Deregulating energy markets in APEC

Economic and sectoral impacts

2002
Lindsay Fairhead Jane Mélanie Leanne Holmes Ye Qiang Helal Ahammad Karen Schneider

Asia-Pacific Economic Cooperation Energy Working Group

© 2002 APEC Secretariat

ISBN 0 642 76459 X APEC#202-RE-01.3 Fairhead, L., Mélanie, J., Holmes, L., Ye Qiang, Ahammad, H. and Schneider, K. 2002, Deregulating Energy Markets in APEC: Economic and Sectoral Impacts, APEC#202-RE-01.3, ABARE Research Report 02.5, Canberra.

Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601 Telephone Facsimile Web site +61 2 6272 2000 +61 2 6272 2001 www.abareconomics.com

Published by ABARE for the APEC Energy Working Group APEC Secretariat 438 Alexandra Road #14-00 Alexandra Point Singapore 119958 Telephone Facsimile Email Web site +65 276 1880 +65 276 1775 info@mail.apecsec.org.sg www.apecsec.org.sg

foreword
In many economies, including in APEC, energy industries are subject to extensive government involvement. This includes direct government ownership and management of energy resources and assets, as well as regulation of various aspects of energy supply and use. Many APEC economies, however, are seeking to implement change in the regulatory structures and institutions in their energy sectors. While the regulatory reform agendas being proposed and implemented throughout the region vary, their common objective is to encourage more efficient energy supply and use. Reform is expected to deliver benefits such as productivity improvements, prices that more accurately reflect costs, and more dynamic energy industries that are responsive to consumer demands. The objective in this study is to contribute to the assessment of the economic and sectoral implications of regulatory reform in APEC energy industries. This is done by providing quantitative analysis of the impacts of regulatory reform on key economic and energy variables. The study demonstrates that there could be significant economywide benefits from regulatory reform, including enhanced productivity and higher gross domestic product. These in turn are likely to lead to higher energy consumption across APEC and more intense energy trading relationships. The study also indicates that energy market reform can contribute to meeting some of the key energy policy objectives endorsed by APEC Energy Ministers. These include the development of more efficient production, distribution and consumption of energy, the facilitation of open energy markets and the promotion of capital flows. Reform can also help APEC economies achieve their important policy objective of ensuring stable, secure and reliable energy supplies. The study was undertaken by ABARE for the APEC Energy Working Group.

BRIAN S. FISHER Executive Director August 2002
Deregulating energy markets in APEC iii

Alan Copeland and Kim Donaldson for their contribution to the analysis of regulatory regimes in APEC member economies.acknowledgments The authors gratefully acknowledge the contributions made to the study by the Asia Pacific Energy Research Centre (APERC) and the many government and energy industry organisations that were consulted throughout its preparation. and Vivek Tulpulé for overall advice and guidance. Christopher Short for international consultations. iv Deregulating energy markets in APEC . In ABARE. the authors thank Muhammad Akmal.

contents Summary 1 Introduction Regulatory reform – what. production and trade in APEC Structure and regulation of energy industries in APEC 3 Reforming energy markets – expectations and outcomes Rationale for regulatory reform in the energy sector Policies to capture the potential benefits of reform Impacts of reforms Conclusions 34 34 39 63 69 71 71 72 73 76 84 85 4 Analytical framework Global trade and environment model Regional and sectoral aggregation Developing a reference case Policy simulations Interpreting results Reference case projections 5 Quantifying the impacts of energy market liberalisation Comprehensive liberalisation of energy markets in APEC economies Deregulating energy markets in APEC 91 92 v . how and why? Measuring the impacts of regulatory reform Structure of the report 1 13 14 15 16 17 18 23 2 Energy markets in APEC Energy consumption.

Sensitivity of results to the coverage of liberalisation Sensitivity of results to the timing of liberalisation Sensitivity of results to market and regulatory design Investment in deregulated energy markets

105 108 110 112 116

6 Conclusions Appendixes
A Energy reform plans and progress – selected APEC economies B Global trade and environment model C Simulation results, by region

119 135 142 149

References

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Deregulating energy markets in APEC

Boxes
1 2 3 4 Policy design problems – the case of California’s electricity market 50 Problems with partial reforms – the case of British Gas 58 Problems with wellhead price controls – gas markets in the United States 59 Energy market liberalisation and energy security in APEC 104

Figures – summary
A Change in APEC energy consumption, 1999-2010, reference case 3 B Change in APEC GDP, 2010, following comprehensive liberalisation 5 C Change in APEC production in selected sectors, 2010, following comprehensive liberalisation 5 D Change in APEC electricity consumption, 2010, following comprehensive liberalisation 6 E Change in APEC gas, oil and coal consumption, 2010, following comprehensive liberalisation 7 F Change in coal, oil and gas production in selected APEC economies, 2010, following comprehensive liberalisation 8 G Change in APEC gas, oil and coal trade, 2010, following comprehensive liberalisation 8 H Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and electricity liberalisation only 10 I Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and gas liberalisation only 10 J Change in APEC GDP and energy consumption, 2010, following full and partial electricity liberalisation 11 K Change in APEC GDP and energy consumption, 2010, competitive and noncompetitive electricity market outcomes 12

Deregulating energy markets in APEC

vii

Figures – main report
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Primary energy consumption, by fuel, 1999 Energy consumption, by end use, 1999 Fuel mix for electricity generation, 1999 Primary energy production, by fuel, 1999 Energy import dependence, 1999 Deviation from the reference case in a GTEM simulation Change in APEC energy consumption, 2010, reference case Change in APEC coal, oil and gas consumption, 2010, reference case Change in APEC electricity production, 2010, reference case Change in APEC production of energy intensive goods, 2010, reference case Change in APEC coal, oil and gas production, 2010, reference case Change in APEC coal, oil and gas imports, 2010, reference case Change in APEC coal, oil and gas exports, 2010, reference case Change in APEC GDP, 2010, following comprehensive liberalisation Change in APEC GDP, 2010, following comprehensive liberalisation, compared to GDP of selected APEC economies Change in APEC production in selected sectors, 2010, following comprehensive liberalisation Change in energy intensive production in selected APEC economies, 2010, following comprehensive liberalisation Change in APEC energy intensity, 2010, following comprehensive liberalisation Change in APEC electricity consumption, 2010, following comprehensive liberalisation Change in APEC energy consumption, 2010, following comprehensive liberalisation 19 20 20 21 23 84 86 86 86 88 89 89 89 93

93 95 95 96 96 98

16 17 18 19 20

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Deregulating energy markets in APEC

2010. 2010. 2010. oil and coal trade. oil and coal production in selected APEC economies. 2010. oil and coal consumption. following comprehensive liberalisation and gas liberalisation only 107 27 Change in APEC GDP and energy consumption. 2010 99 23 Change in gas. following comprehensive liberalisation and electricity liberalisation only 106 26 Change in APEC GDP and energy consumption.21 Change in APEC gas. 2010. following full and partial electricity liberalisation 109 28 Change in APEC GDP and energy consumption. following comprehensive liberalisation 98 22 Share of gas in electricity generation fuel mix. following comprehensive liberalisation 114 Deregulating energy markets in APEC ix . following comprehensive liberalisation 102 25 Change in APEC GDP and energy consumption. following comprehensive liberalisation 113 30 Investment in electricity generation capacity at 2010. 2010. competitive and noncompetitive electricity market outcomes 111 29 Change in investment in electricity generation capacity to 2010. 2010. following comprehensive liberalisation 100 24 Change in APEC gas.

selected APEC economies 26 4 Structural and regulatory characteristics of selected APEC natural gas markets – current and planned 29 5 Structural and regulatory characteristics of selected APEC oil markets – current and planned 31 6 Energy prices following reform 65 7 Improvements in technical efficiency following reform 67 8 Regions and sectors in GTEM 73 9 GDP assumptions.Tables 1 APEC member economies 17 2 Structural and regulatory characteristics of selected APEC electricity industries 24 3 Proposed electricity reforms. APEC economies 75 11 Assumed productivity and price impacts in the electricity sector 77 12 Assumed productivity and price impacts in the gas sector 78 13 Assumed productivity and price impacts in the downstream oil sector 78 14 Assumed productivity gains in the electricity sector under partial liberalisation 83 15 Simulation results. by region 143 x Deregulating energy markets in APEC . reference case 74 10 Share of electricity generated by each fuel under the reference case.

natural gas and downstream oil sectors — areas that are currently still subject to extensive government regulation in some economies. However. in response to growing pressures to minimise costs. Analytical framework The analysis of the impacts of energy market deregulation reported in this study is based on simulation results from ABARE’s global trade and Deregulating energy markets in APEC 1 .summary The economic and strategic importance of energy has long provided a case for extensive government intervention in energy markets in APEC and other economies. These productivity gains can in turn be expected to deliver energy at lower prices than would be the case without regulatory reform. attract private investment and deliver energy products and services at cost reflective prices. These involve a greater reliance on market forces in segments of the industry where competition is feasible. Well functioning markets can also provide the basis for better service quality and greater innovation. These expectations are largely supported by the evidence emerging in energy markets where major reforms have been implemented and new industry structures are well established. The key objective in this study is to provide quantitative analysis of the broad economic and sectoral impacts of policies to deregulate energy markets in the APEC region. Increased market pressure. and the design of an effective regulatory framework where there is a need for government intervention to address issues associated with natural monopolies and externalities. While there is considerable variation in the approaches to deregulation. the reforms being adopted or proposed share some common principles. combined with improved regulatory design. particularly in APEC economies where energy sectors remain highly regulated. has the potential to generate significant productivity improvements along the energy supply chain. The project’s findings demonstrate the benefits that deregulation can deliver for both energy markets and the wider economy. The emphasis is on electricity. many APEC economies are initiating policies to liberalise their energy industries.

GTEM is a dynamic. among other features. In GTEM a reference case or a ‘business as usual’ simulation provides a benchmark against which the impacts of policy changes can be assessed. It is an appropriate tool for analysing the impacts of policies relating to energy sector liberalisation because. • a detailed representation of the world economy. The reference case projects growth in key variables in each region in the absence of policy changes.environment model (GTEM). driven by strong economic growth. including the majority of APEC economies. This growth implies that energy consumption in APEC reaches 6371 million tonnes of oil equivalent in 2010. The developing and newly industrialised economies are expected to account for much of the growth in energy consumption. multiregion. and • an explicit representation of interfuel substitution possibilities and technological change in key industries that are primary energy users. In this study the reference case represents the likely outlook for APEC energy production. compared with 4996 million tonnes of oil equivalent in 1999. • the capacity to capture the linkages between economies through trade and investment flows. it has: • the capacity to model the interaction between different sectors in the economy. natural gas and downstream oil industries. an expanding population and increasing demand for personal services such as transport and the use of electrical appliances. general equilibrium model of the world economy. consumption and trade in the absence of new regulatory reform measures in electricity. • a detailed treatment of energy and energy intensive commodities. total energy consumption in the APEC region is projected to increase by almost 30 per cent over the period to 2010 (figure A). 2 Deregulating energy markets in APEC . Reference case projections In the reference case. multisector. Growth in energy consumption in these economies is moderated to some extent by continued improvements in the efficiency of energy use.

as developed economies contribute more than two-thirds of APEC energy consumption. 1999–2010. The region is generally self sufficient in energy terms. The reference case highlights the relatively strong growth in coal and gas consumption relative to oil. The transport sector provides the main impetus for increased oil consumption in both developed and developing economies. this implies large increases in the absolute levels of energy consumed in the region. reference case % China Other developing Newly industrialised Developed Total APEC Lower economic and population growth in developed economies translates into lower energy consumption growth in these economies. However. reflecting the favored position of these fuels for power generation across the APEC region. The increase in gas consumption is particularly strong in economies that have access to competitive supplies of pipeline natural gas and where environmental considerations are an important influence on the fuel mix. where the cost of imported LNG is significantly higher than the cost of imported coal.A 60 40 20 Change in APEC energy consumption. These patterns are Deregulating energy markets in APEC 3 . with total energy consumption expected to increase by 16 per cent over the period to 2010. where large indigenous coal reserves give coal a cost advantage over other technologies. The substantial increase in APEC consumption of fossil fuels in the reference case is driven to a large extent by the expansion of electricity generation in developing and newly industrialised economies. or Japan. Coal fired power generation increases more rapidly in economies such as Indonesia. with the major exception of oil imports that are sourced primarily from the Middle East. Cost effective energy production and growing energy consumption provide the basis for significant intraregional energy trade within APEC.

Impacts of comprehensive energy market liberalisation on GDP Energy market liberalisation can be expected to lead to higher national incomes as the productivity gains achieved in electricity. From an APEC-wide perspective. It is also equivalent to around half the size of the Indonesian economy.3 per cent in 2010 relative to the reference case.maintained in the reference case. These include: • macroeconomic impacts. This effect is reinforced by the resource allocation benefits of liberalisation — that is. production and trade. • structural changes in economic output. this gain in GDP is significant and translates into an increase in regional economic output of around US$71 billion (in 1999 prices). or the increase in productivity and output that are driven by competition in energy sectors — these indirect economywide impacts arise as efficiency in energy markets is enhanced and lower energy prices flow through to the rest of the economy. Impacts of energy market liberalisation The liberalisation of electricity. This is broadly comparable to the current size of the economy in Chile. in response to changes in relative energy prices and comparative advantage. The slower growth in consumption of oil relative to other fuels implies that APEC will become increasingly energy self sufficient over the outlook period. The largest gains in GDP occur in the developing economies with increases of up to 1 per cent at 2010 relative to the reference case (figure B). gas and oil sectors flow through to the rest of the economy. the Philippines and New Zealand. at both the national and global levels. This 4 Deregulating energy markets in APEC . natural gas and downstream oil markets in APEC economies will have both direct and indirect impacts on the energy sector. the efficiency gains derived from the shift of resources to their most valuable use within APEC economies as energy consumers and producers respond to price signals. and • microeconomic or direct impacts on energy consumption. with energy production in APEC projected to grow by 30 per cent over the period to 2010. The implementation of comprehensive energy sector liberalisation in APEC economies generates an increase in regional GDP of 0.

B 0. 2010.2 % China Other developing Newly industrialised Developed Total APEC Deregulating energy markets in APEC 5 .4 Change in APEC production in selected sectors.2 0. GDP gains are generally lower in the newly industrialised and developed APEC economies as a result of the lower productivity impacts that are expected to occur in economies that have already introduced some or most of the major elements of energy market reform.4 0. Energy sector impacts of energy market liberalisation Associated with the economic output effects. following comprehensive liberalisation Relative to the reference case China Other developing Newly industrialised Developed Total APEC reflects the currently highly regulated regimes affecting energy sectors in most developing economies and the relatively large contribution of oil and gas sectors to economic output.3 0. 2010.6 0.5 0.1 % Change in APEC GDP. The impacts of higher income growth on energy consumption are reinforced by structural C 0. following comprehensive liberalisation Relative to the reference case Energy intensive Other manufacturing Services Agriculture 0. energy consumption in APEC is expected to increase significantly as a result of deregulation.

