sffe may 2012 - the free market for electricity

7/30/2019 SFFE May 2012 - The Free Market for Electricity

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The free market for electricity

does it work?

SFFE Lunch seminar

03.05.12Henrik Karlstrm


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Demands for interference and control have

resurfaced lately [...] This time, too, I hopegovernment keeps a cool head and refrains from

overzealous regulation

- Einar Hope, 10 r med energiloven (2005)

When you have a market failure, no amount of

belief in the markets ability to solve problemshelps. You need political control

- Einar Hope in interview March 2009


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What am I talking about?

The questions: How do we evaluate policy, and by what criteria?

What is good governance?

The case: A deregulated market for electricity

Advantages and problems

Who does/did what, and how do they think about theelectricity market and its functions?

Examples from interviews, surveys, official statistics,law documents, government white papers

What can we learn from this?


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Evaluating policy

What is the point of policy?

To solve, organise, delineate, delegate. But how?

What criteria should we use to evaluate a

policy?

According to what goals?

Economic (efficiency), political (re-election, system

reproduction), ethical (distributionary, non-discriminatory), popular (democratic, participatory)?

Who should do the evaluation?


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The Norwegian electricity market

Deregulated since 1991

Split in two parts one competitive and one

natural monopoly

About 100 utilities to choose from

Stated goals:

More efficient use More income from forced exports


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How to evaluate this economically?

The aim of managing the power system is to

minimize the social-economic costs of all

Norwegian supply of energy that may be

covered by the electrical power system

- NOU 1985 Energilovgivningen, p. 8


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Personally, I believe prices as a tool will give

conservation effects without negative side

effects. We know from our own households that

there is something to be had from usingelectricity more sparingly

- Labour MP Tom Thoresen (1975)


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Price development


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Consumption development


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The economists verdict: Success!

The market has performed well in terms of economicefficiency and market functionality (Bye & Hope 2005)

The market is working a lot better (Economist BenteHalvorsen in interview April 2009)

When prices go up, consumption does go down

Even if it is only 5 10 % reduction for a tripling of prices,it would have been even less without an incentive

No actors exert market dominance

But they do rotate

Owners (Norwegian municipalities) are making a lotmore money


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However

People arent really market oriented:

6 % change supplier in a given year

65 % explicitly want to keep old supplier

2/3 want more political control over

production and prices

Majority thinks utilities make too much money

Supply deficits spark intense media debate

Missing investment incentives


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Points of note

Policy makers and the public are not in sync

This may be because they expect different thingsfrom the market policies Politicians: efficiency

Public: reliably cheap electricity

Legitimacy for a policy is tied up to its publicperception Which is why we see so much legitimising work done

Income from sale of electricity is not evenlydistributed Some municipalities have become rich, others not


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Why the difference?

Almost all involved in the law change were trainedeconomists The designers (obviously)

The minister in charge, Eivind Reiten

The opposition politician responsible, Arne yen The bureaucrats

Politicians do not really understand economics Many thought prices would go down

Except those who knew but chose to keep quiet Other explanations:

People are stupid

These are minor problems the system works!


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For discussion

When a policy seems to be working but no

one is happy, is it working?

Who is fit to evaluate?

The technocracy, the electorate, the average joe?

Who is fit to make policy?

What do we want a policy to do? Regulate, stimulate, delegate?


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Thank you!

sffe may 2012 - the free market for electricity

Documents