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Unbundling in Electricity Networks: Evidence & Implications

Analysis of transmission network unbundling in UCTE countries, investigating investment effects, costs, conflicts, and quality impacts. Findings suggest mixed outcomes with ownership unbundling. Policy implications discussed.

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Unbundling in Electricity Networks: Evidence & Implications

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  1. 2009 IEW Conference - Venice Transmission Network Unbundling and Grid Investments: Evidence from the UCTE Countries Paolo Nardi CERTeT – Università Bocconi

  2. Policy Review: an outline • Sector Inquiry (January 2007) • Third Energy Package (September 2007) • Transmission Network Ownership Unbundling • EP’s second reading (April 2009) • ISO • OU • EEU

  3. Policy Review (2): the debate • Commissioner Kroes • «There is evidence that investments are based on what is good for the integrated company, rather than on efficiency gains for the network company. We need to ensure a structural unbundling that removes the opportunities for discriminating against competing suppliers, and which provides the proper incentives to invest in the network» (speech 06/17) • Mrs Angela Merkel • «Unbundling is a different issue. We have many traditions in Europe. Fourteen member states already have unbundling, others like Germany have a different tradition. I do not think the issue of competition can be reduced to the unbundling question»(Financial Times, March 6th 2007)

  4. Literature Review • Benefits of Unbundling (Léautier, 2001): • Pro-competitive effect of grid investments • Conflict of interest for vertically integrated incumbent • Unbundling is the structural solution • Costs (Kaserman and Mayo, 1991; Kwoka, 2002 and 2008): • Diseconomies of scale • Diseconomies of coordination • Net impact? Ambiguous (Brunekreeft, 2008; Pollitt, 2008) • Lack of definitive econometric evidence on reform effects • Studies on wholesale and retail markets, not on transmission network

  5. Methodology (1) • Research questions: • Is there any evidence of a positive relationship between unbundling and grid investments? • Does the concentration in the wholesale market matter with this evidence? • Sample: • 14 TX networks of UCTE countries (2000-2006) • 28 major interconnections (2000-2006) • Indicators: • annual growth rates of capacity indicators • quality indicators to evaluate side effects

  6. Methodology (2) • Non-parametric tests on medians between: • TX-dataset: • Unbundled vs. not unbundled country-year • Ownership unbundled vs. not ownership unbundled country-year • ICX-dataset: • ICX-year between both unbundled countries vs. not both unbundled countries • ICX-year between both ownership unbundled countries vs. not both ownership unbundled countries

  7. Grid length of the network

  8. Conventional thermal capacity of ICX networks

  9. Empirical findings (1): capacity • Some capacity indicators are likely to increase after ownership unbundling • In TX networks, measured as annual growth rate of grid length (significance= 0.03**) • In ICX networks, measured as annual growth rate of thermal capacity (significance=0.09*) • More mixed evidence when legal and functional unbundling have been also considered

  10. Empirical findings (2): quality • Any unintended costs of Ownership Unbundling? • Concerns expressed by policymakers and scholars on unintended costs of ownership unbundling should not be overcome • Quality indicators show twisted results: • Significance is not always good • Even if unbundling per se is associated to an apparent enhancement of quality indicators, the same indicators systematically worsen if the analysis focuses upon ownership unbundling

  11. Comments: • A scattered evidence of increased grid capacity after ownership unbundling • there could be a problem of short-run effect; • Yet a degradation of quality indicators cannot be excluded • A less reliable and low-quality TX and ICX service could represent a side effect of • difficult coordination and/or • mismanagement of the maintenance activities

  12. Conclusions • Ownership Unbundling does not take off • Relevance of political issues • A phenomenon of capture by ‘hybridized’ utilities • Doubts on the economic rationale behind the EC’s proposal • Benchmark Competition • Regional Approaches by ERGEG (ACER) • Pentalateral Group and market-led initiatives

  13. Thank you for your attention ‘We must now return energy to centre stage’ (Commission President Barroso, January 2007)

  14. Essential References • Brunekreeft, Gert (2008) Ownership Unbundling in Electricity Markets. A Social Cost Benefit Analysis of the German TSO’s. EPRG Discussion Paper 08-15, University of Cambridge • Kaserman, David and Mayo, John (1991) The Measurement of Vertical Economies and the Efficient Structure of the Electric Utility Industry. The Journal of Industrial Economics 39 (5) 483-502 • Kwoka, John (2002) Vertical economies in electric power: evidence on integration and its alternatives. International Journal of Industrial Organization 20 (5) 653-671 • Kwoka, John (2008) Restructuring the U.S. Electric Power Sector: A Review of Recent Studies. Review of Industrial Organization 32 (3) 165-196 • Léautier, Thomas-Olivier (2001) Transmission Constraints and Imperfect Markets for Power. Journal of Regulatory Economics 19 (1) 27-54 • Pollitt, Michael G. (2008) The arguments for and against ownership unbundling of energy transmission networks. Energy Policy 36 (2) 704-713

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