Liberalizing Electricity Markets: An Economic Analysis

* This publication is in Japanese. An English translation is not available.

This book offers in-depth research that addresses issues surrounding the liberalization of electricity markets, using economics as a basis for analysis

Since the 1990s, many countries and regions around the world, the United States and European countries in particular, have been vigorously liberalizing electricity markets. In Japan, the scope of retail electricity market liberalization is to be expanded to cover all high-voltage customers by around 2005, to be followed by a series of institutional changes including the creation of a nationwide wholesale electricity market and establishment of a neutral body to set and monitor the implementation of rules for the electricity transmission and distribution business in the deregulated market. But this is just the beginning of the reforms that must be implemented, and much remains to be done as Japan has yet to tackle a range of critical issues concerning the design of new institutions.

This book, based on the theoretical framework of economics, systematically analyzes important issues in designing institutions for the liberalization of the electricity sector, while at the same time taking the characteristics of the utility industry into account. In Japan, many studies have been conducted on the liberalization of the electricity sector from the standpoint of engineering, but there has been very little research based on economic analysis. We hope that this book, by defining the current state of liberalization from an economic point of view, will contribute to the discussion of the institutional design for the liberalization of the electricity sector. While the book is expected to be instrumental to the government's policy planning, it is not intended as a comprehensive set of policy proposals. Each chapter of the book is an academic article intended primarily to provide findings useful in making policy decisions, rather than to directly put forward policy proposals.

Chapter 1 discusses the basic structure of the electricity market. Specifically, it presents the picture of a liberalized market that should be pursued, and then discusses important points in promoting liberalization in Japan. First, the basic structure of the Norwegian electricity market is introduced as a standard model of electricity markets, which is then compared with the structures of the Swedish electricity market and of the PJM wholesale electricity market encompassing Pennsylvania, New Jersey, Maryland, in the Untied States. In particular, similarities and differences in the measures taken in these markets to minimize losses in electricity transmission and to alleviate transmission bottlenecks are clarified. The point of this chapter is to show that institutional designs observed in major countries and regions have commonalities in their basic structure, though they differ in details. The chapter also illustrates how liberalization of electricity market leads to greater stability and reliability in the electricity supply system, while limiting the excessive investment hitherto made in the electricity transmission network. Furthermore, it demonstrates that liberalization will encourage power generators to find more effective and cost-efficient locations for new power plants and reduce the need to build additional plants solely to meet peak demand. Also, it argues liberalization will provide incentives for users to locate energy-consuming facilities in a cost-efficient manner and to curb electricity consumption during peak hours. The chapter concludes with an analysis of the characteristics of the basic structure of competitive electricity markets, which has important implications for the liberalization of the Japanese market.

This book is divided into 14 chapters in four parts. Part I (chapters 1-5) provides detailed discussion of the institutional design of electricity markets and transmission networks, focusing on market monopoly power, management of transmission line bottlenecks, and sound management of the electrical grid. Part II (chapters 6-8) introduces cutting-edge studies on institutional design in separate chapters written from the viewpoint of auction theory, real-time pricing, and regulation of quality, respectively. Part III (chapters 9-11) examines challenges in protecting the public interest in a liberalized electricity market, shedding light on the impacts of liberalization on universal service, the environment, and the government's nuclear power policy. Part IV (chapters 12-14) provides a detailed account of liberalization trends in the U.S. and Europe, citing specific examples such as the Nord Pool, a cross-border power exchange in the Nordic region, and PJM in the U.S.

HATTA Tatsuo and TANAKA Makoto