D 6 5 4 3 2 1 % China Change in APEC electricity consumption. Electricity consumption grows strongly. where the potential efficiency gains from reform are most significant (figure C). as lower energy prices improve the competitiveness of industrial and commercial output. The significant reductions in electricity prices not only stimulate industrial and commercial demand in these economies but also lead to stronger electricity demand growth from the residential sector. consequently. primarily in developing economies. 2010. nonferrous metals and other manufacturing. lower energy prices have a favorable impact on the cost structures of energy intensive industries such as iron and steel. Energy consumption impacts The macroeconomic and sectoral impacts of energy market reform lead to a substantial increase in APEC electricity consumption at 2010 relative to the reference case level (figure D). reflecting the relatively smaller productivity benefits that are yet to be realised in regions that have already implemented some or most of the major reform elements. The reallocation of resources to energy intensive production is more pronounced in developing economies that are currently least advanced in implementing energy sector reform and. where electricity prices are projected to fall substantially as a result of the fundamental restructuring required to achieve reform objectives. This leads to an increase in the competitiveness of the region’s energy intensive sectors relative to other sectors of the economy and relative to energy intensive production in economies outside APEC. In particular. Expansion of energy intensive sectors is more limited in the newly industrialised and developed economies. following comprehensive liberalisation Relative to the reference case Other developing Newly industrialised Developed Total APEC 6 Deregulating energy markets in APEC .effects within APEC economies.

primarily for electricity generation. Energy production impacts In response to stronger regional energy demand. Compared with natural gas. The shift toward natural gas occurs in all APEC economies. the indirect impacts on coal as a result of deregulation of energy markets are small for APEC generally. coal consumption.E 12 10 8 6 4 2 % Change in APEC gas. oil and coal consumption. reflecting the enhanced competitiveness of gas for electricity generation (figure E). rises markedly relative to the reference case in the newly industrialised economies where coal currently accounts for a large share of the fuel mix. mainly owing to its competitiveness relative to imported LNG and oil. with the most substantial increases arising in economies that are currently the least deregulated and in which gas already plays a major role. When all key energy sectors are deregulated concurrently. Similarly. Production of natural gas rises the most. there is significantly higher demand for natural gas relative to the reference case. production of fossil fuels in APEC economies increases relative to the reference case following deregulation (figure F). as substantial efficiency improvements in gas extraction and reticulation industries result in the APEC region becoming a more competitive gas supplier to international markets. This reflects the commonly open regimes affecting downstream oil sectors in the majority of APEC economies. Deregulating energy markets in APEC 7 . the impacts of energy market deregulation on oil consumption are moderate. 2010. following comprehensive liberalisation Relative to the reference case China Other developing Newly industrialised Developed Total APEC Gas Oil Coal Energy market liberalisation also has important implications for the composition of primary energy consumption. However.

where most of the potential gains from gas reform have already been realised. 2010. G 10 8 6 4 2 % Change in APEC gas. 2010. oil and coal trade. This increased consumption is met primarily by developing gas exporting economies such as Indonesia and Malaysia. Korea and Chinese Taipei. following comprehensive liberalisation Relative to the reference case Gas Oil Coal Exports Imports 8 Deregulating energy markets in APEC . following comprehensive liberalisation Relative to the reference case Coal Oil Gas % 5 10 15 20 Energy trade impacts Changes in regional energy consumption and production underpin changes in energy trade relative to the reference case following the introduction of regulatory reforms (figure G). Gas trade is affected substantially by energy market liberalisation. Liberalisation in these economies enhances their international competitiveness against other gas exporting APEC economies such as Australia and Canada.F China Australia Mexico Indonesia China Mexico Malaysia Indonesia Canada Change in coal. oil and gas production in selected APEC economies. driven primarily by higher LNG consumption in the key north east Asian markets of Japan.

Korea and Chinese Taipei — as their economies grow. The objective of these is to assess the contribution of specific energy sectors to the overall gains from energy market reform and to examine the implications of alternative assumptions about the pace and design of reform programs. Coal exports by other major suppliers to these markets — China and Indonesia — are constrained by higher domestic consumption and the shift of resources to deregulated energy sectors. oil trade at the regional level is only marginally affected by liberalisation. a range of sensitivity analyses is undertaken in the study.Liberalisation of energy markets also creates additional demand for coal imports. developing economies with significant oil resources such as Indonesia and Mexico are projected to increase exports of refined oil products substantially as deregulation of downstream oil sectors increases the international competitiveness of crude oil processing in these economies. and as energy intensive output increases following liberalisation. The results also reflect the highly regulated electricity market structures that currently exist in a number of APEC economies. Narrowing the coverage of liberalisation to the electricity sector only also affects the composition of total energy demand. Consistent with the small changes in APEC oil consumption and production relative to the reference case. Coal assumes a greater role in the energy mix for electricity generation when gas sectors are not liberalised (figure H). Deregulating energy markets in APEC 9 . This reflects the fundamental role of electricity in most economies as an input to production processes and as a component of household expenditure. However. Sensitivity analyses In addition to the analysis of comprehensive and simultaneous liberalisation of electricity. this aggregate result masks some important differences across APEC economies that have diverse oil resource and policy contexts. Australia meets most of the increase in demand for coal imports relative to the reference case. gas and downstream oil sectors. In particular. primarily in the region’s key import markets — Japan. Liberalisation of the electricity sector only The results demonstrate that deregulation of electricity sectors in APEC economies makes the single largest contribution to the GDP gains that follow energy market reform.

Nonetheless. following comprehensive liberalisation and electricity liberalisation only Relative to the reference case Electricity only All energy sectors GDP Electricity Gas Oil Coal Liberalisation of the gas sector only The macroeconomic and energy sector outcomes when gas markets are liberalised independently of reform in other key energy sectors are generally modest compared with the impacts of a broadly focused reform program. gas market deregulation leads to a significant increase in gas consumption at 2010 relative to the reference case (figure I). Further. This is because gas accounts for a small share of energy consumption and production in APEC. I 5 4 3 2 1 % –1 Change in APEC GDP and energy consumption. 2010.H 5 4 3 2 1 % Change in APEC GDP and energy consumption. These impacts are concentrated to a significant extent in developing APEC economies where gas industries are least deregulated and where gas production and distribution sectors contribute to a relatively large share of GDP. 2010. gas markets in some of the major gas producing APEC economies are already open and competitive. following comprehensive liberalisation and gas liberalisation only Relative to the reference case Gas only All energy sectors GDP Electricity Gas Oil Coal 10 Deregulating energy markets in APEC .

Slowing the pace of liberalisation Slowing the pace of liberalisation in APEC economies that are currently least advanced in terms of electricity market reform weakens the productivity gains that could be achieved under a faster timetable. compared with the changes that arise when all APEC economies remove all regulatory and structural impediments by 2010 (figure J).0 0. especially in the wholesale market that is vulnerable to noncompetitive behavior.5 1. Economies that endeavor to attain all reform objectives by 2010 are also affected by partial liberalisation in other APEC economies because of the dynamic trade linkages within the APEC region. for example.5 % Change in APEC GDP and energy consumption. following full and partial electricity liberalisation Relative to the reference case Full electricity liberalisation by 2010 Partial electricity liberalisation by 2010 GDP Electricity Gas Oil Coal Suboptimal market or regulatory design The benefits from reform are also likely to be constrained when ineffective market design or regulatory frameworks result in the exercise of market power by energy suppliers (figure K).0 1. Poor market design could. This could result in generators retaining the efficiency dividends of liberalisation as higher profits rather than passing them through to end users in the form of lower prices. allow electricity generators to exercise market power. 2010. the impacts on GDP and energy consumption are lower in economies that achieve only partial liberalisation by 2010. Key policy implications The findings in this study indicate that the implementation of policies to liberalise energy sectors in member economies will generate economic Deregulating energy markets in APEC 11 . Consequently. J 2.

particularly in electricity and natural gas sectors. secure and reliable energy supplies. Reform can also assist APEC economies to achieve their important policy objective of ensuring stable. 12 Deregulating energy markets in APEC . including private and foreign investment. the development of open energy markets. These benefits will increase if a comprehensive and broadly based approach to liberalisation is adopted. distribution and consumption of energy. the results demonstrate the importance of effective regulatory and market design in ensuring that the benefits of liberalisation are fully realised by APEC economies. competitive and noncompetitive electricity market outcomes Relative to the reference case Fully competitive electicity market Residual market power GDP Electricity Gas Oil Coal benefits for APEC as a whole. policy initiatives to facilitate investment. The significant additional demand for energy in APEC economies that results from liberalisation will require substantial investment in energy infrastructure.K 2.0 0. These include the development of more efficient production. In this context. The study also highlights some important implications for APEC energy policy makers.0 1. 2010.5 1. will be critical to ensuring that the benefits of liberalisation are realised. and the promotion of capital flows.5 % Change in APEC GDP and energy consumption. The study also indicates that energy market reform can contribute to meeting some of the key energy policy objectives endorsed by APEC Energy Ministers. but particularly for developing and newly industrialised economies. Further.

Examples of benefits such as lower energy prices. supply by private firms in competitive markets may replace centralised. Pressures to reform the role that governments play in energy markets have been increasing over the past two decades. trade and other activities of energy suppliers may be lifted. can involve some dramatic changes. The technical and economic characteristics of some parts of the energy supply chain that make it efficient to have a single supplier have also encouraged government intervention in energy markets. To deal with the complex changes involved. such as ensuring the availability of energy at affordable prices for some consumers. public control of energy supply. regulatory reform is usually an ongoing process. The reasons for public sector involvement are many and include the economic and strategic importance of energy and the desire of governments to ensure reliable and secure energy supplies. as elsewhere in an economy. as have concerns about the environmental impacts of energy supply and use. consumers may be given choices for the first time. has long been subject to extensive government involvement. including those in the APEC region. better service quality and greater innovation in some economies that have implemented reforms have provided further stimulus for change. have also been important in some economies.1 introduction The energy sector in most economies. Reform of regulatory structures and institutions in the energy sector. restrictions on prices. Consumers seeking lower energy prices have been a key source of pressure in many economies. Policies are gradually implemented to allow people and institutions time to adjust and to allow policies to be reviewed and refined Deregulating energy markets in APEC 13 . more efficient energy supply. For example. This has included direct government ownership and management of energy resources and assets as well as regulation of various aspects of energy supply and use. and the role of regulation may be narrowed and redefined. Social and other policy objectives. Concerns about the poor performance of regulated energy utilities and government budget constraints have also been important.

Approaches to reform vary widely across economies and energy industries in the APEC region. Within economies there can also be considerable diversity in approaches to different energy types. Regulatory reform often involves a substantial long term commitment to change. In some cases. In other cases. It encompasses policies to restructure or liberalise industries and markets by removing restrictions on entry. governments are just beginning to assess options. The major changes involved also mean that governments considering a reform program generally want to undertake extensive assessments of options and likely impacts. many different models for reform have been used. There is wide variation in approaches within industries. is required. For policy makers assessing options for electricity reform. the emphasis is on the broad picture — the economywide and regional impacts of the reform process. technology changes and competition develops. reform was initiated more than two decades ago — as in the natural gas industry in the United States and the electricity industry in Chile. The objective in this study is to contribute to the assessment of the economic implications of regulatory reform in APEC energy industries. Analysis of likely and actual impacts of reform is therefore vital for the policy development process.as markets grow. how and why? Regulatory reform refers to changes to improve the effectiveness of regulation in achieving its stated objectives and to reduce the costs of regulation. detailed analysis of possible impacts of alternative arrangements for trading in wholesale markets may be required. For APEC members seeking to progress reform on a wide front. as well as policies to redesign existing regulatory frameworks or introduce new ones. so governments need to be convinced that the changes will be worthwhile. ownership and operations of firms. 14 Deregulating energy markets in APEC . exit. Information is required on different levels. This is done by providing quantitative analysis of the impacts of regulatory reform on key economic and energy variables. While some issues and impacts for individual energy industries are examined. Regulatory reform – what. analysis of impacts of reform on a broad scale. the industry that has been subject to the most reform activity. looking beyond the energy industries directly affected to wider economic activity and trade and investment. In electricity.

The relevant question is not whether prices are higher or lower after reform. Reform is expected to deliver benefits such as productivity improvements. It is also important to look beyond the immediate and direct impacts of regulatory reform on the energy sector because this captures only a part of the overall effects of reform. falling energy prices. priorities and judgments about the potential benefits from reform. The fact that reform is often a gradual process also complicates the analysis of outcomes in actual markets. While this type of evidence may provide some interesting insights into the potential impacts of regulatory reform. and more dynamic energy industries that are responsive to consumer demands. the effects of reform will spread well beyond the bounds of the energy markets and the economies in which they are implemented. given the diversity in energy industries across the APEC region and in approaches to reform that are being considered or implemented. for example. IEA 2001a. Prices may have fallen. prices that more accurately reflect costs. a common theme is the desire to encourage more efficient supply and use of energy (OECD 2000. because of some technological development. Furthermore. Different market characteristics and approaches to reform need to be explicitly considered. more reliable energy supply and the development of new products and services after reforms are introduced are often cited in support of reform. While the aims of reform vary. Examples of productivity improvements. but whether they are higher or lower than they would have been in the absence of reform. it is difficult to draw general conclusions based on observations from selected economies where reforms have been introduced. Measuring the impacts of regulatory reform Most of the available evidence on the impacts of reform is based on observations of key energy variables before and after reform. regardless of reform.Different approaches reflect different starting points. its usefulness for guiding policy makers needs to be qualified. The effects of reform should be disentangled from the effects of other variables such as changes in technology. Deregulating energy markets in APEC 15 . It may take many years before a market can fully adjust to changes. APEC 2001). Because energy is an input to all economic activity and energy and energy intensive products are widely traded.

that electricity reform in major coal importing economies will affect not only electricity using industries in those economies. GTEM is a multiregion. It also permits a range of different policy scenarios to be examined. this type of analysis is taken a step further using ABARE’s global trade and environment model (GTEM). but also coal exporting economies. dynamic general equilibrium model of the global economy designed to analyse international economic issues. including those relating to energy markets. Korea Institute for Industrial Economics and Trade 1999 and Industry Commission 1995 for Australia). 16 Deregulating energy markets in APEC . Structure of the report An overview of the energy sector in APEC and a summary of the structure and regulation of the electricity. Chapter 4 includes a description of GTEM and how the model is used to measure the impacts of regulatory reform in the energy sector. for example. multisector.The economywide impacts of energy reforms have been analysed in several studies (for example. the rationale for reform in the energy sector is discussed as well as issues related to the implementation of reform in each energy industry. The policy implications of regulatory reform for the APEC energy sector and the APEC Energy Working Group are discussed in chapter 6. Evidence on the outcomes of reform in selected markets is also examined. It recognises. Results from the model simulations are presented in chapter 5. In this report. In chapter 3. natural gas and petroleum industries in each economy is provided in chapter 2. The GTEM framework explicitly incorporates the different characteristics of energy industries across the APEC region and the linkages between them and other economies.

APEC’s membership also includes some of the most rapidly expanding economies in the world. China Republic of Korea Singapore Chinese Taipei Developing economies Brunei Darussalam Chile People’s Republic of China Indonesia Malaysia Mexico Papua New Guinea Peru Republic of the Philippines Thailand Viet Nam 17 Deregulating energy markets in APEC . one of the largest users of primary energy. are a key influence on energy 1 APEC member economies Developed economies Australia Canada Japan New Zealand Russian Federation United States Newly industrialised economies Hong Kong. population growth and economic policies have resulted in considerable diversity in patterns of energy consumption. with many economies highly dependent on imports to meet their energy needs. resource endowments. natural gas (the Russian Federation and Canada) and liquefied natural gas (Indonesia). Trade plays a vital role in APEC economies of all sizes. and the largest net importers of energy (the United States and Japan) (EIA 2000). where energy consumption has been growing at an average rate of more than 5 per cent a year over the past twenty years. production and trade across the region. Differences in economic development. Much of the growth in APEC energy consumption is driven by demand for energy to generate electricity. APEC member economies (table 1) include the world’s largest producers and consumers of energy (the United States. the largest exporters of coal (Australia). China and the Russian Federation).2 energy markets in APEC APEC energy markets provide a diverse and dynamic setting for implementing regulatory reform. Developments in the electricity supply industry.

the developed economies together accounted for 69 per cent of total APEC primary energy consumption. In 1999.5 per cent a year respectively. The industry has also been the focus of most reform efforts to date and is the highest priority on the regulatory reform agenda for many economies.4 per cent a year. natural gas and nuclear power have increased their shares of energy consumption over the period since 1980. and more rapid growth in the other groups. This has declined from 48 per cent in 1980. the latest year for which comprehensive data are available. The fuel mix varies across economies. energy costs. Growth in energy consumption over the past twenty years has varied widely across the region. electricity and heat that occurs with rising personal incomes. This is largely because of the extensive use of petroleum products in the transport sector where there are few fuel substitution possibilities. with relatively slow growth in the developed economies of 1. The mix of fuels used to generate electricity varies widely and is changing continually. largely in response to energy security and fuel diversification concerns in some economies. production and trade in APEC APEC economies account for approximately 60 per cent of world primary energy consumption. Growth in energy consumption in China has averaged 4 per cent a year since 1980. accounting for 39 per cent of total primary energy consumption in 1999 (figure 1). Coal now accounts for 30 per cent of the regions’ primary energy consumption and gas for 22 per cent. followed by China (17 per cent). energy consumption has expanded by 7. reflecting differences in resource endowments. This has been underpinned by strong economic growth. Energy consumption in APEC Oil is the dominant fuel used in APEC.2 per cent and 4.supply and use throughout the region. Energy consumption. accounting for 38 per cent of the total (figure 1). In the newly industrialised economies and the developing economies (other than China). the other developing economies (8 per cent) and the newly industrialised economies (6 per cent). economic development and economic structure. Coal. Crude oil and petroleum products are the major fuels used in the developed economies. Gas accounts for 27 per 18 Deregulating energy markets in APEC . rapid industrialisation and increased use of energy services such as transport.

crude oil and petroleum products dominate the energy consumption mix (61 per cent). The share of gas is particularly high in some of the developing economies where there are abundant gas reserves. Electricity generation and industry are together the major energy end uses in APEC. followed by gas (23 per cent). Chinese Taipei. Coal is by far the dominant fuel used in China because of the availability of extensive and low cost domestic reserves. In the other developing economies. The growth in the share of gas is largely a result of increased gas consumption in electricity generation. Growth in electricity demand has been a driving force behind the increase in total primary energy consumption in many parts of the APEC region. oil is widely used for electricity generation in some economies such as Singapore and to a lesser extent. these shares vary significantly across development groups in the region (figure 2). for example. accounting for 87 per cent of the total (figure 1). In addition to extensive use for transport in all the newly industrialised economies. However. compared with 23 per cent in 1980. Electricity output in the region has grown at an average rate of almost 4 per Deregulating energy markets in APEC 19 . Transport accounts for 21 per cent of the APEC total. 1999 Coal Oil Gas Nuclear Other Other developing Newly industrialised Developed Total APEC cent of energy consumption in these economies. Crude oil and petroleum products also dominate energy consumption in the newly industrialised economies.1 100 80 60 40 20 % China Primary energy consumption. by fuel. Gas accounts for 41 per cent of total energy consumption in Malaysia. and 31 per cent in Indonesia. each accounting for 23 per cent of the total in 1999.

