Document Type

Article

Abstract

“Deregulation” has changed the market for electricity, but it is still a market with problems from an environmental and an economic point of view. Effective energy policy must provide incentives to the actors best suited to overcome market failures in the new regulatory environment, and must be developed in a way that harmonizes energy efficiency policy with new environmental policies (particularly the development of emissions trading markets and renewable portfolio standards). "Deregulation" does not signal the end of regulation in the electricity sector but instead represents a new regulatory regime. The core regulatory concern in a regulated or deregulated market should be correcting distortions in the price of electricity caused by poor regulation, unavoidable structural flaws in the market, or externalities, as well as accommodating the difference between actual social response to price signals and the predictions of economic theories that assume perfectly rational behaviour. In practice, deregulation means that regulators move from being the key coordinator of other actors to playing a more secondary role. Further, a new concern arises in a deregulated market - avoiding the structural problem of highly inelastic (short term) demand and supply, leading to the ability of suppliers to game the market by withholding power. Retail price reforms seek primarily to tackle this problem, hence deregulation coincides with a move to Real Time Pricing (RTP). RTP and similar price signals are likely to lead to increased efficiency of electricity use, but not to socially optimal demand for electricity. There will still be space for end use energy efficiency measures, whether these take the form of market based environmental mechanisms (like pollution taxes), information provision, or more traditional DSM options.

Date of Authorship for this Version

September 2005