power market liberalization process. The first argument is the “path-dependency”. To test its impact on the reform progress, we try to explain whether the background of the chairperson of the regulatory agency when reforms started or that of the governor/minister responsible for energy policy at that time has an impact on the subsequent reform progress. The second argument is the impact of “democracy” as an institution on the reform progress. We look at the effect of two important indicators of democracy (i.e., civil liberties and political rights) on the reform progress. The final argument of NIE is about transaction costs. We concentrate on the level of corruption in a country as one of the key factors that determine transaction costs and try to explore its impact on the reforms. The results show that the backgrounds of the chairperson and the minister/governor, the level of democracy and corruption in a country are significantly correlated with how far reforms have gone in that country. The negative relationship between reform progress and civil liberties may indicate that reforms may be limited in democratic countries with strong civil society institutions such as trade unions or other organized structures in the society that may consider reforms as ‘harmful’ to their self-interest.     

Modelling energy systems for developing countries

Developing countries’ energy use is rapidly increasing, which affects global climate change and global and regional energy settings. Energy models are helpful for exploring the future of developing and industrialised countries. However, energy systems of developing countries differ from those of industrialised countries, which has consequences for energy modelling. New requirements need to be met by present-day energy models to adequately explore the future of developing countries’ energy systems. This paper aims to assess if the main characteristics of developing countries are adequately incorporated in present-day energy models. We first discuss these main characteristics, focusing particularly on developing Asia, and then present a model comparison of 12 selected energy models to test their suitability for developing countries. We conclude that many models are biased towards industrialised countries, neglecting main characteristics of developing countries, e.g. the informal economy, supply shortages, poor performance of the power sector, structural economic change, electrification, traditional bio-fuels, urban–rural divide. To more adequately address the energy systems of developing countries, energy models have to be adjusted and new models have to be built. We therefore indicate how to improve energy models for increasing their suitability for developing countries and give advice on modelling techniques and data requirements.     

Electricity reform in Argentina: Lessons for developing countries

Argentina was one of the first countries in the world to implement a comprehensive reform of its electricity sector. Among developing countries only Chile has had a comparably comprehensive and successful reform. This paper traces the history of the Argentine reform, which began in 1992, and assesses its progress and its lessons. We conclude that the reform was very successful prior to the collapse of the Argentine peso in early 2002. We suggest lessons for the generation, transmission and distribution (and retailing) sectors, as well as the economic regulation of electricity and the general institutional environment. We note that the achievements of the sector have been severely strained by the government's poor energy policy since the crisis.     

Some thoughts on the Turkish electricity distribution industry

Over the past decade or so, the electricity industry of the Republic of Turkey (and indeed the world) has undergone profound reform in its structure, ownership and mindset. Increasing public concern about efficiency in the sector has led Turkey to discard the traditional model of a vertically integrated industry subject to cost-based regulation in favor of the unbundling of activities and the introduction of competition where it is possible. The industry has been structurally separated into generation, transmission, distribution and retail segments. The competitive segments of the industry (generation and retail) are planed to progressively expose to competition; the monopoly segments (especially, distribution) are to be reoriented to foster competition. Further, the ownership of the industry is under increasing pressure to move away from the public domain into the private one. The present article not only presents an analysis of the Turkish distribution sector and proposed privatization process but also provides some guidelines for policy makers.     

Empirical challenges in the use of learning curves for assessing the economic prospects of renewable energy technologies

In bottom-up energy models endogenous technical change is introduced by implementing technology learning rates, which specify the quantitative relationship between the cumulative experiences of the technology on the one hand and cost reductions on the other. The main purpose of this paper is to critically analyze the choice of modeling and estimation strategies in learning curve analyses of power generation costs. We identify and discuss a number of theoretical and econometric issues involved in the estimation of learning curves. These include the presence of omitted variable bias and simultaneity, but also methodological problems related to the operationalization of theoretical concepts (i.e., learning-by-doing) and the associated use of data. We illustrate the importance of these issues by employing panel data for wind power installations in four western European countries, which are used to compare the results from different learning curve model specifications. The results illustrate that the estimates of learning rates may differ significantly across different model specifications and econometric approaches. The paper ends by outlining a number of recommendations for energy model analysts, who need to select appropriate energy technology learning rates from the empirical literature, or who choose to perform the empirical work themselves.     

Efficiency and environmental factors in the US electricity transmission industry

The electricity industry in most developed countries has been restructured over recent decades with the aim of improving both service quality and firm performance. Regulated segments (e.g. transmission) still provide the infrastructure for the competitive segments and represent a significant share of the total price paid by final customers. However there is a lack of empirical studies that analyse firms' performance in the electricity transmission sector. In this paper an empirical analysis of US electricity transmission companies is conducted for the period 2001–2009. We use alternative stochastic frontier models that allow us to identify the determinants of firms' inefficiency. These models also permit us to control for weather conditions, potentially one of the most decisive uncontrollable factors in electricity transmission. Our results suggest that weather conditions clearly have an influence on transmission costs and that there is room for improvement in the management of US electricity transmission systems. Regulators should also be aware that more adverse conditions generate higher levels of inefficiency, and that achieving long-term efficiency improvements tends to worsen firms' short-term relative performance.     

