IDEAS home Printed from https://ideas.repec.org/a/eee/energy/v31y2006i6p747-768.html
   My bibliography  Save this article

Costs of electricity deregulation

Author

Listed:
  • Woo, C.K.
  • King, M.
  • Tishler, A.
  • Chow, L.C.H.

Abstract

The last decade has witnessed efforts throughout the world to deregulate the electricity industry, with varied results. While there have been a few qualified success stories, many challenges of deregulation have come to light. These challenges can lead to negative, even disastrous, outcomes. Based on a comprehensive literature review, this paper catalogues problems experienced in various deregulation efforts, and considers the application of the lessons learned from this history to Israel, which is considering deregulation. Failings of deregulation are found to center around the following problems: high set-up cost; complicated market design; inevitable spot price volatility; market power abuse; inefficient investment; difficulty in reducing generation cost; dysfunctional input markets; stranded cost; unequal distribution of benefits. We find that many of these problems are exacerbated by the particular circumstances faced by Israel, and advise any country or region considering deregulation to carefully consider these obstacles to success.

Suggested Citation

  • Woo, C.K. & King, M. & Tishler, A. & Chow, L.C.H., 2006. "Costs of electricity deregulation," Energy, Elsevier, vol. 31(6), pages 747-768.
    • Handle: RePEc:eee:energy:v:31:y:2006:i:6:p:747-768
    DOI: 10.1016/j.energy.2005.03.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S036054420500054X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.energy.2005.03.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hattori, Toru & Tsutsui, Miki, 2004. "Economic impact of regulatory reforms in the electricity supply industry: a panel data analysis for OECD countries," Energy Policy, Elsevier, vol. 32(6), pages 823-832, April.
    2. Woo, Chi-Keung, 2001. "What went wrong in California's electricity market?," Energy, Elsevier, vol. 26(8), pages 747-758.
    3. Newbery, D., 2002. "Issues and Options for Restructuring Electricity Supply Industries," Cambridge Working Papers in Economics 0210, Faculty of Economics, University of Cambridge.
    4. Green, Richard, 2002. "Retail Competition and Electricity Contracts," Royal Economic Society Annual Conference 2002 93, Royal Economic Society.
    5. S. Littlechild, 2004. "Regulated and merchant interconnectors in Australia: SNI and Murraylink revisited," Working Papers EP37, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    6. Lam, Pun-Lee, 2004. "Hong Kong's electricity market beyond 2008," Energy Policy, Elsevier, vol. 32(7), pages 851-854, May.
    7. Neuhoff, Karsten & De Vries, Laurens, 2004. "Insufficient incentives for investment in electricity generations," Utilities Policy, Elsevier, vol. 12(4), pages 253-267, December.
    8. Raffaella Lisbôa Mota, 2003. "The Restructuring and Privatisation of Electricity Distribution and Supply Business in Brazil: A Social Cost-Benefit Analysis," Working Papers EP16, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    9. Woo, Chi-Keung & Lloyd, Debra & Tishler, Asher, 2003. "Electricity market reform failures: UK, Norway, Alberta and California," Energy Policy, Elsevier, vol. 31(11), pages 1103-1115, September.
    10. Costello, Ken, 2003. "The Shocking Truth about Restructuring of the U.S. Electricity Industry," The Electricity Journal, Elsevier, vol. 16(5), pages 11-19, June.
    11. Ahmad Faruqui, Hung-po Chao, Vic Niemeyer, Jeremy Platt and Karl Stahlkopf, 2001. "Analyzing California's Power Crisis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 29-52.
    12. Woo, Chi-Keung & Olson, Arne & Orans, Ren, 2004. "Benchmarking the Price Reasonableness of an Electricity Tolling Agreement," The Electricity Journal, Elsevier, vol. 17(5), pages 65-75, June.
    13. Karsten Neuhoff & Laurens De Vries, 2004. "Insufficient Incentives for Investment," Working Papers EP42, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    14. Paul L. Joskow, 2003. "The Difficult Transition to Competitive Electricity Markets in the U.S," Working Papers 0308, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    15. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    16. Marlin King & Milan Cuc, 1996. "Price Convergence in North American Natural Gas Spot Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 17-42.
