Opening electricity markets – market structure and the role of authorities
Introduction
This study examines the development trends of Finland’s electricity supply and assesses the impact of the entrenchment of market mechanisms. The study also evaluates how electricity markets should be developed, using as its criterion the concept of general welfare, which is defined elsewhere in the study.
The development of electricity markets has in recent times been characterised by the incorporation, mergers, and changes in ownership structure of electricity distribution companies, which have also been reflected in the operational objectives of these companies. The significance of profit maximisation has presumably increased. In electricity generation itself, changes have been more limited.
On the part of the authorities, the most significant individual measure affecting electricity markets is the enactment of the Electricity Market Act. The Electricity Market Act seeks to introduce competition in the sale of electricity. The transmission and local distribution of electricity will remain a monopoly. The Electricity Market Act affects electricity generation and wholesale markets by liberalising the conditions for electricity imports and power plant construction.
The study provides a broad assessment of the Electricity Market Act and its practical application. Central attention is paid to what kinds of measures the Electricity Market Act requires of the authorities in influencing the pricing of monopoly services and other services subject to imperfect competition. The study also separately examines the need for direct price regulation.
The wholesale electricity market in Finland consists of contracted electricity trading and temporary electricity trading between various groupings — primarily Imatran Voima (IVO) and Teollisuuden Voimansiirto (TVS). The study assesses the conditions under which Finland’s wholesale electricity market could develop into an open and competitive market. In this context, attention is also drawn to the fact that the central and most economical part of Finland’s electricity generation capacity is of a type that cannot, as things currently stand, be expanded. This applies to hydropower, nuclear power, and to a limited extent also to back-pressure power. The study therefore separately analyses the effects of cost-based pricing and taxes levied for fiscal reasons on the volume and price of electricity consumption under conditions of constraints on the expansion of generation.
Finland’s electricity market is vertically integrated in the sense that the central power company groupings have their own transmission networks. At the same time, electricity distribution companies operate both in the sale and transmission of electricity within their distribution areas. Several electricity distribution companies also have their own electricity generation capacity. The study examines the impact on pricing of differently vertically integrated structures. At the same time, an assessment is also made of power companies’ expansion into electricity distribution company operations. (AI translation)
- ISSN: 1236-7176
- ISBN: 951-9282-89-0
