Competition Policy in the Electricity Sector

Electricity markets are prone to the exercise of market power due to a combination of factors including: inelastic demand, lack of extensive practical storage of electricity, transmission congestion, transmission loop flows and capacity constraints coupled with diversity in the marginal costs of different types of generators. The level of market power can vary rapidly in time according to changes in transmission congestion and fluctuating load levels. Given the propensity of the electricity market to market power, horizontal structural separation (or divestiture) of the generation market is a key policy tool. Some structural separation has been carried out, but on a relatively limited scale. But congestion segments electricity markets and contributes to the exercise of generator market power. This effect can provide the incentive for building new generation capacity. So a balance must be found between providing an incentive to build new generation capacity and the construction of adequate transmission capacity. As long as it is costly to add transmission capacity it is usually not efficient to construct a transmission network capable of handling all power flows without congestion. This document comprises proceedings in the original languages of a Roundtable on Competition issues in the electricity sector which was held by the Working Party n°2 of the Competition Committee in October 2002.