    17. repec:reg:rpubli:207 is not listed on IDEAS
    18. Rigby, Peter, 2004. "Energy Merchant Debt Prospects: When "Worst-Case" Scenarios Become the "Base Case"," The Electricity Journal, Elsevier, vol. 17(1), pages 37-50.
    19. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
    20. Scott, Aleka, 2004. "Between a Rock and a Hard Place: Transmission Planning and Expansion," The Electricity Journal, Elsevier, vol. 17(2), pages 78-82, March.
    21. Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
    22. Woo, C.K & Lloyd, D & Karimov, R & Tishler, A, 2003. "Stranded cost recovery in electricity market reforms in the US," Energy, Elsevier, vol. 28(1), pages 1-14.
    23. Li, Ying & Flynn, Peter C., 2004. "Deregulated power prices: comparison of volatility," Energy Policy, Elsevier, vol. 32(14), pages 1591-1601, September.
    24. Bialek, J.W., 2004. "Recent blackouts in US and continental Europe: is liberalisation to blame?," Cambridge Working Papers in Economics 0407, Faculty of Economics, University of Cambridge.
    25. Janusz W. Bialek, 2004. "Recent blackouts in US and continental Europe: is liberalisation to blame?," Working Papers EP34, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    26. Li, Ying & Flynn, Peter C., 2004. "Corrigendum to "Deregulated power prices: comparison of diurnal patterns" [Energy Policy 32 (2004) 657-672]," Energy Policy, Elsevier, vol. 32(9), pages 1147-1148, June.
    27. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
    28. Woo, Chi-Keung & Horowitz, Ira & Hoang, Khoa, 2001. "Cross hedging and forward-contract pricing of electricity," Energy Economics, Elsevier, vol. 23(1), pages 1-15, January.
    29. Tishler, Asher & Woo, Chi-Keung & Lloyd, Debra, 2002. "Reforming Israel's electricity sector," Energy Policy, Elsevier, vol. 30(4), pages 347-353, March.
    30. Rose, Kenneth, 2004. "The State of Retail Electricity Markets in the U.S," The Electricity Journal, Elsevier, vol. 17(1), pages 26-36.
    31. Bowring, Joseph E. & Gramlich, Robert E., 2000. "The Role of Capacity Obligations in a Restructured Pennsylvania-New Jersey-Maryland Electricity Market," The Electricity Journal, Elsevier, vol. 13(9), pages 57-67, November.
    32. Mota, R.L., 2003. "The Restructuring and Privatisation of Electricity Distribution and Supply Business in Brazil: A Social Cost-Benefit Analysis," Cambridge Working Papers in Economics 0309, Faculty of Economics, University of Cambridge.
    33. Li, Ying & Flynn, Peter C., 2004. "Deregulated power prices: comparison of diurnal patterns," Energy Policy, Elsevier, vol. 32(5), pages 657-672, March.
    34. Sharma, Deepak, 2003. "The multidimensionality of electricity reform--an Australian perspective," Energy Policy, Elsevier, vol. 31(11), pages 1093-1102, September.
    35. Green, Richard, 2003. "Failing electricity markets: should we shoot the pools?," Utilities Policy, Elsevier, vol. 11(3), pages 155-167, September.
    36. Keane, Dennis M. & Woo, Chi-Keung, 1992. "Using customer outage costs to plan generation reliability," Energy, Elsevier, vol. 17(9), pages 823-827.
    37. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    38. repec:bla:jfinan:v:59:y:2004:i:4:p:1877-1900 is not listed on IDEAS
    39. Bushnell, James, 2004. "California's electricity crisis: a market apart?," Energy Policy, Elsevier, vol. 32(9), pages 1045-1052, June.
    40. Lloyd, Debra & Woo, C. K. & Borden, Michael & Warrington, Ron & Baskette, Carmen, 2004. "Competitive Procurement and Internet-Based Auction: Electricity Capacity Option," The Electricity Journal, Elsevier, vol. 17(4), pages 74-78, May.