1999 Other transformation Industry Transport Other Other developing Newly industrialised Developed Total APEC cent a year for the past twenty years. by end use.2 Electricity 100 80 60 40 20 % China Energy consumption. however. the fuel mix varies widely between and within the groups in the region (figure 3). 1999 Coal Oil Gas Nuclear Other Other developing Newly industrialised Developed Total APEC 20 Deregulating energy markets in APEC . nuclear (16 per cent) and hydropower (14 per cent). as the share of gas (19 per cent in 1999) has risen. Again. Twenty per cent of total electricity output in these economies 3 100 80 60 40 20 % China Fuel mix for electricity generation. Coal is the major fuel used to generate electricity in APEC.7 per cent a year. 41 per cent of electricity is generated by coal. This has been more rapid in the developing and newly industrialised economies than in the developed economies. accounting for 44 per cent of the total in 1999. however. where growth in electricity output has averaged around 2. This share has gradually fallen. followed by natural gas (17 per cent). In the developed economies.

it is the dominant form of electricity generation in Canada and New Zealand where hydro capacity is relatively abundant.is generated in nuclear plants. electricity supply industries have relatively high gas use. Gas use is particularly high in Indonesia and Malaysia. While hydropower accounts for only 13 per cent of total electricity output in the developed economies overall. where it accounts for more than 75 per cent of the total. by fuel. The United States. oil for 27 per cent and gas for 21 per cent (figure 4). 33 per cent of electricity is generated in gas fired plants. the United States and Canada are the largest producers of natural gas. and are particularly dominant producers of coal and gas. with Japan and the United States the largest users of nuclear power. while the Russian Federation. In the developing economies (other than China). Coal is also the major source of electricity generation in the newly industrialised economies (40 per cent) and in China. China and Australia are the world’s largest coal producers. Coal accounted for 39 per cent of total APEC production in 1999. The production mix varies widely 4 100 80 60 40 20 % China Primary energy production. 1999 Coal Oil Gas Nuclear Other Other developing Newly industrialised Developed Total APEC Deregulating energy markets in APEC 21 . Energy production in APEC APEC economies account for around 54 per cent of world energy production. and developing. where there are relatively abundant reserves. The trend toward new gas fired power plants also partly explains why economies with relatively new.

the Republic of Korea. In the newly industrialised economies. while gas accounts for 28 per cent of total primary energy production. APEC as a whole is a net importer of energy. Japan.across the region. With the major exception of oil imports from the Middle East. and Chinese Taipei. mainly due to differences in resource endowments. each with import dependence greater than 80 per cent. The largest importers are the United States and Japan and their imports are dominated by oil. China. In the other developing economies. Coal is the major fuel produced in the developed economies. the world’s largest importer of coal. The developing economies (other than China) accounted for the next largest share. Australia is the largest coal exporter in the world. nuclear power is by far the dominant source of primary energy production. APEC energy trade is predominantly intraregional. the newly industrialised economies are the most dependent on imports (97 per cent of energy consumption in 1999). accounting for 33 per cent of the total in 1999. As a group. Coal is widely traded within APEC. accounting for 75 per cent of the total. with limited energy reserves. at 56 per cent. reflecting significant oil and gas exports from Indonesia. the Russian Federation and Canada the largest gas exporters and Indonesia the largest exporter of liquefied natural gas. The major energy exporters in the developing group are Indonesia. with 24 per cent. In the developing economies other than China energy exports exceed energy consumption. accounting for 89 per cent of the total. Singapore. Mexico and Malaysia. followed by the developed economies (25 per cent) and China (2 per cent) (figure 5). The developed economies together accounted for 65 per cent of total APEC energy exports in 1999. Energy trade in APEC The major energy producers in APEC are also among the world’s largest energy exporters. oil production is also significant. Coal dominates energy production in China. followed by oil at 19 per cent. relies predominantly on APEC 22 Deregulating energy markets in APEC . Despite the strong export orientation of several member economies. Japan. Oil accounted for 86 per cent of energy imports to the United States in 1999 and 65 per cent of imports to Japan. Mexico and Malaysia. Economies that are particularly reliant on imports to meet their overall energy requirements include Hong Kong.

Brunei Darussalam is another major LNG supplier to Japan. all electricity industry assets have been privatised and competition has been Deregulating energy markets in APEC 23 . Indonesia. In Chile. the world’s second largest LNG importer. Malaysia and Australia are the largest LNG suppliers to Japan. In some economies substantial reforms have already been implemented. Australia. which is the world’s largest LNG importer. Within south east Asia. More than half of Canada’s total gas production is exported to the United States. in both directions. China and the United States are also the major suppliers of coal to Korea. There are also several major gas trading relationships in the region. as well as South Africa. for example.5 80 40 % –40 China Energy import dependence. Indonesia and Malaysia are the major suppliers of LNG to Korea. Canada is a major supplier of pipeline gas to the United States. Further substantial changes are proposed or are being considered over the next decade. Pipeline gas is also traded. between the United States and Mexico. the United States. China and the Russian Federation). Canada. Malaysia supplies pipeline gas to Singapore. Structure and regulation of energy industries in APEC Electricity Strong growth in electricity consumption across the APEC region over the past two decades has been accompanied by major changes in the structure and regulation of electricity supply industries. 1999 Other developing Newly industrialised Developed Total APEC suppliers (Australia.

several have wholesale competition. there are some common features. In many other economies. while in some economies generation has 2 Structural and regulatory characteristics of selected APEC electricity industries Generation separate from network functions in most states. monitored by a regulator. IPPs must sell to PLN. transmission. state owned vertically integrated monopolies still dominate. In many economies there is full integration from generation through to retail supply. Two vertically integrated private utilities with regional monopolies. State owned vertically integrated State Power Corporation of China (SPCC) involved in all stages. Vertical integration (where an enterprise controls two or more of the four stages — generation. IPPs sell to SPCC or regional utilities. Majority (51 per cent) state owned vertically integrated monopoly. China Indonesia Japan Korea 24 Deregulating energy markets in APEC . State owned vertically integrated utility (PLN) involved in all stages. Regulated by local and central governments. Varies across provinces. Independent regulator. Mainly vertically integrated public monopolies. Ten private vertically integrated utilities with regional monopolies. Competition in all stages. limited IPPs (around 6 per cent of generating capacity). Mixed private and public ownership. All private ownership — 26 generators. third party access and retail competition in the national market (southern and eastern states). with further reforms planned. Limited retail competition for large consumers. The current characteristics of APEC electricity industries and approaches to reform vary widely across the region (table 2 and appendix A). Some self generation and IPPs. regulated by provincial governments. Independent regulators.introduced in all stages of supply. However. Continued ➮ Australia Canada Chile China Hong Kong. Two provinces (Alberta and Ontario) have retail competition. most economies have introduced some competition and private participation in the generation sector of the industry. distribution and retail supply — in the supply chain) is common. Network owners required to offer open access. However. Compulsory wholesale pool. five transmission companies and 36 distribution companies. Korea Electric Power Company (KEPCO).

Singapore Chinese Taipei Thailand United States Viet Nam Sources: Communication with government representatives. National Power Corporation (NPC). State owned Electricity Generating Authority of Thailand (EGAT) dominates generation and is also the sole supplier of transmission services. competition for larger customers. Regulator is the Electricity Department of the Ministry of Industry. Philippines Mixed private and state ownership in generation. State generator. Malaysia Mexico New Zealand Competing private and public generators.c). responsible for distribution and retail. Mixture of private and public ownership. public monopoly in retail supply to small customers. EIA (2000. State owned. Wholesale markets have been established in California and Pennsylvania–New Jersey–Maryland (PJM). are independent accounting identities within EVN. distribution and retailing.b. Voluntary wholesale market.2 Structural and regulatory characteristics of selected APEC electricity industries continued Mixed private and public ownership in generation (IPPs account for around a third of total capacity). Public utilities with regional monopolies are responsible for distribution and retail supply. Deregulating energy markets in APEC 25 . distribution and retail. NPC is also a regulator. New England is adopting the PJM model. Tariffs regulated by an independent authority. State owned vertically integrated monopoly (Taipower). Distribution companies have monopolies in most states. limited IPPs which must sell to Taipower.c). and five smaller retailers. EGAT is also a regulator. State owned Electricity of Viet Nam (EVN) is a vertically integrated monopoly. 29 independent distributors with mixed ownership. Tariffs for end users are regulated by a government committee. vertically integrated companies dominate generation (IPPs account for only 2 per cent) and have monopolies in transmission. Light handed regulation. World Energy Council (2001). is also monopoly supplier of transmission services. Independent regulators. vertically integrated public utilities with regional monopoly in transmission. IEA (1999. Local and provincial electricity departments. five major competing retailers. four of which are significantly integrated with generation. 2002b. Private utilities have regional monopolies in distribution and retailing. single public transmission company. Mainly state ownership in generation. Vertical integration is common. IPPs sell to the main utility (Federal Electricity Commission) under long term contracts. 2000. 2001a. while retail competition has been introduced or is scheduled to be introduced in seventeen states. separate state utility responsible for transmission and distribution.

Chile and Hong Kong. Canada and the United States. The details and timing of reform packages vary widely. Continued ➮ 26 Deregulating energy markets in APEC . particularly in generation. Chile and the eastern states of Australia have full ownership separation of all functions. However. All of the economies included in the study have some private ownership in generation. but private generators now account for 50 per cent of total capacity (World Energy Council 2001). purchasing all electricity for sale to consumers. 3 Proposed electricity reforms. the most common supply arrangement involves a single buyer. although in many cases the private share is small. Transparent open access tariffs to network. Consumer choice is limited in most cases. While the entry of IPPs. Separation of transmission and generation assets. and in parts of Australia. Reform proposals for the economies included in this study are summarised in table 3 (with further details provided in appendix A). restructuring and privatisation has created some competition in generation. The most widely adopted and proposed reform measure is the introduction of private ownership. Chile and New Zealand. with full retail competition implemented in only two economies. selected APEC economies Australia Canada Chile Full retail competition in the national market by 2003. China are the only economies with full private ownership of assets in the electricity industry. usually state owned. in the Philippines the National Power Corporation was the sole generator until 1987.been separated from the other functions. Large consumers are able to choose their supplier in several economies. State ownership is also common. through both privatisation of state owned assets and the entry of independent power producers (IPPs). For example. in many cases the private share remains small. In some cases private generators have already captured substantial market shares. Plans to make private investment more attractive to meet growing demand. Plans in several provinces to promote competition and develop wholesale markets.

IPP share to increase. World Energy Council (2001). Competition between private generators and corporatised subsidiaries of EGAT. selected APEC economies continued China Hong Kong. encouragement of additional IPPs. EIA (2000. distribution system to be privatised. new regulatory powers for the Minister for Energy. Federal Electricity Commission will continue to own the transmission system. integrated utilities to be allowed. full contestability in retail supply. structural separation of the main public utility. 2001a. Singapore Chinese Taipei Thailand United States Further development of wholesale markets and introduction of retail competition. retail competition to be adopted progressively. IEA (1999. China Indonesia Japan Korea IPPs and state owned generators to compete. 2000. Philippines National Power Corporation to be privatised. transmission to be opened to private companies. Wholesale spot market to be established in 2002.b. Government owned generation assets to be sold. various proposals being considered.c). separate and independent regulated monopolies to be responsible for transmission and distribution. Malaysia Mexico New Zealand New governance board to be established.c). 2002b. Deregulating energy markets in APEC 27 . full contestability in retail supply after 2009. Distribution open to private companies and consumers to choose retailer. More IPPs and open bidding for new power plant projects. unbundling of PLN. New regulatory framework to be established. all consumers to have choice of supplier by 2003. More private sector involvement to be encouraged. retail supply to be competitive in 2004. consumers to eventually be given choice of supplier. State owned generators and distributors to be sold. Competition in generation through entry of IPPs. Agreements covering the two current utilities expire in 2008. Sources: Communication with government representatives. post 2003. open access to networks. Competition in generation through sale of KEPCO assets and entry of IPPs.3 Proposed electricity reforms. separation of all transmission and generation to be considered. Independent regulator to be established. Viet Nam Plans for competition in generation by accounting separation of generators in EVN and entry of IPPs.

Singapore and parts of Australia and the United States. mainly through the ownership of pipeline assets. All but one (ENAP in Chile) of the nine state oil and gas companies are also integrated into downstream activities. structure. Approaches vary. Economies with relatively short term plans for an extension of retail competition to smaller consumers include Japan. In some cases. market organisation and regulation (table 4 and appendix A). There is government involvement in exploration and production in most economies. As owners of all or most gas reserves. State oil and gas companies are directly involved in exploration and production in all but four of the gas producing economies identified in table 4 (Australia. with full ownership separation in Chile and parts of Australia. Some private producers are also vertically integrated. Canada and the United States. adopted in other cases. Only six of the listed economies currently have independent regulators. and weaker forms of separation. governments decide the terms and conditions of access to gas resources. Introduction of full retail competition is often the final stage in a phased program of reform. in Korea. Canada. Regulatory arrangements for electricity supply industries are usually complex. The state firms are typically involved in exploration and production joint ventures with private firms. Details and timing vary widely. New Zealand and the United States). full retail contestability is planned to be introduced after 2009. several economies have firm plans in the form of enabling legislation and a reform timetable. In addition to those economies or parts of economies where retail competition has been introduced. retail competition is a long term plan — for example. 28 Deregulating energy markets in APEC . Independent regulators — independent from the relevant ministry — are widely considered a desirable feature of a liberalised electricity industry (IEA 1999). and five plan to follow suit.Separation of the network functions of the electricity supply industry (transmission and distribution) from the potentially competitive functions (generation and retail supply) has also been widely adopted and is widely proposed. Natural gas As with electricity. requiring vertically integrated firms to keep separate accounts for each function. natural gas industries in APEC are characterised by diversity in patterns of ownership.

producers to sell directly to consumers. While major reforms have been implemented in Australia. the reform process is ongoing. including privatisation. some vertical integration. Among the gas producing economies. Canada. Private firms responsible for all other functions. pipeline owners are required to provide third party access. third party access to major pipelines. Korea and Singapore (which each import all their gas requirements) also plan reforms. There is competition to supply some users (mainly large users) in Australia. some competition to supply large consumers. ENAP. For example. State owned oil company. Canada. 4 Structural and regulatory characteristics of selected APEC natural gas markets – current and planned Mainly private ownership. Japan. Private firms undertake exploration and production. Continued ➮ Australia Canada Chile China Indonesia Japan Deregulating energy markets in APEC 29 . regional monopolies control distribution and retailing. Reforms in 2000 allow possibility of majority foreign stakeholdings. Upstream reforms are being considered. Four state owned firms dominate exploration and production. Indonesia and Thailand propose major reforms. Mainly private ownership. with some joint ventures in exploration and production. Chile. reforms to encourage greater upstream competition are currently being considered in Australia. establishment of an independent regulator. New Zealand and the United States. State owned Pertamina is involved in all stages. Pipeline owners in these economies are required to provide access to their pipelines under either regulated or negotiated terms. is responsible for exploration and production. distribution and retailing. while China Petrochemical Corporation (SINOPEC) dominates transmission. Foreign participation via joint ventures. competition to supply most users. with some joint ventures.Competition to supply end users is limited in most cases. Consumers to be allowed eventually to deal directly with producers. structural changes and pipeline access and regulatory arrangements to encourage competition in supply to end users. Pipeline access regulated by an independent regulator. New Zealand and the United States. Mexico. Proposed reforms include: privatisation of Pertamina.

