European energy markets integration and its effects on prices and efficiency of electricity producing firms

Abstract

In this work we investigate the effect of energy (electricity) market integration in Europe and its effects on electricity prices and efficiency improvements in electricity producing firms. We first describe at detail the electricity sector, the role of electricity markets, the main characteristics of electricity as a commodity as well as the main features of this particular and strategic sector, we speak about the evolution of consumption of electricity in developed countries and particularly in Spain. In the second chapter, we address extensively the most recent round of reforms approved for the European electricity markets, known as the third energy package. We speak of the actors that were relevant for such approval their preferred outcomes and the final result of the bargaining process. To do this we use qualitative methods to venture beyond description of what happened and to explain the conditions that rendered the entire process be favourable for the European Commission proposal of reform.

In the third chapter of the dissertation we deal with the issue of electricity prices in European countries. We propose a group of variables as drivers of electricity prices, we discuss the relationship that these variables might have with electricity prices and we conduct an analysis in which we set up a model to test the possible relation of these drivers with the prices paid by industrial and household costumers. In particular we test the relationship that might exist between the suppliers’ ownership and the prices charged to final consumers, as well as the quantity of primary energy available and the exchanges of electricity or the concentration of the electricity markets and the amount of renewable energy supplied in the different European countries. To test our model and the relationship of the proposed drivers with net prices we constructed a panel data that covers the years from 2001 to 2010 a few years before and after the second and the third energy packages, the last major reform packages in European countries.

Finally in Chapter 4 we focus on dealing with what we consider to be one of the most important consequences of liberalizing the electricity sector, which are the possible changes in the firms’ efficiency. Particularly we focus in internal efficiency, that is, the more efficient ways that power plants may find to continue with their activity in a more competitive context. Said in a different way, due the increasing competition because of the liberalization measures, producers of electricity must adjust their production methods to keep been competitive or even gain competitiveness, this, in turn, is connected with gains in consumers welfare. In this case we first make a review of the best and most used methods to assess changes in the performance (efficiency) of firms, we set up a database that takes in account three different years of 130 power plants in eighteen European countries, sixteen of them European Union members and two non-EU members but important partners in what concerns to electricity markets (Norway and Switzerland); the three years taken in account are 2004, 2009 and 2013, the database is not a panel data, but observations made in three different points in time to tests each of the years while the results are used to calculate the Malmquist indexes that will give tell us how firms move relative to the frontier and if the frontier is actually moving.