    41. Jurewitz, John L., 2002. "California's Electricity Debacle: A Guided Tour," The Electricity Journal, Elsevier, vol. 15(4), pages 10-29, May.
    42. Wolak, Frank A., 2003. "Diagnosing the California Electricity Crisis," The Electricity Journal, Elsevier, vol. 16(7), pages 11-37.
    43. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    44. Lee, Won-Woo, 2004. "US lessons for energy industry restructuring: based on natural gas and California electricity incidences," Energy Policy, Elsevier, vol. 32(2), pages 237-259, January.
    45. Fraser, Hamish & Lo Passo, Francesco, 2003. "Developing a Capacity Payment Mechanism in Italy," The Electricity Journal, Elsevier, vol. 16(9), pages 54-58, November.
    46. Woo, C.K. & Lloyd, D. & Borden, M. & Warrington, R. & Baskette, C., 2004. "A robust internet-based auction to procure electricity forwards," Energy, Elsevier, vol. 29(1), pages 1-11.
    47. Chao, Hung-Po & Wilson, Robert, 2002. "Multi-dimensional Procurement Auctions for Power Reserves: Robust Incentive-Compatible Scoring and Settlement Rules," Journal of Regulatory Economics, Springer, vol. 22(2), pages 161-183, September.
    48. Blumsack, Seth & Perekhodtsev, Dmitri & Lave, Lester B., 2002. "Market Power in Deregulated Wholesale Electricity Markets: Issues in Measurement and the Cost of Mitigation," The Electricity Journal, Elsevier, vol. 15(9), pages 11-24, November.
    49. Hurlbut, David & Rogas, Keith & Oren, Shmuel, 2004. "Protecting the Market from "Hockey Stick" Pricing: How the Public Utility Commission of Texas is Dealing with Potential Price Gouging," The Electricity Journal, Elsevier, vol. 17(3), pages 26-33, April.
    50. Frank A. Wolak, 2003. "Measuring Unilateral Market Power in Wholesale Electricity Markets: The California Market, 1998–2000," American Economic Review, American Economic Association, vol. 93(2), pages 425-430, May.
    51. Watts, Price C., 2001. "Heresy? The Case Against Deregulation of Electricity Generation," The Electricity Journal, Elsevier, vol. 14(4), pages 19-24, May.
    52. Paul M. Healy & Krishna G. Palepu, 2003. "The Fall of Enron," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 3-26, Spring.
    53. Parkinson, Thomas W., 2004. "Market Price Risks of Merchant Generation," The Electricity Journal, Elsevier, vol. 17(4), pages 33-48, May.
    54. Woo, Chi-Keung & Karimov, Rouslan I. & Horowitz, Ira, 2004. "Managing electricity procurement cost and risk by a local distribution company," Energy Policy, Elsevier, vol. 32(5), pages 635-645, March.
    55. Lennart Carlsson, 1999. "International Power Trade : The Nordic Power Pool," World Bank Publications - Reports 11498, The World Bank Group.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gore, Olga & Viljainen, Satu & Makkonen, Mari & Kuleshov, Dmitry, 2012. "Russian electricity market reform: Deregulation or re-regulation?," Energy Policy, Elsevier, vol. 41(C), pages 676-685.
    2. Woo, C.K. & Shiu, A. & Liu, Y. & Luo, X. & Zarnikau, J., 2018. "Consumption effects of an electricity decarbonization policy: Hong Kong," Energy, Elsevier, vol. 144(C), pages 887-902.
    3. Francesco Busato & Andrea Gatto, 2019. "Evidenze empiriche dalla volatilità dei prezzi elettrici durante la crisi energetica californiana. Cattura del regolatore nel caso Enron? (Empirical evidence on energy prices volatility during the Cal," Moneta e Credito, Economia civile, vol. 72(285), pages 29-46.
