Simulating the restructuring of the Flemish electricity distribution sector

In Flanders (Belgium), distribution companies are to a large extent owned by the municipalities and as such these municipalities collect an important share of the profits from electricity distribution. This situation (by many it is seen as a hidden tax) cannot be maintained because, in the process of electricity market liberalisation, the ownership will be reshuffled and because the old regulation mechanism, allowing for such cash flows, will be revised. This paper presents some simulations on the restructuring of the electricity distribution sector, using a partial equilibrium model. The focus of the simulations is on the impact of the choice of the regulation mechanism on prices and on the municipalities' budget. Three regulation schemes are simulated, 'rate-of-return' (ROR) regulation, 'constant profit per unit of output' (CPU) regulation and 'price-cap' (PC) regulation. The simulations show that, irrespective of the regulation scheme, it is not obvious that end-user electricity prices will decrease after the liberalisation. Moreover, the restructuring will have a large impact on the profits received by the municipalities. The sign of this impact depends on the regulation mechanism that is imposed, but it appears that, from the three regulation mechanisms that were analysed, the ROR mechanism performs worst, both in terms of municipal cash flows and of economic welfare.Electricity distribution; Electricity markets; Electricity modelling; Regulation; Strategic behaviour

Stranded costs in the electricity sector.

Cost; Costs; Sector; Working;

The Liberalisation of the Energy Sector in the European Union

The energy sector covers the coal, oil, gas and electricity sector. The European coal and oil sector have already been liberalised in the past. The current debate concerns mainly the electricity and the gas sector. In this paper we will concentrate on the electricity sector for three reasons. First, the sector is more important in terms of value added, secondly it is considered to be more complex and, finally, the opening of the electricity market precedes that of the gas market. Obviously, this does not mean that the gas sector should not be studied as there are many challenges left. In section II, we discuss the institutional background for the liberalisation. Section III then analyses the British experience. This is of interest because the UK has liberalised its market about 10 years ago and this experience has been the subject of extensive economic research. In the sections IV to VII, we focus on the four main problems in the liberalisation of the European electricity market: the stranded costs issue, the cross-subsidies issue, the pricing of transmission and the regulation of the environment. Finally, section VIII concludes.

Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium.

This paper derives the socially optimal transmission prices in a congested electricity network when there is imperfect competition in generation, and when the budget constraint of the network operator is binding. The results which we derive are a generalization of the standard Ramsey prices and also of the locational marginal prices (LMP). The model is illustrated with a numerical model based on the Belgian electricity data.

The Potential Impact of Cross-Ownership in Transmission: an Application to the Belgian Electricity Market

This paper looks at the potential effect of partial ownership on the generation and the transmission sector of electricity markets. Ideally, in liberalized electricity markets, transmission is separated from generation. The transmission sector is a natural monopoly operated by a regulated transmission firm, while the generation sector is open for competition. This paper assumes that the transmission firm is not very well regulated and behaves strategically, that there is oligoplistic competition in generation, and that one of the generators, the incumbent, owns part of the transmission firm. We then study the effect of this partial ownership in a numerical model which is calibrated on the Belgian market. The model captures two kinds of partial ownership interactions: passive ownership, where the generation firm simply cashes its share of the transmission firm’s profit without having a direct impact on its decision process, and active ownership, where the generator has a direct influence on the transmission firm’s decision process. It is shown that ownership of the network operator by the incumbent generator reduces double marginalization (= welfare improving) but also reduces entry in the generation market (= welfare decreasing).

Regulating transmission in a spatial oligopoly: a numerical illustration for Belgium

This paper introduces strategic behavior of the electricity network operator in a congested network with imperfect competition for generation. It models a two stage Stackelberg game. First, the network operator sets transmission prices, then generators set output and sales. Several scenarios for the generation market structure and the behavior of the network operator are compared numerically. The calibration of the numerical model is based on data of the Belgian electricity market.Regulation, Transmission, Electricity, Cournot, Numerical model, Security constraints, MPEC, loadflow, Belgium

Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium.

Abstract: This paper derives the socially optimal transmission prices in a congested electricity network when there is imperfect competition in generation, and when the budget constraint of the network operator is binding. The results which we derive are a generalization of the standard Ramsey prices and also of the locational marginal prices (LMP). The model is illustrated with a numerical model based on the Belgian electricity data.Regulation, Transmission, Electricity, Cournot, Numerical model, Security constraints, MPEC, loadflow, Belgium

Stranded costs in the electricity sector

This paper discusses the stranded cost concept. Stranded costs have to do with the transition from a regulated to a more competitive market. The aim of the paper is threefold. First, the paper discusses the place of the stranded cost concept in the variety of costs concepts encountered in the economic literature. In order to come to a proper description of stranded costs, we first define a new concept, i.e. strandable costs. These are the fixed or sunk costs to be paid by the incumbents that have been imposed by the regulator. Strandable costs become stranded when they cannot be recovered through the market after the introduction of competition. Second, we argue on the basis of a simple graphical analysis that from the point of view of economic efficiency, there is no need to allow for stranded cost recovery. Third, this view is illustrated with some numerical simulations, based on the Belgian electricity sector. These simulations suggest that, according to the assumptions and to the definition of stranded costs in our model, there will be no stranded costs for the Belgian electricity producers. A fortiori , the conclusion is that there is no need to allow for stranded cost recovery. However, the simulations go one step further and assume that for one reason or another strandable cost recovery is allowed through a tax on electricity transmission.Stranded Costs; Economic Efficiency; Electricity

The liberalisation of the energy sector in the EU.

Sector;