College Green Dialogues: Regulating Electricity Markets

A College Green Dialogue on the “Regulation of Electricity Markets”

At the mere age of 22, Jean-Philippe Meloche (MPA 2009/2010) worked as an Industrial Adviser at the Competition Commission in London. His experience there, as part of his policy analysis exercise at the London School of Economics and Political Science (LSE) where he studied before coming to the Lee Kuan Yew School of Public Policy (LKYSPP), gave him enough insights that he thought might be interesting to his fellow students. On February 24th, JP put together a College Green Dialogue on the “Regulation of Electricity Markets,” where he explained how deregulated electricity markets can function despite fears of collusion, as well as the overarching regulatory framework set by British policymakers.

During his time with the Commission, it investigated a claim that electricity prices in the UK were too high as a result of alleged market power abuses by electricity generating companies. The UK’s regulatory authority had become suspicious that despite the deregulation of the electricity market under Margaret Thatcher – one of the first successful deregulation initiatives in the world – electricity prices had remained at similar levels.

To his surprise, JP’s assignment entailed an almost textbook-like analysis of the electricity bidding market: using an automatic algorithm, the electricity market operator would purchase all bids that lay below a calculated market clearing rate, thus reproducing in real life a market supply curve, as typically presented in any microeconomics course. Facing a highly inelastic demand, the criticism goes, colluding companies or even individual gamblers could drive up the prices, leading the whole industry to benefit at the cost of efficiency, and eventually the consumer. The Commission, however, could find no abuse of power under the existing market rules.

The presentation led to a vibrant discussion on the pros and cons of such a regulatory tool during the Q&A.

“The placement [in the Commission] has given me a framework to analyze similar patterns of electricity and utility liberalization all over the world, and confirmed the importance of sound theoretical knowledge in designing public policies… it also encouraged me to study at this school (LKYSPP), ” JP concluded with a smile.

– by Olivia Gippner (MPP 2008-10)

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