    4. Jayanta Bhusan Basu & Subhojit Dawn & Pradip Kumar Saha & Mitul Ranjan Chakraborty & Taha Selim Ustun, 2022. "Economic Enhancement of Wind–Thermal–Hydro System Considering Imbalance Cost in Deregulated Power Market," Sustainability, MDPI, vol. 14(23), pages 1-25, November.
    5. Rimšaitė, Laura, 2019. "Corruption risk mitigation in energy sector: Issues and challenges," Energy Policy, Elsevier, vol. 125(C), pages 260-266.
    6. Woo, Chi-Keung & Horowitz, Ira & Tishler, Asher, 2006. "A critical assessment of the Hong Kong Government's proposed post-2008 regulatory regime for local electricity utilities," Energy Policy, Elsevier, vol. 34(13), pages 1451-1456, September.
    7. Lagarto, João & Sousa, Jorge A.M. & Martins, Álvaro & Ferrão, Paulo, 2014. "Market power analysis in the Iberian electricity market using a conjectural variations model," Energy, Elsevier, vol. 76(C), pages 292-305.
    8. Woo, C.K. & Milstein, I. & Tishler, A. & Zarnikau, J., 2019. "A wholesale electricity market design sans missing money and price manipulation," Energy Policy, Elsevier, vol. 134(C).
    9. repec:ags:aaea22:335717 is not listed on IDEAS
    10. Fang, Xichen & Guo, Hongye & Zhang, Da & Chen, Qixin, 2021. "Cost recovery and investment barriers for renewables under market manipulation of thermal collusion," Applied Energy, Elsevier, vol. 285(C).
    11. Sumei Chen & Lingyun He, 2013. "Deregulation or Governmental Intervention? A Counterfactual Perspective on China's Electricity Market Reform," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 21(4), pages 101-120, July.
    12. Guo, Peiyang & Li, Victor O.K. & Lam, Jacqueline C.K., 2017. "Smart demand response in China: Challenges and drivers," Energy Policy, Elsevier, vol. 107(C), pages 1-10.
    13. Du, Limin & Mao, Jie & Shi, Jinchuan, 2009. "Assessing the impact of regulatory reforms on China's electricity generation industry," Energy Policy, Elsevier, vol. 37(2), pages 712-720, February.
    14. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    15. Wang, Nan & Mogi, Gento, 2017. "Industrial and residential electricity demand dynamics in Japan: How did price and income elasticities evolve from 1989 to 2014?," Energy Policy, Elsevier, vol. 106(C), pages 233-243.
    16. Tishler, Asher & Milstein, Irena & Woo, Chi-Keung, 2008. "Capacity commitment and price volatility in a competitive electricity market," Energy Economics, Elsevier, vol. 30(4), pages 1625-1647, July.
    17. Tishler, A. & Newman, J. & Spekterman, I. & Woo, C.K., 2008. "Assessing the options for a competitive electricity market in Israel," Utilities Policy, Elsevier, vol. 16(1), pages 21-29, March.
    18. Woo, C.K. & Ho, T. & Shiu, A. & Cheng, Y.S. & Horowitz, I. & Wang, J., 2014. "Residential outage cost estimation: Hong Kong," Energy Policy, Elsevier, vol. 72(C), pages 204-210.
    19. Jintao Lu & Licheng Ren & Jiayuan Qiao & Siqin Yao & Wadim Strielkowski & Justas Streimikis, 2019. "Corporate Social Responsibility and Corruption: Implications for the Sustainable Energy Sector," Sustainability, MDPI, vol. 11(15), pages 1-20, July.
    20. Pousinho, H.M.I. & Mendes, V.M.F. & Catalão, J.P.S., 2011. "A risk-averse optimization model for trading wind energy in a market environment under uncertainty," Energy, Elsevier, vol. 36(8), pages 4935-4942.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Horowitz, I. & Woo, C.K., 2006. "Designing Pareto-superior demand-response rate options," Energy, Elsevier, vol. 31(6), pages 1040-1051.