Reform proposals include: separation of retail supply from transmission and distribution.c). PEMEX is required to provide private firms with third party access to its pipelines. with gas and transport prices unbundled. retail competition to follow. Viet Nam State owned Petro Viet Nam and its subsidiaries are responsible for all stages of supply. Malaysia Mexico New Zealand All private ownership. Retail competition after the completion of the Bangkok Ring distribution network. Singapore Natural gas currently only used in electricity generation. Pipeline owners normally provide third party access. Sources: Communication with government representatives. PEMEX. production and pipelines. Review to be completed by end 2002. Interstate pipelines required to provide third party access. Kogas. Light handed regulation. Proposed reforms include: separation and privatisation of Kogas’s importing and wholesaling functions. PowerGas to convert pipelines to carry natural gas and provide third party access. has a monopoly over gas exploration and production and is also involved in transmission. State oil company.c). Independent regulators. separation of firms responsible for upstream activities and transmission and distribution/retailing. with some joint ventures with foreign companies. Proposal for state owned manufactured gas company. 2001b. Large buyers can buy directly from producers. distribution and retail supply. monopoly in transmission. Chinese Taipei Thailand United States Private firms responsible for all exploration and production and most transmission and storage. 2002b. apart from minor government involvement ending in 2001. with PTT Transmission to provide third party access to excess capacity. State owned Chinese Petroleum Corporation (CPC) is responsible for all exploration. State owned Petroleum Authority of Thailand (PTT) is the sole supplier of gas. Four states have implemented choice for retail consumers with more set to follow. EIA (2000.4 Korea Structural and regulatory characteristics of selected APEC natural gas markets – current and planned continued Vertically integrated state monopoly. involved in all stages. State owned Petronas involved in all stages — joint ventures in upstream. distribution and retailing. Main reform proposal — independent regulator to oversee increasingly privatised upstream industry. competition in wholesale market by 2003. no gas specific regulator. IEA (2000. The only liquefaction plant is fully foreign owned. 30 Deregulating energy markets in APEC . LNG facilities also owned by CPC but private bids being sought for new facilities. World Energy Council (2001).

All of the nine state owned firms in table 5 are vertically integrated. Mainly private ownership (small state share in upstream). Downstream reforms have also been widely implemented. Vertical integration is also common. Continued ➮ Australia Canada China Deregulating energy markets in APEC 31 . Private oil companies compete in open retail market.Oil Oil industries in APEC are also characterised by extensive state involvement in upstream activities. responsible for exploration and production. No specific oil regulation. Further major upstream and downstream reforms are planned in Indonesia. nine have state oil firms. Governments are also involved in downstream activities in a variety of ways. ENAP. with legislation passed by the parliament in October 2001. The major upstream reform implemented and proposed is the removal or easing of controls on private and foreign involvement. Chinese Taipei. State owned firm. the Philippines. regulation of prices. Malaysia. vertically integrated companies dominate all upstream and downstream functions. Downstream activities have been deregulated over the past decade in Hong Kong. often and increasingly with private joint venture partners. high degree of vertical integration. although these activities remain heavily regulated in many economies. distribution and retailing. have been eased. with some joint ventures. State owned. ENAP also owns all three domestic refineries which face competition from imported petroleum products. Of the thirteen oil producing economies listed in table 5. 5 Chile Structural and regulatory characteristics of selected APEC oil markets – current and planned All private ownership. such as petrol station location and ownership. Japan. with international oil companies often involved in exploration and production as well as refining. with some foreign joint ventures permitted. Some controls on importation of refined products have been lifted to promote competition and some restrictions on retail prices and other retail activities. control of trade in petroleum products and regulation of retail supply activities. including ownership of facilities. China. provincial and federal regulators. and Thailand.

IEA (2000. Retail market deregulated since 1991. State owned PEMEX is vertically integrated with a monopoly in exploration and transportation.c). Light handed regulation. Recent reforms include removal of restrictions on ownership of petrol station sites.c). with a high degree of vertical integration. 2002b. Proposed reform — greater use of private capital in upstream activities. New laws passed in October 2001 to promote competition. no upstream industry. No upstream. downstream sector open to competition. Pipelines and storage also controlled by Petro Viet Nam and distribution/retailing controlled by several state enterprises. Proposed reforms: privatisation and unbundling of Pertamina. State owned Chinese Petroleum Corporation (CPC) is involved in all stages. Viet Nam Upstream controlled by state owned Petro Viet Nam. China Indonesia Japan Korea Malaysia Mexico New Zealand All private ownership. some joint ventures with private firms in upstream activities. Three private vertically integrated firms downstream. Philippines Singapore Chinese Taipei Thailand Downstream deregulated in 1998. with some vertical integration — producers jointly own the single refinery. Some independent retailers. six private firms involved in refining. United States All privately owned. plan eventually to privatise CPC. Some private involvement allowed in production and distribution and petrochemical plants. establishment of new regulatory authority. state involvement in one of the three refineries and also in exploration and production. State owned. World Energy Council (2001). 32 Deregulating energy markets in APEC . private ownership downstream. vertically integrated Pertamina has monopoly downstream. Sources: Communication with government representatives. no upstream industry. EIA (2000. as well as distribution network and retail outlets. Deregulated refining and retail supply sectors. Deregulated downstream sector. competing refiners and retail suppliers to be allowed. privatised retail supplier competes with international oil companies. State owned Petroleum Authority of Thailand (PTT) part owns refineries and is involved in production and petrochemical plants. Hong Kong. State owned Petronas involved in upstream joint ventures. 2001b. with some joint ventures with foreign firms. Retailers are PEMEX franchises. no retail regulation.5 Structural and regulatory characteristics of selected APEC oil markets – current and planned continued No upstream.

Canada. Indonesia. Canada. In Australia. Thailand. China. the United States and Viet Nam) are significant exporters of coal to world markets. Japan announced recently the closure of its last domestic coal mine. six (Australia. Chile.Coal Ten of the eighteen economies included in this study have domestic coal industries (Australia. Canada. New Zealand. Of the ten producers. In the other economies state owned firms own and operate all or some coal mines. however. China. governments are involved in exploration and production through the granting or allocation of permits. Indonesia. the United States and Viet Nam). As owners of all or most coal resources in each economy. Mexico. regulation is not a significant issue in APEC coal industries. Deregulating energy markets in APEC 33 . Mexico and the United States all exploration and production is undertaken by private firms holding permits. Compared with the electricity and gas industries.

While differences in fuel costs and load characteristics could partly explain the price gaps between 34 Deregulating energy markets in APEC . there are some common driving forces. but there are many complex issues to resolve in implementing reform policies. much of the pressure for electricity deregulation has come from large industrial users concerned about relatively high prices in some regions (Joskow 1997). presented in chapter 5. to discuss some design issues for each energy type. The aims in this chapter are to review the rationale for regulatory reform in the energy sector and the role of markets and regulation. and to examine the available evidence on the impacts of regulatory reform on key energy variables such as prices and the performance of energy supply industries in economies that have already implemented reforms. In the United States. Rationale for regulatory reform in the energy sector Pressures for reform The pressures for regulatory reform in the energy sector vary across economies and energy types. These include some outside the APEC region. The potential benefits of this shift are substantial. Conclusions on the expected and actual outcomes of reform provide a starting point for the quantification of impacts on the energy sector and wider economic activity and trade. to outline the policies that are being implemented in various APEC economies and elsewhere. However.3 reforming energy markets – expectations and outcomes The widespread regulatory reforms that are being implemented or considered across the APEC region represent a major shift from extensive government involvement and heavy handed regulation to greater reliance on market forces and a narrower regulatory role. for example. Energy prices Consumers seeking lower energy prices have been a key source of pressure for reform.

Pressures for privatisation to be a central feature of reform in many economies have been driven by international evidence that. or. there has been a move away from cost recovery or rate of return regulation. the gaps largely reflected the impact of regulation and limited competition. poor capacity utilisation and excessive reserve margins. has also created pressure for reform. where competition is not feasible.and within states. Large price differentials across Australian states partly reflected the costs of transporting gas from remote fields. In Japan. policies such as the requirement for electricity generators to use relatively high priced domestic coal have resulted in the highest electricity prices in the OECD (IEA 2001d). to redesign regulation to provide better incentives for efficient energy supply. In a recent survey of electricity reform in APEC. which may allow firms to use labor and capital inefficiently and pass excessive costs onto consumers. governments have sought ways to promote competition and thereby reduce the need for regulation. on average. The potential for significant reductions in natural gas prices through increased competition has also been a driving factor behind gas reform policies in Australia (Industry Commission 1995). including excessive costs. but they also reflected the effects of limited competition and extensive regulation. Poor performance by regulated utilities Evidence of poor performance in many utilities. In Australia. the need to reduce prices was considered an important issue in seven of the nine economies examined (World Energy Council 2001). To deal with concerns about poor performance in regulated utilities. low labor productivity. to incentive based regulation. For example. publicly owned Deregulating energy markets in APEC 35 . reform has been encouraged by the need to keep prices for energy (and other inputs) at competitive levels as part of efforts to attract private investment in various sectors of the economy (Gausch and Hahn 1997). for example. The initial pressures for natural gas reform in the United States can also be traced to price differentials between interstate and intrastate markets and attempts by large users to seek lower priced gas (Jess 1997). a major study of energy transmission and distribution found that there were substantial gains to be made by improving the performance of energy utilities to international best practice (Industry Commission 1991). In many developing economies.

Policies such as regulating to protect domestic suppliers from import competition. thereby undermining supply security and reliability. However. Trying to strike a balance between creating incentives for more private sector involvement and addressing social and other policy objectives has been an important factor shaping the reform process. Fiscal pressures Budget constraints have made many governments reluctant to continue to subsidise inefficient energy suppliers or to commit to new large energy infrastructure projects. This factor has been particularly important in some of the rapidly growing economies in the Asia Pacific region. electricity generators have diversified their sources of fuel supply and it has been argued that system security has increased (Robinson 2000). Gonenc.utilities operate less efficiently than private utilities. Maher and Nicoletti 2000). for example. for example. particularly if social and environmental concerns are addressed through energy pricing and supply policies. where governments have been keen to encourage entry of independent power producers (IPPs) to meet increasing demand for electricity (World Energy Council 1998). Since privatisation and deregulation. coal consumers were dependent on a single nationalised supplier and supplies were frequently disrupted by strikes and other actions. it may be difficult to attract private investors into heavily regulated industries. especially in the electricity sector. avoiding major supply disruptions or price shocks) have been a further impetus for reform. 36 Deregulating energy markets in APEC . controlling depletion rates of nonrenewable resources or minimum stockholding requirements are unlikely to be the best strategy for ensuring security. is likely to enhance their monopoly power and reduce supply diversity. Energy market reform has also been required in some economies seeking assistance packages after the Asian economic downturn in the late 1990s. is planning to split and privatise the assets of the Petroleum Authority of Thailand as part of a package of reforms agreed with the International Monetary Fund in 1998 (EIA 2000). before privatisation and deregulation. Protecting local producers. Thailand. Security of supply Concerns about the effectiveness of government involvement and regulation in ensuring the security of national energy supply (that is. especially over the longer term (IEA 1999. In Britain.

increased the feasibility of creating competitive generation markets quickly (Joskow 1997). a primary aim is to encourage efficient supply and use of energy (APEC 2001. The role of markets and regulation While the objectives of reform vary across economies and energy types. there is a growing body of evidence of the possible benefits that may be generated (see Winston 1998 and Gonenc et al. Examples of benefits such as lower prices. While a desire to reduce prices has been one driving force behind reform. One problem with drawing conclusions about the success or otherwise of reform on the basis of observations about prices is that it is very difficult to disentangle the effects of deregulation from other determinants of price. Further. for example. it is necessary to understand what the reform process is trying to achieve. OECD 2000). more efficient supply. Another fundamental issue is that to judge outcomes.Technological developments The development of new technologies for producing and delivering energy has also created pressures for reform. is examined later in this chapter. better service quality. and the care needed when interpreting such evidence. Developments in natural gas powered plant have also added to pressure for gas market reform — as potential generators have sought access to cheaper gas — and for coal reform. Evidence of the impacts of energy sector reform. successful reform will not necessarily reduce all prices for all consumers. Evidence of successful reforms in other sectors and economies With a history of regulatory reforms now spanning more than two decades in some sectors. to ensure that its ability to compete was not constrained by regulation. Deregulating energy markets in APEC 37 . The development of the combined cycle gas turbine. views about the need for public investment in large scale energy investments have been challenged by the technical feasibility of smaller plants. greater customer satisfaction and increased innovation have provided impetus for reform. At the same time. critics of reform point to outcomes such as rising prices and supply disruptions in deregulated markets to support their case. with greatly reduced minimum efficient plant size and shorter construction times. IEA 2001a. 2000 for surveys).

Responding to price signals – allocative efficiency In a well functioning market. This market pressure should translate into productivity improvements. Privately owned firms in a well functioning capital market need to minimise costs in order to generate maximum profits for their shareholders. to deal with natural monopolies. For example. say for electricity in peak periods. externalities or abuse of market power. In the natural monopoly parts of the energy supply chain. thereby reducing the amount of capacity 38 Deregulating energy markets in APEC . competition may not be feasible. Competition between suppliers should force them to pass savings onto consumers in the form of lower energy prices.Regulatory reform has generally involved a two-pronged approach to meeting the objective of encouraging efficiency: • allowing markets to play a greater role in determining what is produced. if prices can adjust to reflect the cost of capacity constraints. consumers may switch demand away from peak periods. this should create benefits in several forms. as signaled by the prices that consumers are willing to pay. The challenge for regulators is to design a regulatory framework that provides incentives to minimise costs in these market segments. Reforms to create or liberalise markets and redesign regulation are expected to encourage efficiency and generate benefits in several ways. designing or redesigning regulations to ensure that they promote efficient outcomes. A shift away from cost of service or rate of return regulation to price capping or incentive regulation is an attempt to do this. by removing restrictions on firms and consumers. more efficient use of capacity and more cost effective choices of inputs. and • where there may be a case for intervention in markets. Profit maximising suppliers have an incentive to allocate resources to their most valuable use. consumed and invested. where one firm can supply the market at lower cost than two or more. Compared with a situation where prices are controlled by regulation or distorted by subsidies. Incentives to minimise costs – technical efficiency Replacing the poor incentives associated with regulation or public ownership with market disciplines puts pressure on suppliers to minimise costs. consumers face prices that accurately reflect the costs of supply and suppliers face prices that tell them how consumers value their services or products.

