A Comparison of Deregulation, Electrical Efficiency Programs, And Integrated Market Transformation Policies: Impact On Carbon Emissions And Service Costs In Western Europe's Power Sector

Panel: Panel 1: Energy Efficiency policies, programmes and their links

Authors:
Florentin Krause, International Project for Sustainable Energy Paths (IPSEP)
Jonathan Koomey, Lawrence Berkeley National Laboratory

Abstract

The study finds that limited reform proposals based solely on restructuring and deregulating the electricity supply industry are associated with large opportunity costs that have been widely overlooked. This paper summarizes an in-depth analysis of the impacts of alternative policy instruments for transforming the electricity sector on the costs of electricity services and on carbon dioxide emissions. Using scenario modeling analysis, the study calculates year 2020 service costs and carbon emissions for a five-country region within the European Union: France, Germany, Italy, the Netherlands, and the United Kingdom.

The following scenarios and policy frameworks are examined: (1) business-as-usual scenarios based on pre-1990 industry structures and planning regimes; (2) a "pure" deregulation scenario providing access to the electricity market for all suppliers; (3) deregulation combined with market transformation programs for addressing non-entry barriers to cogeneration, renewables, and demand-side energy efficiency technologies; (4) a low-cost, low-carbon scenario based on framework 3.

A decisive input for these scenarios is an in-depth assessment of the cost and economic potential of electrical efficiency improvements in Western Europe. Additional analyses examine the sensitivity of results to alternative fuel price forecasts. The study also draws on in-depth analysis of possible technology improvements and cost developments in electricity generation to capture uncertainties in the highly dynamic competition between alternative resource options. Special attention is paid to the relative costs of electricity savings and electricity production as feedback effects of policy measures bring about declines in both pre-tax fuel prices, generating costs, and in the costs of energy efficiency improvements. The impact of incorporating environmental externalities is also quantified. All results are expressed as a function of the degree to which policies succeed in mobilizing cost-effective resource potentials.

The study finds that limited reform proposals based solely on restructuring and deregulating the electricity supply industry are associated with large opportunity costs that have been widely overlooked. The economic benefits of pure deregulation are found to be significantly smaller than those of an integrated least-cost or minimum-carbon policy reform. The study further indicates that under pure deregulation, power sector carbon emissions are likely to rise significantly in the longer-run, while aggressive implementation of efficiency potentials could lead to significant absolute emission reductions below present levels. Due to various feedback effects between policies and the costs of energy efficiency and other resources, even a minimum carbon strategy is found to result in significantly larger economic benefits than deregulation alone.