    2. Tishler, A. & Woo, C.K., 2006. "Likely failure of electricity deregulation: Explanation with application to Israel," Energy, Elsevier, vol. 31(6), pages 845-856.
    3. Baskette, C. & Horii, B. & Kollman, E. & Price, S., 2006. "Avoided cost estimation and post-reform funding allocation for California's energy efficiency programs," Energy, Elsevier, vol. 31(6), pages 1084-1099.
    4. Woo, Chi-Keung & Olson, Arne & Horowitz, Ira & Luk, Stephen, 2006. "Bi-directional causality in California's electricity and natural-gas markets," Energy Policy, Elsevier, vol. 34(15), pages 2060-2070, October.
    5. Moore, J. & Woo, C.K. & Horii, B. & Price, S. & Olson, A., 2010. "Estimating the option value of a non-firm electricity tariff," Energy, Elsevier, vol. 35(4), pages 1609-1614.
    6. Helman, Udi, 2006. "Market power monitoring and mitigation in the US wholesale power markets," Energy, Elsevier, vol. 31(6), pages 877-904.
    7. Woo, C.K. & Kollman, E. & Orans, R. & Price, S. & Horii, B., 2008. "Now that California has AMI, what can the state do with it?," Energy Policy, Elsevier, vol. 36(4), pages 1366-1374, April.
    8. Woo, C.K. & Zarnikau, J. & Moore, J. & Horowitz, I., 2011. "Wind generation and zonal-market price divergence: Evidence from Texas," Energy Policy, Elsevier, vol. 39(7), pages 3928-3938, July.
    9. Woo, Chi-Keung & Horowitz, Ira & Olson, Arne & Horii, Brian & Baskette, Carmen, 2006. "Efficient frontiers for electricity procurement by an LDC with multiple purchase options," Omega, Elsevier, vol. 34(1), pages 70-80, January.
    10. Paul Twomey & Richard Green & Karsten Neuhoff & David Newbery, 2005. "A Review of the Monitoring of Market Power: The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Working Papers 0502, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    11. Cao, K.H. & Qi, H.S. & Tsai, C.H. & Woo, C.K. & Zarnikau, J., 2021. "Energy trading efficiency in the US Midcontinent electricity markets," Applied Energy, Elsevier, vol. 302(C).
    12. Woo, C.K. & Olson, A. & Horowitz, I., 2006. "Market efficiency, cross hedging and price forecasts: California's natural-gas markets," Energy, Elsevier, vol. 31(8), pages 1290-1304.
    13. Amundsen, Eirik S. & Bergman, Lars, 2006. "Why has the Nordic electricity market worked so well?," Utilities Policy, Elsevier, vol. 14(3), pages 148-157, September.
    14. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    15. Woo, C.K. & Chen, Y. & Olson, A. & Moore, J. & Schlag, N. & Ong, A. & Ho, T., 2017. "Electricity price behavior and carbon trading: New evidence from California," Applied Energy, Elsevier, vol. 204(C), pages 531-543.
    16. Chi-Keung Woo & Jay Zarnikau & Asher Tishler & Kang Hua Cao, 2022. "Insuring a Small Retail Electric Provider’s Procurement Cost Risk in Texas," Energies, MDPI, vol. 16(1), pages 1-12, December.
    17. Chi-Keung Woo & Ira Horowitz & Jay Zarnikau & Jack Moore & Brendan Schneiderman & Tony Ho & Eric Leung, 2016. "What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?," The Energy Journal, , vol. 37(3), pages 29-57, July.
    18. Woo, C.K. & Milstein, I. & Tishler, A. & Zarnikau, J., 2019. "A wholesale electricity market design sans missing money and price manipulation," Energy Policy, Elsevier, vol. 134(C).
    19. Crawford, Gregory S. & Crespo, Joseph & Tauchen, Helen, 2007. "Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1233-1268, December.
    20. David P. Brown & Derek E. H. Olmstead, 2017. "Measuring market power and the efficiency of Alberta's restructured electricity market: An energy-only market design," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 838-870, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:energy:v:31:y:2006:i:6:p:747-768. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/energy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.