Energy policies and risks on energy markets; a cost-benefit analysis

Abstract

The key question dealt with in this report is whether and how governments should be involved in taking measures regarding security of energy supply. In order to answer this question, we developed a framework for cost-benefit analysis and applied this framework to a number of policy options. Read also the press release and accompanying�document ' Increasing the reliability of electricity production: a cost-benefit analysis '. The options chosen vary from government investments in strategic oil stocks to financial incentives for consumers to reduce their consumption of electricity. The set of options comprises several types of governmental action, including subsidies, regulation and government investments. Moreover, the selection includes measures meant to address risks on all three major energy markets: oil, natural gas, and electricity. The general picture following from the cases studied is that security of supply measures are hardly ever beneficial to welfare: benefits of policy measures do generally not outweigh costs. From an economic point of view, therefore, it would be often wiser to accept consequences of supply disruptions than to pursue security of supply at any cost. This implies that governments should exercise caution in imposing measures regarding security of supply. If serious market failure is detected, careful attention should be paid to the design of the corrective measure. Establishing and maintaining well-functioning markets appears to be an efficient approach in realising a secure supply of energy. That approach would include removal of entry barriers, securing equal access to essential facilities and increasing transparency of markets.