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Über dieses Buch

This textbook explains the main economic mechanisms behind energy markets and assesses how governments can implement policies to improve how these markets function. Adopting a micro-economic perspective, the book systematically analyses the various types of market failures on the electricity and gas markets as well as coal, oil, hydrogen and heat markets to identify government policies that can improve welfare. These shortcomings include the natural monopoly and the public-good character of energy infrastructures; market power resulting from inflexibility of supply and demand; international trade restrictions; negative externalities concerning the use of fossil energy; positive externalities concerning innovative new energy technologies; information asymmetries with regard to the product characteristics of energy commodities; and other public concerns, such as energy poverty.

In turn, readers will learn about various measures that governments can use to address these market failures, including incentive regulation for electricity grids; international integration of wholesale energy markets; environmental regulatory measures like emissions trading schemes; subsidy schemes for new technologies; green-energy certificate schemes; and energy taxes. Given its scope, the book will appeal to upper-undergraduate and graduate students from various disciplines who want to learn more about the economics and regulation of energy systems and markets.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Economic Analysis of Energy Markets: An Introduction

Abstract
This chapter explains why the economic analysis of energy markets is relevant for current societal debates and how the optimal regulation of these markets can be determined. Energy is an essential commodity for economic growth, and, therefore, its availability at efficient prices is crucial for societies. Using energy, however, has significant negative environmental effects, as it is still mainly based on fossil energy. The challenge for policy makers is, hence, to foster an efficient supply of energy, while mitigating negative environmental effects. This chapter introduces the public-interest approach as a tool to find the optimal regulation to realize the societal objectives regarding energy markets. This approach departs from the theoretical benchmark of perfectly functioning markets and analyzes how fundamental shortcomings can be overcome.
Machiel Mulder

Chapter 2. Energy Carriers and Supply Chains

Abstract
Knowledge of the physical characteristics of energy and the various types of activities within energy supply chains is necessary before being able to analyse the optimal regulation of energy markets. Therefore, this chapter introduces the various types of energy carriers, distinguishing primary from secondary carriers and non-renewable from renewable sources (Sect. 2.2). This chapter also discusses the concept of the energy balance, which describes the origins of supply and the destinations of use of energy within an economy. The chapter proceeds by describing the various layers in the supply chains, starting from exploration of energy resources, production, conversion, storage, transport until consumption of energy (Sect. 2.3). This chapter concludes by discussing how these energy supply chains of activities can be organized (Sect. 2.4).
Machiel Mulder

Chapter 3. Energy Markets and Energy Policies

Abstract
The most efficient way to coordinate various activities within a supply chain is to make use of markets. Markets can be defined as institutional solutions which enable economic agents to obtain inputs from other agents for their production or consumption activities or to supply their outputs to other agents. The more developed these energy markets are, the less economic agents need to realize the required inputs within their organization themselves. This chapter first discusses the various dimensions of markets (Sect. 3.2), before going into the main characteristics of the markets for coal, oil, gas, electricity and heat (Sect. 3.3). This chapter concludes by introducing the role of governments in organizing these markets, both as an active player in the supply chain and as regulator (Sect. 3.4).
Machiel Mulder

Chapter 4. Microeconomic Perspective on Regulating Energy Markets

Abstract
The analytical framework for the economic analysis of regulating energy markets is derived from microeconomics. Section 4.2 discusses the basic microeconomic concepts and the theoretical benchmark of perfectly functioning markets. It shows that in such markets optimal welfare is achieved, which means that the allocation of goods is done in the best possible way. This chapter also explains the conditions for having perfectly functioning markets and that, in practice, almost never all conditions are satisfied. Although energy markets have become fairly mature in most regions, many of them suffer from market failures. Besides discussing the various types of market failures, attention is paid to the possibility of regulatory failures. Section 4.3 discusses how costs of and benefits of regulatory measures can be assessed.
Machiel Mulder

Chapter 5. Information Asymmetry in Retail Energy Markets

Abstract
Economic agents need to have full information on characteristics of commodities in order to successfully conclude contracts with each other. In real markets, however, consumers and producers often don’t have the same information which results in so-called information asymmetry. Regulatory options to address this information asymmetry are discussed in Sect. 5.2. For residential energy consumers a specific information problem occurs, which is that they sometimes cannot oversee all the products offered by retailers. The regulatory options to address this are discussed in Sect. 5.3. Finally, residential consumers may not be able to oversee the ability of energy retailers to commit to supply contracts which may affect the reliability of supply. Section 5.4 discusses the regulatory options to protect residential consumers against this risk.
Machiel Mulder

