Spot and Bother: The Unfortunate Impact of Economics on Electricity

July 9, 2003 - 12:00pm
Bldg. 90
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Utilities such as the electricity production and distribution industry have been re-regulated in recent years to emphasize private provision and spot pricing of output, in the belief that this would result in a more efficient industry that gave consumers a higher level of welfare. While this accords with the conventional beliefs of economists, these beliefs are not justified for two reasons. Firstly, the theory that purports to show that prices would be lower, output higher, and consumer welfare greater with competitive as opposed to monopoly provision is incorrect. Secondly, iterative general equilibrium models are unstable, which implies that the prices of any basic commodity (one that enters into the production of all others) would be unstable in a spot market system. These problems with conventional economic belief imply that the re-regulation towards competitive spot markets was a mistake that should be replaced by more engineering-oriented analysis of scale economies and buffer pricing.

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