Prices may fail to reflect the full costs of supply because of externalities in energy production or consumption. For example. if governments introduce instruments targeted at reducing pollution rather than trying to specify certain limits on firm behavior. Incentives for innovation – dynamic efficiency Innovation is encouraged in well functioning markets because firms must continually seek ways to maximise profits. Policies to capture the potential benefits of reform The broad principles of increasing the role of market forces and designing regulation to encourage efficient outcomes underpin reform across each energy type. Furthermore. energy suppliers find it difficult to determine whether consumers value some product or service at more than the cost of supply. different economic. Deregulating energy markets in APEC 39 . technical and institutional characteristics of each energy type shape the policies that are required to achieve the broad objectives.required. Ensuring that there are incentives for innovation in regulated monopolies is a difficult challenge for regulators. Compared with some of the traditional policies that have been used to deal with externalities. investors need to be sure that regulations are not going to change over time. Provided they are confident of being able to capture adequate returns into the future. Another is to develop new products or services that consumers consider to be valuable. One way to increase profits is to find new or innovative ways to deliver existing products or services at lower cost. such as regulation of the location and operation of energy plants to deal with environmental externalities. the firm can determine the least costly way to reduce pollution. where the expected gains are the greatest due to its relatively high degree of regulation and government ownership and its important role in most economies. Much of the policy focus has been on electricity. However. firms will undertake the risky investments associated with innovation. undermining their rights to a return on the risks that they take when being innovative. policies that use market mechanisms to deal with externalities are likely to generate better outcomes. Regulations that result in transfers from owners of assets to users may undermine the incentive to innovate. With limited price signals.

Distribution involves transport at lower voltages from the transmission grid to end users. These supply arrangements have long been considered the best way to deal with the special features of electricity supply and demand. The options for changing the structure and operation of the industry are also influenced by these special characteristics. using various technologies with diverse cost structures. as the financial obligations of generators and customers must be measured and settled (Joskow 1997). In many economies. Important externalities are also associated with transmission network operation and use. Transmission is the high voltage transport of electricity from generators to distribution centres. but electricity cannot be economically stored. the integrated operator can take account of the interactions and quickly respond to problems that may arise. cyclically and randomly. Generation involves the production of electricity. all four functions have traditionally been supplied by vertically integrated public utilities or regulated private utilities with monopoly rights to supply electricity to specified areas. billing and servicing. Reliance on a single electricity supplier has evolved because of the natural monopoly characteristics of electricity transmission and distribution. which includes arrangements for delivery of electricity as well as associated services such as metering. along with providing the service of transporting the electricity. Vertical integration allows these externalities to be internalised — that is. The fact that there is no physical link between the power supplied by a specific generator connected to the network and a specific customer taking energy from the network adds to the cost and complexity of the coordination task. Failure of one generator can affect the stability of the whole network. The final stage is supply to end users. Generation capacity must be sufficient to meet the regular peaks in demand and random fluctuations. The transmission system performs this complex coordination task. generation and consumption must be balanced continuously to maintain the stability of the network and avoid sudden losses of power. seasonally. The high fixed costs and low marginal costs of providing the physical transportation system mean that delivering electricity through two or more networks would involve higher total costs than using one more intensively 40 Deregulating energy markets in APEC .Electricity Electricity supply can be divided into four stages. Further. Electricity demand varies hourly.

the basic elements in most reform models include: • separation of generation from transmission and distribution. While both functions have often been carried out by a publicly owned monopoly or regulated private monopoly. • competing generating companies (privately owned or corporatised) bidding into a power pool. emphasising the types of complexities and tradeoffs involved and some broad implications for the expected outcomes of reform. technological advances have enhanced the potential for entry by competing suppliers. However. pool reserve capacity. The following discussion provides an overview of some of the issues. although the system operation and coordination function remains a natural monopoly (IEA 2001a). It is beyond the scope of this report to examine in detail all of the complex issues involved in moving from the basic model to a practical approach to reform. For example. thereby facilitating decentralised electricity supply (IEA 1999). Developments in information technology have also reduced the price of sophisticated metering and grid control equipment. The average costs of the coordination function of the transmission system fall as the network expands and the system operator is able to better manage the risks of system failure. bundle demand and achieve the least cost order of dispatch of different types of generating capacity. the development of the combined cycle gas turbine reduced the minimum efficient plant size from 1000 megawatts in the early 1980s to between 50 and 350 megawatts currently. Deregulating energy markets in APEC 41 . • establishment of an independent regulatory body. Basic model for electricity reform The timing and approach to electricity sector reform vary widely across economies in the APEC region. • transmission and distribution companies (privately owned or corporatised) providing access to all network users on nondiscriminatory terms. and • all or part of the retail market open to competition. Generation and supply to end users are the potentially competitive parts of the electricity supply industry. It can be argued that in some cases duplication of the actual wires within a network may be efficient.(up to the point where capacity constraints become a problem).

this approach is likely to be the least effective in controlling anticompetitive behavior. However. However. The possible loss of economies of vertical integration must be balanced against the expected competitive gains in deciding whether to use this approach. First. A third unbundling option involves separation of the system operation functions. transmission and distribution within vertically integrated firms. rather than the bundled price that the vertically integrated utility would charge. complete structural separation of generation. Complete separation is likely to be more difficult where utilities are privately owned than when they are publicly owned. but decisions about network use are made by the independent operator. Three different approaches have been used to deal with this problem. Prices must be nondiscriminatory — the utility must charge itself the same price for transmission services as it charges competitors seeking third party access to the network. Such behavior could limit the scope for competition in generation. but they must retain separate accounts for each part of the business. directly removes the incentive to discriminate against potential competitors in generation. the separation of grid ownership from operational and investment decisions raises some 42 Deregulating energy markets in APEC . The utility can remain vertically integrated in the sense that it can own generation and transmission assets. This largely explains why this option has mainly been used where utilities are publicly owned. They must offer separate prices for generation and transmission services. but this is a much weaker form of separation. This option avoids the problems associated with compulsory divestiture of assets and does not require the extensive regulatory oversight that accounting separation involves. to ensure nondiscriminatory grid access for competing generators. as compulsory divestiture raises important property rights issues. transmission and distribution. Extensive regulatory oversight is required and it can be difficult to determine what constitutes a reasonable price and allocation of costs for different services. Firms can remain vertically integrated. A second option is accounting separation of generation. or were so prior to reforms. through compulsory divestiture.Unbundling and open access When the owner of monopoly transmission and distribution assets also owns generation assets it may be able to discriminate against potential generation competitors when setting access terms and conditions and making decisions about investments in the network. Any cost advantages associated with vertical integration are maintained.

where the utilities are privately owned. compared with generation (which accounts for a half to twothirds). which buyers and sellers can interact and how they can interact. the costs of impinging on private property rights? Market organisation Another fundamental issue for electricity reform is market design — in essence. For example. Unbundling of transmission and distribution from generation and retail supply opens up a range of alternatives. do the competitive benefits and lower regulatory burden associated with complete separation more than offset the possible loss in operational efficiencies and. Ownership separation is required in New Zealand (IEA 2001a). The main difference from the traditional model is that generation is separated and generators compete for the right to supply the single buyer (usually state owned) which then sells to captive retail customers. The best option will depend on the starting point and judgments about the balance of costs and benefits of each option. Under the traditional vertically integrated monopoly model all consumers must purchase electricity and associated services.difficult issue. In short. will it face incentives to make optimal decisions about use of the grid. Many different models have been used throughout the world and they can be characterised and labeled in various ways. For example. from a single supplier. such as transport and metering. Accounting separation is most typically used. A useful way to distinguish models is in terms of the extent of competition and consumer choice they involve. should it be regulated? Separation of the other potentially competitive part of supply — supply to end users — from distribution is also an important issue. retail reforms can have a substantial impact on efficiency throughout the industry. The model is widely used where reforms have allowed the entry Deregulating energy markets in APEC 43 . Unbundling of retail supply can take the form of either accounting separation or complete separation through divestiture. The single buyer model represents the smallest change from the vertically integrated monopoly model. Unbundling distribution and retail supply is an important step in the process of introducing competition and consumer choice. There is no competition at any stage of the supply chain and no choice for consumers. there is no unambiguously optimal approach to unbundling. While distribution and retail supply account for a relatively small share of the total cost of electricity supply. who should own the independent system operator.

The potential benefits to consumers may well exceed the direct effects on the retail margin. as progressively smaller customers are allowed access to the wholesale market. and metering costs are high relative to the margin paid for retailing services. full retail competition requires time of day metering. APEC economies currently using the single buyer model include Indonesia. the local distribution utility retains its monopoly over supply to retail customers. Generators may be required to sell through a pool. Japan. In California. given the very limited role of competition and consumer choice. Retail consumers have choice. Given that it involves competition between generators and choice of suppliers for consumers.of IPPs. the potential benefits from greater competition need to be balanced against the costs of implementing the model. for example. Malaysia. in terms of convincing consumers that moving to full competition is worthwhile. However. the model retains many of the weaknesses of the traditional vertically integrated monopoly model and. either through choice of a retail supplier (as the local distributor’s monopoly over retail supply is removed) or by direct access to the wholesale market. Under the wholesale competition model. or bilateral contracts between generators and distributors or large industrial users may be permitted. However. this model should provide incentives for cost efficiency in generation (IEA 2001a). However. the size of direct costs such as metering will be important. Consumers have shown limited willingness to take advantage of the opportunity to buy electricity and associated services from competing suppliers. The retail competition model represents the next step toward full competition. Mexico. Korea. it is unlikely to encourage allocative or dynamic efficiency. retail competition offers the best prospect for meeting the objective of efficient electricity supply and use. because the introduction of consumer choice will provide market discipline and put pressure on costs and prices throughout the industry. the Philippines. Wholesale competition is often used in the transition to retail competition. Thailand and Viet Nam (APEC 2001). For example. of the 300 new electricity service providers (ESPs) 44 Deregulating energy markets in APEC . but the distributors purchase electricity in a competitive wholesale market. If the process of deciding who builds and operates generation plants is open and competitive.

a key problem is that for bilateral markets to work it is necessary to define rights to transmission capacity. Implementation of both the wholesale and retail competition models raises a range of market design issues. In Japan. Pools and bilateral markets have been compared in terms of the extent to which they may facilitate uncompetitive behavior by bidders. Swan. only a handful remain (Sioshansi 2001). should the wholesale market involve a mandatory pool or bilateral trade with a voluntary pool? How should the price for power dispatched from the pool be determined? How frequently should bids be taken? The choice between mandatory pools and bilateral contracts illustrates the complexities involved in designing just one aspect of the market. A mixture of mandatory pools and bilateral contracts supplemented by optional pools is used across the Asia Pacific region (World Energy Council 2001). Schneider and Ye 2001). For most commodities it would be reasonable to expect that allowing bilateral trade. the network operator is a passive player. receiving bids and determining the lowest cost dispatch of capacity to meet demand. the network operator plays a central coordination and allocation role. For example. The network operator will make up any imbalances in the network. enforce transmission rights and manage any conflicts over rights (Short. The aggregators must have transmission rights to use the network. receiving demand and supply schedules from market aggregators. given the interdependencies between users of the grid (Joskow 1997). There is no consensus on which approach is best. would encourage efficient outcomes as it would provide more flexibility and scope to take account of specific requirements of different buyers and sellers. Graham and MackaySmith 2000). There is no unambiguous way to do this. Under a bilateral contract market. contestable consumers account for almost 28 per cent of retail electricity sales. There is no Deregulating energy markets in APEC 45 . either exclusively or in parallel with some centralised market.that entered following the opening of the retail market in 1998. However. but only 1 per cent of these has switched to a competing supplier (Fairhead. In a pool system. ensuring that demand and supply are balanced and the reliability of the system is preserved.

including both the price of energy and the price of transmission (IEA 2001a). To encourage efficient use of a network. the relevant costs are short run marginal costs. The challenge is to control monopoly power while ensuring that prices provide incentives for efficient operation and use of networks and optimal investment and innovation. It represents one of the most difficult challenges for policy makers. The price structures that have been adopted around the world vary in the extent to which they reflect costs. must be used to 46 Deregulating energy markets in APEC . they must increase to ration the available capacity. If there is excess capacity. prices should also reflect the costs of capacity constraints — that is. In addition to providing signals for efficient use of given capacity. Nodal pricing offers the greatest potential for encouraging efficient use of a network. in network industries where long run average costs are falling. To encourage new investment. prices should reflect the marginal cost of use. However. If there is excess demand for use of the network. If prices do not reflect the costs of capacity constraints when there is congestion then some less efficient mechanism must be used to ration the available capacity. prices guide investment decisions and determine whether costs are covered. Nodal prices are relatively high at those nodes and times when there is congestion. pricing to ensure efficient use of given capacity will not generate sufficient revenue to cover costs. which include the value of marginal transmission or distribution line losses and any additional costs of maintaining and operating the grid.conclusive evidence that one is likely to result in less competitive outcomes than the other (Short et al. such as priority rules for generators. Nodal prices adjust continuously to balance supply and demand for delivered energy. Setting prices above short run marginal costs when there is excess capacity will result in inefficiently low levels of network use. If prices do not reflect congestion costs then some alternative mechanism. prices must cover long run average costs. are relevant for investment decisions. or the costs of expanding capacity. 2001). Long run costs. Higher prices provide an incentive for users to reduce demand at congested times. Regulation of transmission and distribution Regulation of prices for access to and use of transmission and distribution networks has been a central component of electricity reform packages.

prices for use of networks are usually supplemented with additional charges. Zonal pricing is a simplified version of nodal pricing. regulators are also interested in controlling average price levels set by monopoly suppliers of transmission and distribution services. If congestion is not a significant issue. This method is widely used in the European Union. with prices set for each zone reflecting average congestion costs across the nodes in the zone. each part of the tariff can be set to reflect different costs for different locations. with fixed connection charges and capacity and energy use charges that may depend on the time of use (IEA 2001a). they will generally not generate sufficient revenue to cover costs. 74 per cent of OECD economies Deregulating energy markets in APEC 47 . then the disadvantages of this approach may be small. While they do not reflect congestion costs. While the structure of prices is relevant for encouraging efficiency. Distance related prices are a function of the distance between the buyer and seller. Postage stamp pricing involves a flat rate across all nodes and over pre-specified time periods. relative to the advantages of having a simpler pricing system where users know prices in advance. Zonal pricing is used in some parts of Australia and the United States. However. To deal with the need to generate sufficient revenues to cover costs. It therefore does not signal the costs of congestion at different nodes and times. For example. times and users.allocate scarce capacity. thereby providing signals for efficient use of electricity. Nodal pricing is used in New Zealand and the Pennsylvania–New Jersey–Maryland (PJM) market in the United States. Rate of return regulation is the most widely used method. However. they do reflect marginal transmission losses. High nodal prices also provide incentives to invest in new interconnections to congested areas. The most commonly used price structure is a multipart tariff. high implementation costs and informational requirements mean that the same tariff usually applies across broad customer groups and locations. Its effectiveness in providing signals for efficient use of existing capacity and investment in new capacity therefore depends on how close the zone average is to the actual costs at each node. The main advantage of this method over full nodal pricing is its relative simplicity. which vary with the distance between the buyer and seller (IEA 2001a). In principle.