Chapter 6. Natural Monopoly in Transport and Distribution

Abstract
Most energy is transported and distributed via networks to end-users, which holds in particular for electricity, gas and heat. These networks are often characterized by a natural monopoly. This chapter first discusses the economic definition of natural monopolies and what the consequences are if a firm operating a natural monopoly is not regulated (Sect. 6.2). Section 6.3 discusses the principles of tariff regulation and how to deal with the information asymmetry between regulator and regulated firm. Next, attention is paid to benchmarking methods (Sect. 6.4), the WACC (Sect. 6.5), the design of tariff structures (Sect. 6.6), relationship with investments (Sect. 6.7) and, finally, how regulators can evaluate the effectiveness of tariff regulation (Sect. 6.8).
Machiel Mulder

Chapter 7. Reliability of Energy Supply as Semi-public Good

Abstract
Gas, electricity and heat markets depend on the reliability of the physical networks for transport. This reliability can be seen as a semi-public good and, as a consequence, its provision is not fully secured by the market. This chapter first explains how the functioning of energy markets and networks is interrelated before discussing regulatory measures which can be taken to ensure reliability of energy supply. Section 7.3 goes into the organization of financial incentives to network users related to network capacity; Sect. 7.4 discusses how financial incentives can be given to market participants to contribute to system balancing, while Sect. 7.5 discusses how to assure that there is always sufficient production capacity and that all production is priced even if the market is not able to clear.
Machiel Mulder

Chapter 8. Externalities in Production and Consumption in Energy Markets

Abstract
In well-functioning markets, economic agents are incentivized to take into account all effects of their decisions. Sometimes this is not possible because of externalities. Examples of externalities in energy markers are the environmental effects of using fossil energy and the impact of importing fossil energy on security of supply. This chapter first discusses how the various types of externalities in energy markets distort market outcomes (Sect. 8.2). Then, the chapter goes into the design of environmental taxes (Sect. 8.3), support schemes (Sect. 8.4) and emissions trading schemes (Sect. 8.5), before discussing how these three types of environmental regulation affect electricity markets and how they interact with each other (Sect. 8.6). The chapter concludes by discussing the regulation of security of supply externalities (Sect. 8.7).
Machiel Mulder

Chapter 9. Market Power in Wholesale and Retail Energy Markets

Abstract
A fundamental characteristic of energy markets is their vulnerability to the presence of market power, which is that one or more suppliers can influence market prices. This vulnerability is related to a number of factors: low price sensitivity of demand, inflexibility of supply, limited abilities to store energy, and restricted capacities of the transportation network. These characteristics are discussed in Sect. 9.3. First, Sect. 9.2 discusses the general conditions and welfare consequences of the presence of firms using market power. Afterwards, Sect. 9.4 discusses how the presence and use of market power in energy markets can be monitored. Finally, Sect. 9.5 discusses a number of regulatory options to address the market failure of market power.
Machiel Mulder

Chapter 10. International Restrictions on Trade in Energy

Abstract
When international trade in energy is restricted, several negative welfare effects may occur. Removing trade barriers, therefore, can contribute to the functioning of energy markets. This chapter first discusses the negative effects of international trade barriers on productive efficiency (i.e. costs per unit of production), allocative efficiency (i.e. intensity of competition and international differences in prices) and security of supply (Sect. 10.3). Then, Sect. 10.4 discusses what kind of international trade barriers exist in energy markets and by what kind of regulatory measures these barriers may be reduced. Among others, attention is paid to both network extension and a higher utilization of existing infrastructure. Finally, this Chapter analyses the implications of an improved international integration of markets for the effectiveness of national energy policies (Sect. 10.5).
Machiel Mulder

Chapter 11. Distributional Effects and Equity Concerns in Energy Markets

Abstract
Well-functioning markets result, by definition, in efficient market outcomes, but this does not mean that the outcomes are always socially accepted as the optimal outcomes. This chapter shows that there are many possible efficient market outcomes depending on the initial allocation of endowments. In Sect. 11.2, it will become clear that the concepts of allocative efficiency and distribution have different meanings. The other two sections of this chapter discuss regulatory measures to redistribute welfare. Section 11.3 addresses the question how resource rents can be redistributed within society, while Sect. 11.4 discusses the issues of energy poverty and fairness and what types of regulatory measures can be used to make the distribution of welfare more aligned with social objectives.
Machiel Mulder

Chapter 12. Regulating Energy Markets: Concluding Remarks

Abstract
This textbook has analysed the characteristics of energy markets and how the functioning of these markets can be improved through regulation. This analysis has departed from the public-interest approach which provides the analytical framework in order to search for optimal regulatory measures to address market failures. This final chapter summarizes the lessons learned regarding the key conditions for well-functioning energy markets and by what kind of regulatory measures governments may help to improve the functioning of these markets. Section 12.2 discusses the fundamental components of regulating energy markets and realizing energy transition, while Sect. 12.3 discusses the economic criteria for defining the optimal regulatory measures. Section 12.4 concludes this textbook by applying the lessons learned to the analysis of the optimal policies to promote energy transition.
Machiel Mulder

Backmatter

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