1. Introduction
It is a great pleasure to be contributing to a special issue in honor of
David Newbery. David and I have worked closely together for all of my career at
Cambridge and my debt to him in terms of my interest in this particular subject
is immense. Characteristically, David has very kindly read and given me rapid
and detailed comments on the first draft of this paper (without seeing this first
paragraph). I can only hope that I have responded sufficiently to his insightful
comments.
Electricity markets in the developed world stand at something of a crossroads.
Many countries have made some, often substantial, progress with marketbased
reforms in production and retailing and the introduction of incentive regulation
of networks (see Joskow, 2008, for example). During the reform period
governments have sought to reduce their direct involvement in the electricity sector.
Now however rising environmental concern about global warming is beginning
to focus minds more clearly on the need for the reduction of carbon dioxide.
The need for substantial de-carbonization of the electricity sector is increasingly
recognized and being reflected in economic policy around the world, and particularly
within European Union (EU) countries.1 Indeed the EU as a whole has
adopted a trio of 20% targets by 2020 relating to climate change, renewable energy
and energy efficiency. These are a ‘hard’ target of a 20% reduction in CO2,
an ‘indicative’ target of 20% of final energy consumption from renewable sources
and an ‘aspirational’ target of a 20% improvement in energy efficiency (see Egenhofer,
2007, p.2). However between EU countries wide differences remain in
national level targets and in the degree of emphasis to be put on the ‘indicative’
and ‘aspirational’ targets with some countries (such as Spain and Germany) putting
great emphasis on renewables in contrast to other countries (such as the UK
and France).
There has been significant agreement on what constitutes the elements
of an energy market reform package (see Jamasb and Pollitt, 2005). At the level
of the EU this has been driven by the electricity and gas market reform directives
(in particular 1996/ 92/EC and 2003/ 54/EC). Addressing climate change
seriously, however, has the potential for introducing significant divergence in
policy choices between countries. This paper will argue that electricity (and, by
association, natural gas) regulation in an era of significant climate change concern2
needs to strengthen the role of competition and market forces as well as to
respond to the political pressure for action on de-carbonization of the electricity
and heat sectors.
The paper proceeds as follows. First we will briefly discuss the nature
of the traditional model of electricity reform and the place of economic regulation
within it. Next we will outline the drivers for changing the current model of
electricity regulation. Third, we will discuss the premises on which a new model
should be based. Fourth, we will outline the key elements of a new model. Lastly
we will conclude with lessons for independent regulatory agencies, governments
and companies. The paper draws heavily on the experience of the UK, but has direct
implications for most other European Union countries, which operate within
the context of EU energy and environment directives aimed at achieving common
goals and spreading best practice forms of action and regulation.
It is a great pleasure to be contributing to a special issue in honor ofDavid Newbery. David and I have worked closely together for all of my career at
Cambridge and my debt to him in terms of my interest in this particular subject
is immense. Characteristically, David has very kindly read and given me rapid
and detailed comments on the first draft of this paper (without seeing this first
paragraph). I can only hope that I have responded sufficiently to his insightful
comments.
Electricity markets in the developed world stand at something of a crossroads.
Many countries have made some, often substantial, progress with marketbased
reforms in production and retailing and the introduction of incentive regulation
of networks (see Joskow, 2008, for example). During the reform period
governments have sought to reduce their direct involvement in the electricity sector.
Now however rising environmental concern about global warming is beginning
to focus minds more clearly on the need for the reduction of carbon dioxide.
The need for substantial de-carbonization of the electricity sector is increasingly
recognized and being reflected in economic policy around the world, and particularly
within European Union (EU) countries.1 Indeed the EU as a whole has
adopted a trio of 20% targets by 2020 relating to climate change, renewable energy
and energy efficiency. These are a ‘hard’ target of a 20% reduction in CO2,
an ‘indicative’ target of 20% of final energy consumption from renewable sources
and an ‘aspirational’ target of a 20% improvement in energy efficiency (see Egenhofer,
2007, p.2). However between EU countries wide differences remain in
national level targets and in the degree of emphasis to be put on the ‘indicative’
and ‘aspirational’ targets with some countries (such as Spain and Germany) putting
great emphasis on renewables in contrast to other countries (such as the UK
and France).
There has been significant agreement on what constitutes the elements
of an energy market reform package (see Jamasb and Pollitt, 2005). At the level
of the EU this has been driven by the electricity and gas market reform directives
(in particular 1996/ 92/EC and 2003/ 54/EC). Addressing climate change
seriously, however, has the potential for introducing significant divergence in
policy choices between countries. This paper will argue that electricity (and, by
association, natural gas) regulation in an era of significant climate change concern2
needs to strengthen the role of competition and market forces as well as to
respond to the political pressure for action on de-carbonization of the electricity
and heat sectors.
The paper proceeds as follows. First we will briefly discuss the nature
of the traditional model of electricity reform and the place of economic regulation
within it. Next we will outline the drivers for changing the current model of
electricity regulation. Third, we will discuss the premises on which a new model
should be based. Fourth, we will outline the key elements of a new model. Lastly
we will conclude with lessons for independent regulatory agencies, governments
and companies. The paper draws heavily on the experience of the UK, but has direct
implications for most other European Union countries, which operate within
the context of EU energy and environment directives aimed at achieving common
goals and spreading best practice forms of action and regulation.
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