Rate of return or cost based regulation allows the firm to recoup costs and earn a set rate of return on a specified base. are regulated. incentive based regulation is designed to provide incentives for cost minimisation. gas and water in the United Kingdom specifies that the regulator must take account of the special needs of certain groups such as rural customers. Regulation of end user prices can limit the scope for reform to deliver benefits. For example. pensioners and the disabled (Waddems 1999). despite the relatively high costs of supplying some consumers. particularly large users. Governments therefore continue to regulate their prices to control abuse of monopoly power. the firm may be able to reduce costs by reducing service quality. 2000). innovation and efficient investment. not profits. Furthermore. such as the level of X and the frequency with which the caps are adjusted (OECD 2000). rather than being implicitly embodied in the policies of government owned utilities. However. a desire of governments to ensure that all households have electricity supply at affordable prices. has often resulted in cross subsidies from 48 Deregulating energy markets in APEC . for a specified period that the firm can charge for a defined basket of services. The firm has an incentive to inefficiently expand the capital base to which the allowed rate of return applies. The regulator sets a price or revenue cap. including an adjustment factor X which represents the scope for productivity improvements. In contrast. Reform often means that these objectives and their implications must be explicitly set out. say by reducing supply reliability. Prices or revenues. even though this may increase costs. The effectiveness of incentive regulation in providing incentives for efficiency depends on the choice of key parameters. most end users remain captive to a single distributor. For example.had rate of return regulation for transmission in 1998 (Gonenc et al. using the methods outlined above. Regulation of end user prices While reforms have created effective choices for some electricity users. Profits are retained so the firm has an incentive to increase them by reducing costs or finding innovative ways to meet demand. a feature of many electricity reform packages has been a move away from cost based or rate of return regulation to incentive based regulation. In addition. governments often regulate end user prices to achieve social or other policy objectives. legislation covering the supply of electricity.

such as lengthy licensing procedures. given the difficulty in determining to what extent high prices reflect strategic behavior by generators and to what extent they reflect changing demand and capacity conditions and costs. The failure to allow retail prices to adjust to reflect changing market conditions has been an important factor contributing to the electricity supply problems in that market (see box 1). There are several policy options for dealing with abuse of market power. and are not prepared to use alternative instruments such as direct financial assistance. A further option is some form of price regulation. In California. If governments wish to continue to protect certain consumers from higher prices. Victoria and South Australia may be attributable to strategic behavior in the market (Short. Another is to require compulsory divestiture of assets by horizontally integrated generators to create competing generators. One option is to identify and remove any remaining barriers to entry or other regulatory restrictions on generators. Bushnell and Wolak 1999). strategic bidding is estimated to have resulted in prices rising 22 per cent above competitive levels in 1999 (Borenstein. Prices in the British market were estimated to be around 26 per cent higher than the imputed marginal cost of the marginal supplier over the period 1992–94 (Wolfram 1999).industrial and commercial consumers to domestic users and from urban to rural consumers. An example of end user price regulation creating problems for reform comes from the Californian electricity market. Deregulating energy markets in APEC 49 . Cross subsidies cannot be sustained in a fully competitive market. Horizontal market power The potential for generators to exercise significant market power by limiting supply to increase prices has been recognised since the early stages of reform of the British electricity market (Green and Newberry 1992). It may be difficult to design cost effective regulation. Studies of actual behavior in several deregulated markets claim that strategic bidding has been responsible for raising prices above estimated competitive levels. This will limit the role of prices in providing signals for efficient supply and investment and efficient use by consumers. or at least the threat of regulation. the costs of any regulation must be balanced against the potential benefits. they must restrict the pricing policies of electricity suppliers. For Australia. it has been estimated that in certain months up to half of the price paid for wholesale electricity in the states of New South Wales. However. that may limit competition. Swan and Rolph 2000).

Privatisation Privatisation has been a feature of reform in many economies. However. development proposals were delayed by community opposition and lengthy environmental review processes. wholesale prices soared. driven by government budget considerations plus a desire to encourage better performance by utilities. to hedge wholesale market price risks (Joskow 2001a). The problems with limited capacity can be traced to the time before deregulation. no new generation capacity was built in California. While wholesale prices were deregulated. price regulation exacerbated the problems. but instead result from the way that the regulatory reforms were implemented. 1 Policy design problems – the case of California’s electricity market The problems with California’s electricity reform program — with wholesale price increases of up to 500 per cent over a year (Joskow 2001a). wholesale spot prices averaged ten times their level in 1998 and 1999 (Joskow 2001a). rolling blackouts and utilities in severe financial difficulties — has led some policy makers to reconsider the benefits of reform. and rising gas prices resulting in generation cost increases. The first significant addition to capacity did not come on stream until summer 2001 (Joskow 2001b). For the first four months of 2001. 50 Deregulating energy markets in APEC . in the summer of 2000 a combination of limited generation and transmission capacity. With growing demand pushing the system to its capacity limits. retail prices were not allowed to adjust to moderate the peaks in demand and to provide signals for capacity expansion. soaring wholesale prices and a market that was only partially deregulated led to serious problems. The utilities were therefore forced into severe financial difficulties. In the four years leading up to deregulation. For the first two years progress was relatively smooth (Sioshansi 2001). reduced imports of hydro power because of water shortages). Incumbent utilities were required to purchase electricity in the wholesale market and sell to all consumers who did not choose to switch to a new competing supplier at the regulated price. The wholesale and retail markets in California were opened to competition in April 1998. The regulator rejected the utilities’ request to be allowed to negotiate fixed price long term contracts with generators. retail prices were frozen for up to four years. When the new rules were introduced. growing demand. combined with problems that were emerging before reform (limited capacity) and some factors that were independent of the reform process (soaring fuel prices for gas fired generation. as investors were uncertain about the new regulatory setting. Further. However. Rather than providing price signals to allow suppliers and consumers to respond to these circumstances. the problems in California are not inherent problems with deregulation.

financial rewards and penalties for managers are generally closely linked to performance. The sale of publicly owned vertically integrated utilities has been an important step toward facilitating competition in generation and. consumers are unlikely to benefit. In privately owned firms. The impacts of privatisation depend on the economic and regulatory environment in which the privatised entity operates. Turning a public monopoly into a private one is likely to encourage better performance in terms of lower costs and improved production techniques. in the state of Victoria in Australia four publicly owned generators were sold to separate buyers. including the threat of takeover. in practice it is difficult to design incentives that mimic those generated in markets. retail supply. Privatisation may also be necessary to ensure that potential entrants are not deterred by the prospect of competing with a publicly owned incumbent. which would not face market pressures and may be considered unlikely to be allowed to fail by the government. privatisation has often been an integral part of the package for promoting a more competitive industry. In cases where it is considered too difficult or costly to regulate a private monopoly or privatisation is not politically feasible. compared with those in publicly owned firms. This provides the decision makers in private firms with clearer incentives for good management. This involves creating incentives for the utility to operate more like a private firm. as managers try to maximise profits for shareholders. although regulation will to some extent dampen the market signals that the private firm receives and will involve costs. In the electricity industry. also weakens the incentives facing public managers. However. as well as being a means for promoting better performance in utilities. creating four independent players in the market. where performance is measured in terms of generating returns for shareholders. However. Regulation can be used to control the monopoly power and ensure that some benefits are passed on to consumers. horizontal separation and privatisation has provided stimulus for competition. In some cases. some utilities have been corporatised. The absence of capital market pressure.Privatisation is expected to generate benefits by providing incentives for managers to make better use of existing capacity and better decisions about investment in new capacity. For example. in contrast to a private Deregulating energy markets in APEC 51 . For example. objectives that may be difficult to measure. where penalties and rewards are unlikely to be as strongly linked to economic performance and where there may be multiple. to a lesser extent. and in some cases conflicting.

2000). For example. so it may be several years before sufficient time series data are available to compare a given firm’s performance before and after privatisation. Given that the full environmental impacts of energy supply and use are not reflected in market prices. as prices can adjust to signal costs and benefits. Despite these difficulties. 52 Deregulating energy markets in APEC . more efficient generating capacity with lower emissions of greenhouse gases and certain air pollutants. unbundling and open access has facilitated the utilisation of smaller scale. comparing similar private and publicly owned firms. Further. Restrictions on new capacity. However. lower emissions may come at the expense of higher generation costs and prices. These environmental policies are likely to involve tradeoffs. any analysis needs to recognise that it will take time for a privatised firm to adapt to its new environment. the available evidence from studies of firms over time suggests that privatisation does tend to improve profitability and performance (Gonenc et al. finding comparable firms and isolating the effects of ownership can be difficult. for environmental and other reasons. Incorporating environmental objectives The interaction between environmental policies and other regulatory reforms is a further important policy design issue. Privatisation is usually part of a package of reforms and disentangling the effects of various components of the package is difficult. governments often take additional steps to address environmental concerns. a corporatised firm does not face a threat of takeover to discourage poor performance. There is likely to be an expectation that the government will support a poorly performing firm. Identifying and measuring the effects of privatisation is difficult. An alternative to time series analysis is cross sectional analysis. Restrictions on generating plants locating in certain area may improve local air quality.firm. For example. were one factor contributing to the supply shortages and high prices in California in 2000 and 2001 (see box 1). Reforms to promote competition and encourage efficiency in electricity supply can be expected to deliver environmental benefits in several ways. particularly if the firm is serving noncommercial functions for the government. Policy makers can then decide whether the benefits of environmental policies more than offset the costs. but if capacity shortages result then prices may rise. Regulatory reform helps to make these types of tradeoffs explicit and transparent.

Faced with opportunities to supply gas for power generation in competitive electricity markets. Continuous balancing of supply and demand is not required and. prior to any reforms. so problems of entrenched poor performance and limited competition are likely to be less severe. because gas moves relatively slowly in pipelines.Natural gas The natural gas industry was one of the earliest to be subject to regulatory reform in the APEC region. Without the complexities of network interactions and the need for system coordination. often in parallel with electricity reform. so there is less need for excess capacity. with natural gas a major input to electricity generation and a competitor with electricity in end use markets. Since then many economies have initiated gas reform programs. has been characterised by greater private ownership and less vertical integration than electricity supply. The close links between the two industries. Demand varies across seasons and with time of day. Further. gas supply and demand issues are less complex. However. there are many differences between the two industries. Deregulating energy markets in APEC 53 . in terms of physical and economic characteristics. gas supply does have some characteristics that make it more difficult to create competitive markets compared with other commodities such as oil. gas supply does not involve the diversity of cost structures that characterise electricity supply. and these shape the policies adopted and expectations about the potential benefits of reform. In addition. but gas can be economically stored. so the key role that the electricity network operator plays in organising the least cost order of dispatch is not relevant for gas. in most economies the natural gas industry. the gas supply industry would seem to be more amenable to competition and light handed regulation than electricity markets. with deregulation commencing in the United States in 1978 with the removal of some wellhead price controls in the Natural Gas Policy Act. Key characteristics of natural gas supply and demand Compared with electricity. unexpected disruptions to supply or demand need not affect the stability of the whole supply network. As in the electricity industry. gas producers have been keen to obtain access to pipelines on the best possible terms. However. a central issue for gas market reform has been how to create more competitive and flexible markets in the presence of natural monopolies in transmission and distribution. has created pressure for concurrent reforms.

often in joint venture arrangements. The experience of other economies in the region in promoting efficient pipeline based gas industries is therefore relevant. Vertical integration is an alternative mechanism for managing the risks involved in large scale specific investments. For transport by tanker. capacity can usually be expanded by adding compressors at considerably lower cost than building a new pipeline.While oil and gas have similar production technologies and costs. several major pipeline projects are in progress or being considered to exploit the massive gas reserves in the region (EIA 2000). While many Asian economies do not have well developed pipeline networks. Natural gas supply has traditionally been characterised by long term contracts. For transport across land. gas is much more costly to transport. A given section of pipeline can carry fifteen times as much energy in the form of oil than it can in the form of compressed gas (Jensen 1992). Pipelines exhibit natural monopoly characteristics. usually involving some ‘take or pay’ obligation. Investors in these large projects usually require long term contracts and a long term plan for project development. gas must be liquefied. They involve large fixed costs and low marginal costs such that a given level of demand can usually be met at lower cost by using one pipeline more intensively rather than building a second one. are a way to manage the risks of opportunistic behavior where large specific investments in pipelines are required to link particular gas fields with particular customers or groups of customers. which accounts for a small but growing share of world gas trade. Most of the gas consumed in the world is primarily transported to consumers via pipelines. Long term contracts are also a feature of LNG markets. considerably larger pipelines and extensive investment is required. The gas must be compressed and. compared with oil. and a large commitment to pipeline investment will generally have to be made before a field is developed. Even when a market grows beyond the initial design capacity of a pipeline. This makes it considerably more costly to transport than oil. It has been used to various 54 Deregulating energy markets in APEC . pipelines are the only economic option. relying instead on imported LNG with major users located near import terminals. Such contracts. LNG projects usually involve integrated development of gas fields and capital intensive processing and transport facilities. Gas supplies are often located long distances from markets.

and regulate. specifying conditions such as whether the holder has rights to firm or interruptible service. and then separately arrange for its transport. unbundling refers to separating the market for the gas commodity from the market for gas transport services. In the traditional model for gas supply in many economies. • upstream competition. although generally less extensively than in electricity. a distinction that determines the priority given to the contract holder during capacity shortages (Juris 1998). often long term. gas supply.degrees in APEC gas markets. Creating a distinct market for transport services is less complex in gas than in electricity because it is possible to define clear capacity rights to gas pipelines. The purpose is to separate. consumers have only been able to purchase delivered gas from a single pipeline owner at a bundled price incorporating the cost of the gas plus the cost of transporting it. supplemented by sales in spot markets in some cases. and • regulation of wellhead prices. Short term changes in demand or supply may leave some transport contract holders with unused capacity rights. Unbundling and open access to pipelines creates the opportunity for gas consumers and producers to negotiate directly for the sale of gas. Pipeline companies sell transport contracts. Deregulating energy markets in APEC 55 . Reselling these to others who need capacity will result in a more efficient outcome than simply wasting the capacity. Unbundling and open access In the context of gas reform. the natural monopoly part of the supply chain — transport services — and allow competition to develop in the potentially competitive part of the industry. Secondary markets promote efficient allocation of transport capacity. The effectiveness of unbundling and open access in creating or contributing to a more efficient gas industry depends on several key issues. Most gas commodity sales are arranged through bilateral contracts. • vertical separation and privatisation. where capacity contracts can be resold. In some relatively developed markets there are also secondary transport markets. including: • regulation of pipeline access and pricing.

Even if it is not a seller of gas. Even in the relatively small market of New South Wales in Australia. a second transmission pipeline was completed in 2000 to provide competition for the existing pipeline. there may be multiple pipelines delivering supplies from different locations. firms can remain vertically integrated. Vertical separation and privatisation Separation of vertically integrated firms is not essential for an effective unbundling and open access policy. the difficulty in making this weaker form of separation effective may mean that full separation is the preferred option. As discussed in relation to electricity reform. provided accounts for each activity are separated and it can be established that prices for transport for third parties are nondiscriminatory. in order to extend its market power into the downstream market. with several transmission pipelines often carrying gas which is then delivered into a single distribution network. restricting use to less than efficient levels. there are some important constraints on the market power of pipeline owners. Without regulation. because the cost of failing to invest in new pipelines is likely to be greater than the cost of restricting access or setting monopoly prices (Productivity Commission 2001).Regulation of pipeline access and pricing Whether and how to regulate access to natural monopoly pipelines is one of the most difficult issues facing gas policy makers. the unregulated owner of a natural monopoly pipeline has an incentive to charge monopoly prices for access. while the technology and cost structure of pipelines mean that it is usually more efficient to have a single pipeline linking a given gas source with a given market. This largely reflects the judgment that. The appropriate policy depends on the circumstances in 56 Deregulating energy markets in APEC . even without regulation. given that it impinges on the property rights of pipeline owners it may deter new investment. However. regulation also has costs. This has long been the case in the United States. For example. a pipeline owner who is also a seller of gas has an incentive to restrict access to the pipeline for potential competing gas sellers. Access regulation has tended to be more light handed in gas markets than in the electricity industry. Regulation of access and pricing can potentially deal with these problems. but sells transport services only. For example. However. Finding the right balance between the rights of pipeline owners and users is a crucial issue.

there are many competing gas producers. There must also be competition in the upstream segment of the supply chain. in the only state where significant upstream reform has been initiated — Western Australia — wellhead prices have fallen by 25–50 per cent (National Competition Council 2001). Upstream competition As in the electricity sector. such as the United States. In Australia for example. While there will not be ongoing competition in such a market. The presence of a single supplier is not necessarily a cause for concern.the markets involved and judgments about the costs and benefits of vertical integration. In contrast. In some large markets. transmission and distribution were vertically integrated in only two states. The degree of private ownership in gas varies widely across the APEC region. including structural reforms (see box 2). Deregulating energy markets in APEC 57 . smaller or less mature markets are often supplied by a single producer or joint venture arrangement. In both states. Victoria and Western Australia. usually under a long term contract. upstream competition was not addressed as part of the initial gas reform package. but in recent years it has been identified as a major issue for reform (Harman and Mélanie 1999). In some economies. Privatisation and its sequencing with other reforms. The case of British Gas illustrates that the potential benefits of privatisation may not be realised unless it is accompanied by reforms to facilitate competition. gas production is carried out by multinational petroleum companies while in others there are publicly owned vertically integrated monopolies. However. the vertically integrated utilities have been split into two companies and privatised as part of the reform process. one of the major privatisations in the reform process has resulted in the major distributor in the state of New South Wales taking a 51 per cent share of ownership in the major transmission pipeline serving the state. Prior to reforms. lack of upstream competition has been a cause for concern in some reforming economies. particularly structural reforms. there may have been strong competition between suppliers to secure the long term contract. However. The diversity of policy approaches to vertical integration in gas markets is illustrated in the case of Australia. reforms to control monopoly power in gas transmission and distribution are only part of the requirement for the potential gains from competition to be realised. As an illustration of its potential importance. has been an issue in some economies.

