Which economic model for a water-efficient Europe? Report of a CEPS Task Force. CEPS Task Force Report, 27 November 2012

This CEPS Task Force Report focuses on how to improve water efficiency in Europe, notably in public supply, households, agriculture, energy and manufacturing as well as across sectors. It presents a number of recommendations on how to make better use of economic policy instruments to sustainably manage the EU’s water resources. Published in the run-up to the European Commission’s “Blueprint to Safeguard Europe’s Waters”, the report contributes to the policy deliberations in two ways. First, by assessing the viability of economic policy instruments, it addresses a major shortcoming that has so far prevented the 2000 EU Water Framework Directive (WFD) from becoming fully effective in practice: the lack of appropriate, coherent and effective instruments in (some) member states. Second, as the Task Force report is the result of an interactive process involving a variety of stakeholders, it is able to point to the key differences in interpreting and applying WFD principles that have led to a lack of policy coherence across the EU and to offer some pragmatic advice on moving forward

Shale Gas and the EU Internal Gas Market: Beyond the Hype and Hysteria. CEPS Working Document No. 369, September 2012

This paper analyses the interplay between shale gas and the EU internal gas market. Drawing on data presented in the 2012 International Energy Agency’s report on unconventional gas and additional scenario analyses performed by the Joint Research Centre, the paper is based on the assumption that shale gas will not fundamentally change the EU’s dependence on foreign gas supplies. It argues that attention should be shifted away from hyping shale gas to completing the internal gas market. Two main reasons are given for this. First, the internal gas market is needed to enable shale gas development in countries where there is political support for shale gas extraction. And second, a well-functioning internal gas market would, arguably, contribute much more to Europe’s security of supply than domestic shale gas exploitation. This has important implications for the shale gas industry. As it is hard to see how subsidies or exemptions from environmental legislation could be justified, shale gas development in Europe will only go ahead if it proves to be both economically and environmentally viable. It is thus up to the energy industry to demonstrate that this is the case

Renewables and the EU Internal Electricity Market: The case for an arranged marriage. CEPS Policy Brief No. 264, 15 March 2012

This Policy Brief argues that pursuing the renewables objective could contribute to the completion of the internal electricity market, help to overcome opposition to transmission projects and decrease the market power of incumbents. Conversely, an integrated internal electricity market means less price volatility in specific regional markets, which allows for more efficient deployment and grid integration of renewables. Three sets of recommendations are proposed

The Benefits of Investing in Electricity Transmission: A Case Study of Northern Europe. CEPS Special Report, January 2012

Electricity trading can bring down the costs of the EU’s transition to a competitive low-carbon economy, in particular by facilitating the integration of renewable energy from variable sources. Yet insufficient grid infrastructure and regulatory obstacles prevent the trading potential from being fully realised in northern Europe. While many interconnector projects are under development, various barriers are precluding the grid rollout from taking place on time. The European Commission’s energy infrastructure package is an important step forward to overcome these barriers. But the scale and urgency of the infrastructure challenge call for significant further progress

Horizontal integration under yardstick competition

Horizontal integration through mergers and cross-ownership is ubiquitous; industries regulated by yardstick competition are no exception in this regard. However, even though yardstick competition is applied to sectors of vital economic importance, such as energy and water networks, the welfare effects of horizontal integration in these settings have largely escaped scientific scrutiny. The dissertation therefore studies the welfare implications of horizontal integration under yardstick competition and identifies potential trade-offs. Specifically, whereas mergers and cross-ownership may bring about efficiency gains, there is a possibility that horizontal integration simultaneously decreases the effectiveness of regulation, benefiting certain firms at the expense of consumers and competitors. Key conditions for such strategic effects to occur and to dominate efficiency effects are derived in a principal-agent model. The thesis also demonstrates that the issue is not merely of academic interest, but has affected the practical application of yardstick competition in the electricity distribution industries of both Belgium and Norway. Chapter 1 analyses how horizontal mergers, joint ventures and regulatory decentralisation complicate the application of yardstick competition in Belgian electricity distribution. Chapter 2 develops a theoretical model of mergers under yardstick competition - formalising the welfare trade-offs at the heart of this dissertation. Chapter 3 leverages Data Envelopment Analysis to quantify both efficiency and strategic effects of horizontal restructuring in Norwegian electricity distribution and points to a recent merger that appears to have been driven by strategic motivations. Chapter 4 uses several econometric identification strategies - dynamic regression, matching on observables and instrumental variables - to establish that between 2007 and 2015, cross-ownership increased firm performance in Norwegian electricity distribution, which suggests that the net welfare effects were positive in this application.Beyond incentive regulatio

Merger Incentives Under Yardstick Competition : A Theoretical Model

Are the incentives for firms to merge horizontally under yardstick regulation actually aligned with social and consumer welfare ? Natural monopoly operators regulated by yardstick competition, such as electricity network operators and water distribution utilities, have merged repeatedly in recent years. In the context of regulated network industries, yardstick competition implies that firms compete on costs, given that their revenue allowance is based on cost observations from similar firms (peers). Whereas regulators have raised concerns about horizontal mergers under yardstick competition, traditional economic theory suggests that this restructuring should not lead to (unilateral) anticompetitive effects. In our theoretical model, by contrast, firm incentives for horizontal mergers involving peers are only aligned with social and consumer welfare if effciency gains are sufficiently large. We go on to show how regulators can better align firm incentives with welfare considerations and limit the need for costly merger control by adapting the yardstick regime to the domestic industry structure

The Potential Evolution of the European Energy System to 2020 and 2050. CEPS Working Document No. 392, 26 March 2014

This paper assesses the impact of decarbonisation of the energy sector on employment in Europe. Setting the stage for such an assessment, the paper provides an analysis of possible pathways to decarbonise Europe’s energy system, taking into account EU greenhouse gas emissions reduction targets for 2020 and 2050. It pays particular attention to various low-carbon technologies that could be deployed in different regions of the EU. It concludes that efficiency and renewables play a major role in any decarbonisation scenario and that the power sector is the main enabler for the transition to a low-carbon economy in Europe, despite rising electricity demand. The extent of the decline in the share of fossil fuels will largely depend on the existence of carbon capture and storage (CCS), which remains a major source of uncertainty

When Efficient Firms Flock Together: Merger Incentives Under Yardstick Competition

Local monopolists that are regulated by yardstick competition frequently merge with their peers. However, economic theory provides little guidance for merger analysis. In contrast, the theoretical model in this article shows that there can be room for strategic firm behaviour even in a setting where firms are many and collusion is not sustainable. Specifically, the article derives conditions under which firms propose welfare-decreasing mergers to avoid competition with efficient peers and establishes when peer effects discourage firms from implementing socially desirable mergers. Efficient peers flock together whereas inefficient firms remain independent, unless peer effects are counteracted by efficiency effects