Interaction between liberalised energy markets

The markets for electricity, natural gas and district heating are interlinked both with respect to the energy flows and with respect to ownership of supply sources and infrastructure. The extent and the possible consequences of these linkages are examined The options for public interventions in these markets are analysed to compare instruments with respect to their ability to provide the necessary incentives for an efficient functioning of the liberalised markets. Both aspect of retail markets with households facing multi-product distribution companies and aspects of the production of combined heat and power based on natura] gas has been covered. Much of the concern so far has been on the production and wholesale markets for electricity with respect to efficiency of markets and market power issues. This project identifies some important aspects related to final consumers and the integaction of markets with different types of regulation and scope for liberalisation. From a Danish perspective the district heat market and the dependence on market conditions for natural gas is a specific concern. Consumer concerns also relate to the creation of multi-product energy distribution companies that are privately owned and possibly controlled by foreign interests. Such companies might use bundled sales of energy products to extent their dominant position in one market e.g. a regulated heat market to a market with considerable competition (electricity). Bundled sales would not necessarily result in a loss for the consumer as the electricity cost could be included at competitive price levels due to economies of scope in supplying energy products to the same customers. However, the regulatory authorities responsible for district heat prices will have a more complicated job in surveying the bundled price setting. The markets for electricity and heat were examined with respect to their dependence on natural gas supplies and the possibility of limited competition in gas supplies. Integration of activities within natural gas distribution and CHP production has been analysed with respect to incentives and welfare implications. Results of the project point to critical market conditions and identify areas of concern for regulatory policies. Furthermore the possible integration of gas supply companies with Combined Heat and Power producers involves three major energy markets and is of specific importance in the Danish case. Welfare implications of different market developments has also been analysed with respect to gas and electricity integration. The analysis shows that there is a large welfare loss associated with having monopolies in both natural gas supplies and the CHP production. If liberalisation allows integration of these two energy markets welfare would be improved relative to the first case. Furthermore the analysis shows that the existence of differentiated electricity production technology (fuels) reduces the welfare loss from the monopoly in the natural gas supply even though the natural gas keeps a high market share. Integration in this case still reduces the welfare loss from the limited competition in the two markets but this is of much less importance in this case