there was no unbundling of gas sales and transport. Furthermore. Because the underlying impediments to competition were not addressed. the reform process failed to address other factors that limited the scope for competition to develop. in an attempt to control this monopoly power and stimulate competition. A long series of regulatory interventions followed the privatisation. Only after repeated interventions and the separation of British Gas into two companies in 1996 could competition finally develop (Juris 1998). British Gas was privatised in 1986 as a vertically integrated enterprise. and in contrast with subsequent reforms in most economies. There are several possible permit allocation systems. the scope for new entry by competing suppliers was severely limited by the availability of gas supplies. Government involvement is inherent in upstream gas and oil (and also coal) because the resources are often publicly owned or lie under publicly owned land or water. Not long after flotation. prospectivity and the level of competition in the bidding process (Harman and Mélanie 1999). That investigation and many subsequent ones led to an extension of regulation of the firm’s tariff structure.Allocation of permits for exploration and development is a key issue affecting upstream competition in gas and oil. 58 Deregulating energy markets in APEC . Market liberalisation was not accompanied by unbundling and structural reform. However. British Gas was able to use its market power in transmission and distribution to limit competition in the potentially competitive market for supply of gas to consumers. develop and produce these primary resources. even in accounting terms. Governments must decide whether and how to allocate rights to explore. Transmission and distribution were not separated. The effectiveness of each in encouraging the optimal level of exploration and development depends on a range of factors such as the level of exploration maturity. restrictions on its access to new gas supplies and an agreement to offer some of its contracted supplies to potential rival suppliers. the pricing policies of British Gas were referred to the Monopolies and Mergers Commission. 2 Problems with partial reforms – the case of British Gas Gas reform in the United Kingdom commenced in 1982 with the Oil and Gas (Enterprise) Act giving other firms the right to compete with British Gas to supply large customers and to use pipelines owned by British Gas (Yarrow 1991). with British Gas holding long term contracts with most of the producers on the United Kingdom continental shelf. the privatisation effectively turned a public monopoly into a private one.

prices increased and the ceilings eventually became binding. which in turn led to further costly regulation of the supply and use of gas. In response to the supply shortages. Price controls on gas sold in interstate markets were introduced by the federal government in 1958. or the need for some firms to exit the industry. When gas demand started growing strongly in the early 1970s. Prices in intrastate markets were not controlled. to the extent that LNG and pipeline gas are alternatives or complements (for 3 Problems with wellhead price controls – gas markets in the United States Natural gas wellhead price controls resulted in major supply shortages in the United States in the early 1970s. Deregulating energy markets in APEC 59 . The reform policies that relate directly to pipelines may also indirectly affect LNG markets. while maintaining controls on old gas supplies. However. Supply shortages began to emerge. The Natural Gas Policy Act 1978 began the partial deregulation of prices for new gas supplies. the limited supplies were diverted to them rather than the interstate markets. the government also introduced the Power Plant and Industrial Fuel Use Act 1978 which prohibited the use of natural gas and oil in new power plants and phased out natural gas use in existing plant by 1990 (Joskow 2001a). and the Natural Gas Wellhead Decontrol Act 1989 completely removed controls by 1993. The United States experience clearly illustrates the problems that can arise when prices are not allowed to adjust to balance supply and demand and provide signals for investment in new capacity (see box 3).Wellhead price controls A further issue for the upstream part of the gas industry in some economies has been wellhead price controls. The restrictions on the use of gas were eventually lifted in the 1980s. and as they rose with demand. where prices are low or falling. the government partially deregulated wellhead prices. thereby exacerbating the problems in the regulated market (Jess 1997). in the case of high or rising prices. Removal of these is intended to generate benefits by allowing prices to provide signals to guide efficient supply and use of existing reserves as well as signaling the need for new exploration and development. LNG issues The upstream competition and wellhead price control issues discussed above are relevant to the LNG part of the gas supply industry.

These may involve approval of sales to ensure that they are not contrary to the national interest. Policies adopted have included: • support or protection for local suppliers. an extra layer of government involvement creates costs. and these must be balanced against any benefits. • stockpiling requirements. refining and distribution facilities. there are some regulatory issues that relate specifically to LNG. the political sensitivity of high petroleum prices and the potentially large economic costs of having inflated prices for a key input in the 60 Deregulating energy markets in APEC . Transport costs are relatively low and transport infrastructure does not exhibit natural monopoly characteristics. and • restrictions on access to exploration and development rights. However. However. as in the case of spot market exports from Australia. tankers can be switched between different routes and markets. largely reflecting the strategic importance of oil and the desire of governments to ensure that national supply is not vulnerable to major external shocks. the oil industry has been one of the most heavily regulated in the APEC region. even where approval is rarely withheld. location and operation of LNG processing facilities. Petroleum Oil is one of the most widely traded commodities in the world. including limits on imports and subsidies for local production. Compared with electricity and gas. there are fewer potential natural barriers to competition in oil markets. the resources involved are generally more mobile and not specific to particular trades. Restrictions may also apply to the ownership.example. • government ownership of production. For example. • price controls. • restrictions on foreign ownership. where the viability of a large LNG export project may depend on the concurrent development of a domestic pipeline based industry). Some governments place restrictions on the sale of LNG in both contract and spot markets. as gas pipelines tend to be. Large scale investment is necessary to develop petroleum reserves and transport to refining facilities and consumers. However. In addition. In addition.

implementation of an open access regime for oil terminals should allow large users of petroleum products to purchase their goods from the terminal gate at wholesale prices. Removal of restrictions on entry of new producers is also designed to encourage competition. with the aim of increasing competition and putting downward pressure on retail prices. coal has traditionally been considered an essential strategic resource in many economies. Restrictions on the number and location of retail outlets are also being lifted in some economies. price controls were introduced after the first oil price shock in 1973-74. for example. In the United States. However. Rising prices should encourage conservation efforts by consumers and increased exploration and development. is to be lifted (EIA 2000).economy have frequently resulted in regulation of retail prices or some regulatory oversight of retail prices to control any abuse of market power. the requirement that all foreign oil and gas companies operating in the country do so in partnership with Pertamina. For example. for example. structural reforms and privatisation have been important components of oil reform packages. In Indonesia. Coal Like petroleum. Policies such as protecting or fostering domestic production by restricting import competition result in costs — as inefficient producers can survive — and are also likely to limit the ability of domestic energy markets to adjust to external shocks. supplemented by special arrangements for genuine emergency situations (such as the Strategic Petroleum Reserve in the United States — see Joskow 2001a). Given its role as a fuel for electricity generaDeregulating energy markets in APEC 61 . In response to the shortages the government announced the gradual decontrol of oil prices (Joskow 2001a). in Australia. thereby putting pressure on distributors to keep prices at competitive levels (IEA 2001b). the state owned oil and gas firm. in 1979 oil shortages became a major problem after Iran ceased exporting oil. price controls designed to protect domestic consumers from external shocks can exacerbate supply shortage problems. Reforms are underpinned by the view that national energy security is better served by policies that encourage more diverse and efficient supply arrangements. Similarly. These are designed to improve incentives for efficient performance and to facilitate greater competition. Potential barriers to downstream competition are also being addressed. As for electricity and gas.

including obligations to sell to public utilities and restrictions on trade. long term contracts between coal suppliers and major users can provide an alternative to vertical integration. As discussed in relation to petroleum. Prices received by local producers will fall. Common features of reform packages in the coal industry have included: • privatisation and structural reforms. as well as reforms in related industries such as rail and port services. and • nondiscriminatory access to rail and port facilities. Policies that have given coal a special protected status have often been accompanied by government regulations affecting the management. staffing and operations of coal mines. with costs borne by taxpayers or domestic consumers. As the major supplier of fuel for electricity generation in the APEC region. structural reforms should help to facilitate the development of competition and more efficient supply. and price controls. Privatisation should also encourage productivity improvements. However. historically. • removal of restrictions on the sale and use of coal. As in other energy industries. the coal industry is also affected by regulatory reform in the electricity industry and the gas industry (the major competitor for thermal coal). for transport and heating. Removal of subsidies to local producers and restrictions on the level of imports should also encourage more efficient supply. these policies tend to allow inefficient mines to survive. but consumers should continue to face the world price. subsidies to local producers. often in conjunction with ownership of power plants. governments in some economies have considered it important to ensure a stable and reliable coal supply. which have further reduced incentives for efficient performance. This has been achieved through policies such as: government ownership of mines. restrictions on imports and exports. • removal of subsidies to domestic production. steel making and. as inefficient supply can no longer compete with imports at world prices. including vertically separating coal mines and power plants and splitting publicly owned monopoly coal producers into several competing producers. provided it is accompanied by removal of restrictions on the operations of mines.tion. but there may be some offsetting costs as the advantages of vertical integration are lost. Electricity and 62 Deregulating energy markets in APEC .

Indexes are developed to summarise the characteristics of reform in each economy. While emphasising the difficulties in undertaking this type of empirical analysis. for example. for example. and economy specific economic and technological conditions are controlled for. This could occur. of some technological improvement or changes in some other variables not directly affected by reform. improved productivity and better service quality in energy supply industries is widely cited in support of regulatory reform.gas reforms should put pressure on coal suppliers to improve productivity and ensure that prices are at competitive levels. open access policies involve tradeoffs between the interests of users and owners of major infrastructure. improved productivity after reform is not necessarily an indication that reform has been successful. productivity or other variables before and after reform therefore need to be interpreted with caution. For example. A broad assessment of average price movements after reform may therefore be misleading. Policies to provide open and nondiscriminatory access to rail and port facilities are also designed to facilitate the development of competition between coal suppliers. Before examining the evidence it is important to note the potential problems with empirical analysis of the impacts of reform. One study that attempts to identify various factors affecting electricity prices and technical efficiency is Steiner (2000). However. Furthermore. Comparisons of prices. and achieving the appropriate balance can be difficult. It is difficult to disentangle the effects of reform from the effects of other economic and technological changes. because. or when prices are allowed to adjust to provide signals for efficient use of scarce capacity (say in periods of peak demand) and incentives to invest in new capacity. Impacts of reforms Evidence of impacts such as reduced energy prices. The relevant question is not whether productivity has improved after reform. as the determinants of energy prices are often complex and constantly changing and it is hard to separate the effects of reform. Steiner concludes that broad expectations about the price and productivity effects of deregulation Deregulating energy markets in APEC 63 . some prices could be expected to rise as a result of reform. but whether it is higher than it would have been in the absence of reform. Productivity may have improved anyway. when subsidies or cross subsidies are removed. as in the electricity and gas industries. The analysis of price changes is particularly difficult.

Japan. are likely to provide the best guide to likely long term impacts. to allow market participants time to adjust. there is a considerable amount of evidence of broad changes in energy markets. such as in the United States and the United Kingdom. Price increases were larger the longer the time period since the introduction of the reforms. The evidence from the United States gas industry also illustrates that the benefits of reform may continue to develop over time. However. The evidence shows significant falls in real average prices over time. Prices may rise where subsidies or cross subsidies are removed. In some cases industrial prices have fallen more sharply than domestic. Changes are often phased in. Unbundling and private ownership also improve capacity utilisation and bring reserve margins closer to optimal levels (Steiner 2000).are supported by the evidence for nineteen OECD economies (including five APEC economies — Australia. and policies are reassessed and modified as technologies and markets change. Evidence on trends in average prices over several years may mask some other important changes. or 64 Deregulating energy markets in APEC . New Zealand and the United States). Markets where reform has been in progress for many years. policies are still evolving. Each of these is a likely outcome of reform. Canada. A further problem with any analysis of the impacts of energy market reforms is that reform tends to be a gradual process. both before and after deregulation. Prices in restructured energy markets Evidence on trends in energy prices in deregulated markets is summarised in table 6. expansion of third party access to networks and the introduction of electricity markets reduce both industrial and residential prices. including price increases for some consumers or some products and increased price volatility. even in these markets. while residential consumers still buy through local distribution companies. Unbundling of generation and transmission. These trends help to illustrate the types of impacts that could be expected over the long term. Industrial prices are reduced more than residential prices because the larger industrial users can benefit from directly dealing in wholesale markets. Most of the evidence relates to markets where major changes have been implemented and several years have passed since reforms were first initiated. Despite these difficulties and qualifications.

6 per cent. more for some industrial and commercial Winston (1998) Continued ➮ Deregulating energy markets in APEC 65 . final user price fell by 17 per cent 1987–98 IEA (1999) Electricity Fischer and Serra (2000) Electricity Germany Average industrial 1996–99 prices fell 9.6 Energy prices following reform Energy type Economy Electricity Electricity United Kingdom United Kingdom Prices Average real prices fell 13 per cent Time frame 1990–97 Source IEA (1999) Littlechild (1999) Average prices for 1990–99 domestic customers fell around 26 per cent in real terms Average prices for industrial customers fell 25 to 34 per cent in real terms Electricity Australia Average real prices fell 14 per cent Average real prices fell 10 per cent 1991–98 1991–2001 1992–2000 1990–2000 IEA (2001b) Electricity Victoria. while average domestic prices were virtually unchanged in real terms Chile Wholesale price fell by 34 per cent.8 per cent IEA (2001a) Natural gas United States Average 30 per cent fall for residential customers. Australia Average industrial prices fell 29 per cent Average commercial prices fell 40 per cent Institute of Public Affairs (2001) Electricity New Zealand Average commercial 1985–95 prices fell by about 25 per cent. but average domestic prices increased by 0.

electricity utilities who supply customers at set prices are able to manage spot market price volatility through long term contracts with generators. A key difference between a regulated and deregulated market is that in the latter there are more likely to be mechanisms available for consumers and producers to respond to the price variability. However. For example. in terms of identifying the impacts of reform. Prices are likely to be more volatile in deregulated markets because they are driven by the interaction of supply and demand rather than set by regulators. It is difficult to say how regulated prices and supply would have responded to the combination of factors evident in California such as rapidly increasing demand and rising fuel costs. as in California (see box 1).6 Energy prices following reform continued Energy type Economy Natural gas Prices Time frame Source Crandall and Ellig (1997) United States Average real prices fell 1984–86 by 10–38 per cent Average real prices fell by 23–45 per cent Average real prices fell by 27–57 per cent 1984–89 1984–94 Natural gas Western Australia 25–50 per cent fall in wellhead prices National Competition Council (2001) where there are problems with the design of reforms — for example. The spot electricity market in California provides some of the most dramatic examples of price volatility in deregulated markets. the relevant question is how prices in the deregulated market compare with what they would otherwise have been. 66 Deregulating energy markets in APEC . However. If the price of fuel inputs for electricity generation rises. Markets are not insulated from external shocks. then this should be reflected in the price of electricity. where regulations do not effectively control abuse of market power by some suppliers. problems arise when utilities do not have the flexibility to manage price risks. with wholesale price increases of up to 500 per cent over a year (Joskow 2001a).

Regulatory reform and technical efficiency

Examples of efficiency improvements in some industries following reform — including improved labor and capital productivity and lower costs — are presented in table 7.

