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The Future of Electricity (and Gas) Regulation in a Low-carbon Policy World

Abstract:
This paper discusses whether a new paradigm is necessary for independent economic regulation of electricity (and closely associated natural gas) systems. We begin by summarizing the nature of the traditional model of electricity reform and the place of economic regulation within it. Next we outline the drivers for changing the current model of electricity regulation, namely, the maturity of the existing model, the reality of changing circumstances, and the coming of age of climate change concern. We go on to discuss the premises on which a new model of regulation should be based. These are: remembering the successes of the current system of regulation; a new focus on processes not just outcomes; a recognition of the economics of climate change; and the appropriate management of uncertainty. We then highlight the key elements of a new model for regulation: new processes of regulation; new models of competition and the issues raised by a focus on climate change. The paper draws heavily on the experience of the UK, but has direct implications for the rest of the European Union countries and for other countries whose regulatory systems mirror them.

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Energy Specializations: Natural Gas – Markets and Prices; Electricity – Markets and Prices ; Energy and the Environment – Policy and Regulation

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electricity markets, Natural gas markets, Regulation, UK, Europe, uncertainty, Climate change

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-NoSI2-5


Published in Volume 29, Special Issue #2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.