Considerations on the Reform in the Power Sector (Avoiding Chaos on the Path to an Optimal Market Structure)

Abstract

The reform of a single player power sector (i.e. a natural monopoly) into a multiple-players power market brings to the clients not only the benefits of competition but also the costs of complexity. In between the two, an optimal number of players is found, corresponding to the minimum price of power to the clients. Considering time as the third dimension, the optimum curve becomes a potential surface on which the evolution of the market entities is seen as oscillations (mergers and unbundling) along the valley of the minimum price. Every oscillation triggers a price burst, which is detrimental to the clients. To avoid this, the role of the regulator is better defined in the sense of smoothing the transition from monopoly to market. The example of the US and of the EU power sectors evolution is relevant here. In the above approach, long range competition resulting from the future opening of power markets in Europe, or from the penetration, 70 years ago, of the interconnection technology in USA, is compared with the short range (local) competition. Finally, the price limits are determined, which ensure that (i) the new entrants on the market are not eliminated and (ii) the market avoids oscillations (chaotic behavior), which may drastically shock a non-resilient economy. A case study calculation is made for a transition economy (Romania).