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electricity market design in developing countries: a tailored design approach

 
 
Nummer
01.25
 
Naam
Electricity Market Design in Developing Countries: A Tailored Design Approach
 
Samenvatting

Following the liberalization of electricity markets in OECD countries in the 1990s, many developing countries followed suit. However, In these countries the reforms were much less successful and In many cases the inadequate levels of service continued. Research by Delft University of Technology explains the causes of these difficulties and suggests a different approach.

 
Projectleider
Laurens de Vries (projectleider)
Onderzoekers
Sharad Karmacharya
Beschrijving

A New Approach to Electricity Market Restructuring in Developing Countries

Following the liberalization of electricity markets in OECD countries in the 1990s, many developing countries followed suit. However, In these countries the reforms were much less successful and In many cases the inadequate levels of service continued. Research by Delft University of Technology explains the causes of these difficulties and suggests a different approach.

For a long time, it was thought that there was an optimal way of reforming markets. A Standard Market Design was even formulated. However, Delft University has shown that the different physical, economic and institutional conditions in developing countries require a tailored approach. Moreover, developing countries' need to attract capital requires a reduction of investment risk, the more so because Investment risk already is much higher there. In the OECD, liberalization had the opposite effect of shifting investment risk from the consumers to the investors in order to make Investors more cautious and thus improve economic efficiency.

The Delft researchers show which market design works best under which conditions. Full liberalization, with household consumers being able to choose their electricity supplier. Is not an attractive option In developing countries. While this is mandatory In the European Union, the transaction costs are too high compared to the low household energy consumption in most developing countries while it increases investment risk. Instead, developing countries have a choice between wholesale competition - in which large consumers and distribution companies compete with each other for electricity from generation companies - and the single buyer model.

The single buyer model Is closest to the old monopolistic utility, except that the generation market Is open to Independent power producers who sell their electricity to the utility. In this model, as much investment risk can be removed from the independent power producers as Is necessary to attract their Investment, but the dominant role of the single buyer involves serious long-term risks. As a monopolist, the single buyer may become economically Inefficient; the very large contracts with the Independent power producers makes him even susceptible to corruption. Moreover, short-term political motivations may lead to electricity price controls below the average cost of the single buyer, a situation which Is frequently observed in Asia. While apparently attractive to consumers, this is a destructive policy in the long term as it makes investment impossible. Wholesale markets are less susceptible to these problems but require stronger institutions, such as a competition authority and a sector regulator. Without effective competition, dominant market players are susceptible to the same risks as the single buyer.

 
Partners
Technische Universiteit Delft, Faculteit Techniek, Bestuur en Management
Deelprogramma
Understanding complex networks
Sector
Energie-infrastructuur
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Afgerond
2011
 

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