The Trade-off Between Static and Dynamic Efficiency in Electricity Markets - A Cross Country Study

Abstract

This paper is the first to explicitly test for the presence of a trade-off between static and dynamic efficiency in a regulated industry, the electricity industry. We show for 16 European countries over the period 1998-2007 that higher electricity end-user prices in a country subsequently lead to higher investments in the capital stock, i.e. in generation, distribution and transmission assets. Moreover, there is a trade-off between vertical economies and competition. Ownership unbundling and forced access to the incumbent transmission grid increase competition but come at the cost of lost vertical economies. Generally, we find that regulation that affect only the market like the establishment of a wholesale market or free choice of suppliers increase investment activity via spurring competition. Regulation, however, that adversely affects the incumbent directly, like ownership unbundling, decreases aggregate investment spending. (author's abstract)Series: Working Papers / Research Institute for Regulatory Economic