Main drivers of natural gas prices in the Czech Republic after the market liberalisation

One of the goals of the European Commission in the energy sector is creating a single competitive European market. The decision to liberalise energy markets has far-reaching consequences not only for gas companies, but also for the rest of the real economy in view of the fact that natural gas is being used as an important primary energy source in several sectors of production and in the power industry.We aim to answer how liberalisation/unbundling has influenced gas pricing/prices in the Czech Republic. We investigate the individual components of end-customer gas prices according to the value chain and we define and structure the drivers of these components.We use a case study from the Czech Republic, one of the Central and Eastern European countries, which, contrary to the old Member States, is buying most of its gas from one supplier (high import dependence and low supply diversity) and where the transmission and distribution network is characterised by a sufficient contractual and physical capacity. We stress that next to basic conditions on the European gas market (import dependency on external gas producers) legal and institutional conditions and the initial market structure of each Member State are also important for the results of the liberalisation.     

Capital-labour-energy substitution in a nested CES framework: A replication and update of Kemfert (1998)

The ease with which firms can substitute away from energy to other inputs is an important determining factor in the costs of climate change mitigation policies. Climate policy simulation models usually represent this substitutability by using the Constant Elasticity of Substitution (CES) function with parameter values often taken from econometric studies. Hence, the accuracy of the estimated substitution parameters has a strong influence on the validity of the climate policy simulation. In this article, we attempt to replicate the results presented in a widely cited article in this field: Kemfert (1998) (‘Estimated substitution elasticities of a nested CES production function approach for Germany’, Energy Economics, 20, 249–264). We first use the data and software reported in that article and compare our results with those reported in the original study. We then test the same data and a new, more recent, data set on German industrial data with an improved econometric approach. Despite applying various approaches and modifications, we are not able to replicate the results in Kemfert (1998). We furthermore conclude that the data sets that are typically used to estimate nested CES functions often have too few observations and too little independent variation of the explanatory variables to obtain reliable estimates when using a direct non-linear approach.     

Asymmetric error correction models for the oil–gasoline price relationship

The existing literature on price asymmetries does not systematically investigate the sensitivity of the empirical results to the choice of a particular econometric specification. This paper fills this gap by providing a detailed comparison of the three most popular models designed to describe asymmetric price behavior, namely asymmetric ECM, autoregressive threshold ECM and ECM with threshold cointegration. Each model is estimated on a common monthly data set for the gasoline markets of France, Germany, Italy, Spain and UK over the period 1985–2003. All models are able to capture the temporal delay in the reaction of retail prices to changes in spot gasoline and crude oil prices, as well as some evidence of asymmetric behavior. However, the type of market and the number of countries which are characterized by asymmetric oil–gasoline price relations vary across models. The asymmetric ECM prescribes that long-run price asymmetries are most likely to be found in the second stage of the transmission chain. Conversely, the ECM with threshold cointegration suggests that long-run price asymmetries vary across countries and markets. Short-run price asymmetries are captured by the asymmetric ECM specification and the TAR-ECM. The latter model suggests that all European countries are likely to be affected by asymmetries at the distribution stage, while the results obtained with the asymmetric ECM are mixed.     

Ownership unbundling in electricity distribution: The case of The Netherlands

This paper addresses the merits of ownership unbundling of distribution networks, as exemplified in the case of The Netherlands. In essence, this problem concerns the question of whether the operation and management of electricity distribution networks in this country will evolve into a market-driven commodity business or remain a genuine public utility task. In order to deal with this problem, a framework is developed that enables the classification of different institutional regimes. Depending on the nature of the institutional regime, this case of the Netherlands illustrates how certain aspects of the liberalisation of the electricity sector can become vitally important to the continuing process of restructuring.     

China's electricity market restructuring and technology mandates: Plant-level evidence for changing operational efficiency

China's electricity sector has experienced substantial efficiency improvement during the last one and a half decades. The recent literature has mostly attributed the efficiency improvement to the 2002 unbundling reform with little attention paid to the large scale retrofitting process introduced by technology mandates. Using a unique panel dataset for hundreds of power plants from 1997 to 2010, we are able to examine the contributions from technology mandates and market restructuring. We confirm the significant contributions from the unbundling reform but more importantly, technology mandates have contributed at least half of the observed efficiency improvement during this period. The results have significant implications for efficiency and demand forecast in the future.