How can elec­tric­ity mar­kets func­tion more cost-ef­fec­tively?

Financial Mirror (Cyprus) - - OPINION - By An­dreas Poul­likkas

The trans­mis­sion and dis­tri­bu­tion ac­tiv­i­ties are nat­u­ral mo­nop­o­lies as the same in­fra­struc­ture (elec­tric­ity grid) is used to serve the com­pet­i­tive pro­duc­tion and sup­ply ac­tiv­i­ties.

This way, the prod­uct (elec­tric­ity) mar­keted by the pro­duc­tion and sup­ply sec­tor is trans­ported through the elec­tric­ity network from the pro­duc­tion point to the point of con­sump­tion. At the same time, elec­tric­ity is a so­cial com­mod­ity and it is un­ac­cept­able in mod­ern so­ci­eties for any cit­i­zen not to have ac­cess to this com­mod­ity.

Given a fi­nite elec­tri­cal sys­tem, for an elec­tric­ity mar­ket to op­er­ate ef­fi­ciently and eco­nom­i­cally, ei­ther un­der a com­pet­i­tive regime or un­der a mo­nop­oly, three ba­sic prin­ci­ples need to be met: (a) static ef­fi­ciency, that is avail­able re­sources to be utilised ef­fec­tively for the op­er­a­tion of the mar­ket (e.g., more ef­fort and less ex­pen­di­ture), (b) pub­lic choice, mean­ing the align­ment of par­tic­i­pants mo­ti­va­tions (pro­duc­ers and sup­pli­ers) in the elec­tric­ity mar­ket based on the col­lec­tive in­ter­est and (c) dy­namic ef­fi­ciency, which is the in­crease in the rate of in­no­va­tion within the elec­tric­ity mar­ket and im­prove­ment in terms of both the ser­vice of­fered to the con­sumer and the re­li­a­bil­ity and qual­ity of the prod­uct.

As far as the ba­sic prin­ci­ple of static ef­fi­ciency is con­cerned, an eco­nom­i­cally op­ti­mal al­lo­ca­tion of re­sources is re­quired so as elec­tric­ity con­sumers pay the price of the cost, they bur­den the elec­tric­ity sys­tem with, based on the prin­ci­ple of cost ori­en­ta­tion.

For the ba­sic prin­ci­ple of pub­lic choice, given the need to pro­duce a so­cial com­mod­ity (elec­tric­ity), the elec­tric­ity mar­ket can be a mo­nop­oly (a pub­lic or pri­vate en­ter­prise) or a com­pet­i­tive one (with a num­ber of com­pa­nies).

Re­gard­ing which of the two op­tions is more likely to act in the com­mon in­ter­est (e.g. sat­is­fac­tion of the ba­sic prin­ci­ple of static per­for­mance), based on in­ter­na­tional ex­am­ples, pub­lic own­er­ship mod­els is more likely to be able to work in an au­ton­o­mous way mo­ti­vated not by the com­mon in­ter­est but the in­ter­est of its em­ploy­ees, its sup­pli­ers, in some cases, even its com­peti­tors.

The rea­son is that pub­lic own­er­ship lacks a re­stric­tion, that is the in­cen­tive for the low-cost func­tion­ing of the elec­tric­ity mar­ket. To ad­dress this re­stric­tion, reg­u­la­tory in­ter­ven­tion is al­ways needed so that the pub­lic un­der­tak­ing (whether in a mo­nop­oly model or in a com­pet­i­tive elec­tric­ity mar­ket) can meet the ba­sic prin­ci­ple of static per­for­mance.

To meet the third prin­ci­ple of dy­namic per­for­mance, we need to en­sure that there is an ap­pro­pri­ate en­vi­ron­ment for in­no­va­tion that cre­ates growth for the ben­e­fit of con­sumers. It is known that growth is not cre­ated un­der equi­lib­rium con­di­tions even if they are ef­fec­tive in the short term. Growth is caused by im­bal­ances, that is by in­no­va­tions.

In ad­di­tion, de­tect­ing, record­ing and in­flu­enc­ing con­sumer be­hav­iour are ac­tiv­i­ties in which com­pet­i­tive mar­kets are more suc­cess­ful.

In the case of elec­tric­ity mar­kets this is done by sup­pli­ers so that there is con­tin­u­ous im­prove­ment in the per­for­mance of their prod­uct (elec­tric­ity) in the mar­ket.

These are the ad­van­tages of­fered by com­pet­i­tive mar­kets, which meet the above prin­ci­ples and cre­ate rapid growth for the ben­e­fit of con­sumers by re­ward­ing in­no­va­tion.

That is to say, mar­ket forces with the par­tic­i­pa­tion of al­ter­na­tive pro­duc­ers and sup­pli­ers of elec­tric­ity and the ap­pro­pri­ate reg­u­la­tion can op­er­ate elec­tric­ity mar­kets in a cost-ef­fec­tive way for the ben­e­fit of con­sumers by in­tro­duc­ing in­no­va­tive tech­nolo­gies that can trans­form con­sumers from be­ing pas­sive par­tic­i­pants to ac­tive par­tic­i­pants through the dig­i­ti­za­tion of the elec­tric­ity sec­tor and the in­stal­la­tion of smart tech­nolo­gies and ap­pli­ca­tions. An­dreas Poul­likkas is Chair­man of the Cyprus En­ergy Reg­u­la­tory Author­ity

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