7

Improvements in technical efficiency following reform

Energy type Economy Electricity United Kingdom United Kingdom

Efficiency indicator

Time period

Source Littlechild (1999)

Staff levels reduced by 1990-91 to a third in transmission, 1997-98 a half in distribution Operating costs net of 1992-93 to depreciation reduced 1997-98 by 40 per cent in transmission, 27 per cent in distribution Average power plant mid-1980s to availability increased 1999 from less than 75 per cent in the mid-1980s to 84 per cent in 1992 and 93 per cent in 1999 Average labor productivity across all states has more than doubled Customers per employee increased by 240 per cent Number of employees reduced by half Output per employee more than doubled 1991–99

Electricity

Littlechild (1999)

Electricity

Australia

World Energy Council (2001)

Electricity

Australia

Short et al. (2001)

Electricity

Australia

1990–99

IEA (2001b)

Electricity

Victoria, Australia

Brown coal plant utilisation increased from 66.6 per cent to 83.7 per cent Customers per distribution worker doubled

1995-96 to 1998

Institute of Public Affairs (2001)

Electricity

Chile

Rudnick (1998)

Continued ➮

Deregulating energy markets in APEC

67

7

Improvements in technical efficiency following reform continued

Energy type Economy Electricity

Efficiency indicator

Time period

Source IEA (1999)

New Zealand Cost savings in generation and transmission of 10–15 per cent Argentina Staff reduced by 48 per cent Workers per MW capacity reduced from 0.91 to 0.57 1992–94

Electricity

World Energy Council (1998)

Natural gas

United States Real operating and maintenance costs fell by roughly 35 per cent

Winston (1998)

Regulatory reform and the reliability and quality of energy supply

There have been many high profile problems with reliability of supply in deregulated energy markets in recent years. In each case a complex mix of factors has been identified as contributing to the problems. For example, in the state of Victoria in Australia a series of power cuts in February 2000 reflected a combination of circumstances, including an industrial dispute that had taken around 20 per cent of generating capacity offline, two unplanned generator outages and an extremely high peak demand caused by a heat wave across south eastern Australia (IEA 2001b). In Auckland, New Zealand, cable failures resulted in extensive blackouts in February 1998. While the utility, Mercury Energy, and the reform process were widely blamed, the problems can be traced back to the late 1980s and a failure to undertake necessary investments in new capacity because of approval problems. In the late 1980s it was determined that by 1997 there would be a need to enhance supply security by building a new tunnel to carry extra cables. The project was delayed because of difficulties in securing a route, but was completed in 2000 (IEA 2001c). While these supply problems have arisen in deregulated markets, they cannot be judged to be an outcome of regulatory reform.
68 Deregulating energy markets in APEC

There is evidence that service quality has improved in some deregulated electricity markets. In the Australian state of Victoria, supply reliability improved following deregulation. Average outage minutes per year and per customer were reduced from 510 in 1989-90 to 266 in 1993-94 and 260 in 1994-95 (IEA 1999). In Argentina, the frequency and duration of power cuts fell between 1992 and 1996 from an average of thirteen a year lasting 22 hours to less than four a year lasting six hours (World Energy Council 1998). In the United Kingdom electricity industry, the average number of interruptions per customer is down and the average number of minutes lost is about half its level before privatisation. The number of complaints about the electricity companies has fallen by over 60 per cent (Littlechild 1999).

Conclusions
This overview of the rationale for reform points to several potential impacts of the regulatory reform process: • improved productivity in energy supply industries, in response to market pressure or improved regulatory design; • prices that more accurately reflect costs — lower prices in cases where they had been inflated by inefficient supply or lack of competition, and higher prices where they had been subsidised or regulated at below market levels; and • more innovative and flexible energy supply and use, responding to changing energy prices. Translating policy principles into practice raises complex economic and technical issues. The presence of natural monopolies and the technical complexities of energy supply, especially electricity, complicate the task of designing policies to capture potential benefits. For example, there are difficult tradeoffs involved in decisions on whether and how to separate vertically integrated utilities. Similarly, decisions on whether and how to regulate access to gas pipelines or electricity grids must balance the interests of the owners and the users of the assets. If incentives to invest are undermined, the potential benefits of reform may be reduced. Furthermore, governments pursuing social or other objectives through energy pricing and supply policies can limit the scope for benefits to be realised. For example, maintaining retail price regulation to protect consumers from
Deregulating energy markets in APEC 69

lower prices and enhanced service quality. 70 Deregulating energy markets in APEC . The effects of improved productivity and lower energy prices on energy production. In markets where reforms have been in place for several years. are examined in chapter 5. consumption and trade.price rises undermines the role of prices in providing signals for efficient energy supply and use. there is considerable evidence of improved productivity. as well as wider economic activity and trade. While empirical evidence needs to be interpreted with caution. it does provide some broad support for the expectations about the impacts of reform.

multiregion. com). Global trade and environment model The analysis of the impacts of energy market liberalisation reported in this study is based on simulation results from ABARE’s global trade and environment model (GTEM). GTEM is an appropriate framework for analysing the economywide and intereconomy dimensions of energy market reform because it takes into account the interactions between different sectors in an economy and estimates the impacts of policies on key economic variables. GTEM is a dynamic. sectoral and regional output. Modeling the potential outcomes of energy market reform at the APEC level is complicated by such diversity as it is difficult to account for the individual characteristics of each economy’s reform policies. general equilibrium model of the world economy. The database also includes a high level of Deregulating energy markets in APEC 71 . the price of energy inputs into production.4 analytical framework As discussed in the previous chapter. this study has adopted the notion that the broad objectives of energy market reform — that is. primary and final energy consumption. In order to simplify the modeling process.abareconomics. These variables include productivity. The modeling framework used in the analysis is described below. and regional income and expenditure levels. multisector. The database separately identifies all but four APEC member economies and incorporates all of the other major players in international energy markets. The model code is available on ABARE’s web site (www. It is derived from the MEGABARE model (ABARE 1996) and the GTAP model (Hertel 1997). The model’s database is highly suited to an assessment of APEC’s energy sector liberalisation. The dynamics of energy market reform will vary widely across economies according to their different circumstances and the specific objectives they seek to achieve. to create more efficient and competitive energy markets — can be captured by increases in productivity in the sectors that are being liberalised. trade and investment flows between regions. liberalisation of energy markets is typically a long and complex process.

GTEM also includes a detailed representation of technological change and interfuel substitution in energy and energy intensive sectors. The database used to simulate the impacts of energy sector deregulation in this report has been aggregated to the 22 regions and 19 sectors presented in table 8. This approach allows electricity to be generated from seven explicitly recognised technologies: brown coal. thereby preventing technically infeasible combinations of inputs being chosen as model solutions. trade and investment behavior of representative producers and consumers in 45 regions across 55 sectors. The iron and steel industry is able to substitute between these technologies in response to changes in their relative costs. petroleum. oil and gas — and electricity. A more detailed description of GTEM is provided in appendix B. GTEM allows substitution between different fuels as well as between fuels and other primary factors of production — labor. capital and natural resources. For all other energy using sectors. hydro and other renewables based technologies. GTEM consists of equations and data that describe the production. including detailed treatment of energy and energy related sectors. GTEM restricts substitution possibilities to known technologies.commodity disaggregation. Further. the ‘technology bundle’ approach is adopted to model electricity generation and iron and steel production. Regional and sectoral aggregation At its most disaggregated level. nuclear. Substitution between technologies in response to changes in their relative costs is allowed. The regional aggregation separately identifies all APEC economies with the exception of 72 Deregulating energy markets in APEC . GTEM captures the substitution possibilities in iron and steel production between blast furnace and electric arc technologies. gas. In this way. In GTEM. This feature of GTEM is important for analysing the impacts of policies that affect the relative costs of energy inputs — such as those related to energy market liberalisation — on the fuel mix for electricity generation. black coal. The sectoral aggregation has been chosen to include the three fossil fuels — coal. as well as the major energy intensive sectors that are likely to influence total energy consumption. consumption.

the transition economies of eastern Europe and the former Soviet Union. Peru and the Russian Federation. The reference case projects the growth in key variables in each region in the absence of any policy changes. As a result. the European Union. rubber and plastics Nonmetallic minerals Iron and steel Nonferrous metals Fabricated metal products Motor vehicles and other transport equipment Electronic equipment Textiles Other manufacturing Agriculture. Papua New Guinea. the reference case represents the likely outlook for APEC’s energy sector Deregulating energy markets in APEC 73 .8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Regions and sectors in GTEM Regions Australia Canada Chile China Hong Kong. forestry and fisheries Processed food Transport and trade Services Brunei Darussalam. Developing a reference case GTEM requires a reference case against which the impacts of policy changes can be measured. of Malaysia Mexico New Zealand Philippines Singapore Chinese Taipei Thailand United States Viet Nam European Union Transition economies Other OPEC Rest of Latin America Rest of World 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sectors Coal Oil Gas Other minerals Electricity Petroleum and coal products Chemicals. Rep. Rest of Latin America and the Rest of World — are also identified. GTEM is able to capture the effects of domestic policy reform at both regional and global levels. China Indonesia Japan Korea. Other key economies or groups of economies — OPEC. These represent large energy producing and trading regions that might be affected by energy sector liberalisation within APEC. for example. In this study.

The GDP growth rates used in the study are based on historical data from 1995 to 2001.3 4.5 3.0 5.7 4. The shares of electricity produced by five different technologies (coal. reference case Average annual growth 2001–10 % Australia Canada Chile China Hong Kong. In addition to the regional cost differentials affecting capital.7 7.9 5. The reference case provides a baseline against which the impact of further energy market reforms can be assessed. The reference case is a ‘business as usual’ simulation in which it is assumed that APEC economies implement no new regulatory reform measures in energy markets beyond those that have already been implemented.5 4. Rep.9 4.2 4.0 4.0 3. China Indonesia Japan Korea.4 4.9 3.6 2. gas.3 3. nuclear. Economic growth In developing a reference case for APEC. operations 74 9 GDP assumptions.9 Deregulating energy markets in APEC . assumptions have been made about the likely rates of economic growth over the projection period.8 5.2 3.1 2. hydro and other renewables) to 2010 are determined exogenously (outside the model) in the reference case on the basis of government and other projections (table 10). These assumptions reflect a wide range of factors that affect the fuel and technology choices for electricity generation. of Malaysia Mexico New Zealand Philippines Singapore Chinese Taipei Thailand United States Viet Nam European Union Transition economies Other OPEC Rest of Latin America Rest of World 3.1 3. Long term projections to 2010 are from ABARE.8 4. The GDP growth assumptions used in the study are shown in table 9.6 0.and general economic conditions in member economies over the period to 2010. Fuel mix in electricity generation A further key assumption with implications for the reference case is the fuel mix in electricity generation. oil. Wide regional variation in cost factors and structures implies that the relative competitiveness of alternative electricity generation technologies is likely to vary significantly across APEC economies.

6 12.0 68.0 0.8 34.9 14.1 17.0 0.1 11.0 19. in some economies noncost factors also play a significant role in influencing the fuel mix in power generation.1 42.2 0.0 2.8 3.6 12.2 23.1 48.0 7.7 16.6 14.0 8.0 4.6 72.0 22.3 21.0 0.0 0.8 0.5 75 Australia Canada Chile China Hong Kong.0 82.0 Gas 1998 2010 % 9.0 10. China Indonesia Japan Korea.2 69.9 19.66 16.6 33.5 19. and fuel costs.8 0.4 55.8 11.9 60.1 23.0 1.1 8.0 0.2 9.0 20.0 44.0 43.2 0.3 0.0 0.0 73.0 21.1 3.0 0.6 13.4 1.0 0.0 % 0.4 9.2 13.0 32. This could also have an impact on the results of policy simulations but it is unlikely that these would be significant.0 20. of Malaysia Mexico New Zealand Philippines Singapore Chinese Taipei Thailand United States Viet Nam 80.1 34.0 72.0 12.8 65.8 19.9 % 12.0 39.0 1.1 28.0 0.1 22.9 21.6 Oil 1998 2010 % 1.9 52.6 65.0 0.0 75.0 6.7 0.8 35.2 0.1 0.6 19.1 15.6 18.7 15. These factors include broader government objectives such as those related to regional development and security of energy supply.1 9.0 49. APEC economies Coal 1998 2010 % % 79.2 48. Rep.7 13.5 6.3 5. 10 Share of electricity generated by each fuel under the reference case.8 34.0 44.0 0.0 3.2 % 7.1 22.1 7.0 15.3 10.0 36.0 20.0 42.8 8.0 3.0 6.0 8.6 17.1 1. The adoption of stringent environmental controls on electricity generation can be expected to affect the relative cost of competing generation technologies. Changing these assumptions would lead to different reference case results.2 Deregulating energy markets in APEC .2 58.0 41.1 16.5 6.1 38.4 16.8 3.0 Other 1998 2010 % 9.1 11.0 21.1 50.0 5.2 3.0 2.7 Nuclear 1998 2010 % 0.7 5.9 2.0 0.0 21. Nonetheless.0 11.3 0.2 64.0 52.2 37.0 0.0 54.3 1.1 12.7 21.3 4.2 0.4 27.3 4.1 0.9 0.0 37.2 11.0 9.4 16.8 34.and maintenance.9 51.5 % 1.0 0.9 0. The reference case assumptions have been chosen to reflect a likely path of these variables over the period to 2010.0 17.0 26.9 22.0 0.0 22. the total cost of electricity generation in a specific APEC economy can also be affected by environmental policy settings. The assumptions related to GDP growth in APEC economies and to the shares of electricity production by different technologies are important factors underpinning the reference case projections.9 34.0 18.2 3.1 22.0 0.5 53.0 1.

gas and petroleum products) these are: • economies that have already implemented all or most of the elements of reform across all market segments (from production to retail distribution). consumed and invested. While the trend toward energy market liberalisation is already evident in the APEC region.Policy simulations Although some of the objectives of energy sector deregulation are specific to individual APEC economies. Experiences of regulatory reform in economies that have already implemented liberalisation policies provide some evidence of the types of gains that may be generated in energy markets. Variation in the progress of reform is also significant between different energy sectors within an economy. more efficient investment and wider consumer choices. the broad principle underpinning reform is that there are significant long term efficiency benefits from allowing markets to play a greater role in what is produced. with reform of the electricity sector the most advanced in many economies. lower prices. • economies that have implemented only some major reforms but have not yet extended the reform process to all market segments or moved beyond transitional arrangements in some or all market segments. Further. This process is expected to have direct impacts on the regional energy sector by affecting energy prices. For each type of energy (electricity. For the purposes of this study. the approaches to reform as well as the extent of reform undertaken to date vary considerably across APEC economies. output and trade. Classification of APEC economies into these three groups is intended to highlight the relative magnitude of the productivity gains that could be 76 Deregulating energy markets in APEC . it can be expected that the benefits flowing from further reform initiatives are likely to differ across economies and between energy sectors. APEC economies have been classified into three broad categories on the basis of information in the economic literature as well as information from relevant government representatives in APEC. and • economies that have introduced only very limited reforms or are yet to implement any reform plans. including productivity improvements. lower energy prices are likely to have economywide implications for the structure and level of economic output. As a result. as energy is a fundamental input to economic activity.

expected in economies that are currently at different stages of energy market reform if they pursued fully liberalised markets. Conversely. United States Canada. Chile. China. a move from current market structures to market designs that deliver fully competitive outcomes. Malaysia. The assumed gains in productivity used in the study and the corresponding energy price impacts for different categories of APEC economies and energy subsectors are presented in tables 11–13. the efficiency gains to be achieved from further liberalisation are likely to be lowest in economies that are relatively advanced in their energy market reform agendas and that have already realised some or most of the potential gains. Hong Kong. Singapore 10 20 –9. In particular. the 11 Assumed productivity and price impacts in the electricity sector Classification APEC economies Productivity impacts % Average price impacts % –6.0 77 . The policy simulations undertaken in the study are designed to assess the impacts of the implementation of comprehensive deregulation — that is.1 Economies that have implemented all or most of the elements of reform across all market segments Economies that have implemented only some major reforms or have not yet extended the reform process to all market segments Australia. implement any reform Mexico. In the case of electricity. it can be expected that economies most likely to have the highest efficiency gains are those that are currently the furthest from competitive markets. Thailand. Chinese Taipei. Korea.6 Economies that have introduced only China. Within this framework. These assumptions are based on a range of sources. the productivity estimates for economies in category one — those that have implemented all or most of the elements of reform — are derived from OECD studies for the United States. New Zealand. Japan. limited reforms or are yet to Indonesia. Philippines. Viet Nam Deregulating energy markets in APEC 30 –12.

Indonesia. Chinese Taipei. United States Indonesia 5 Economies that have implemented only some major reforms or have not yet extended the reform process to all market segments Economies that have introduced only limited reforms or are yet to implement any reform 78 30 –7. Hong Kong. New Zealand.8 Economies that have introduced only China. China. implement any reform Singapore.9 Classification APEC economies Economies that have implemented all Australia.4 Classification APEC economies Economies that have implemented all or most of the elements of reform across all market segments Australia. Korea. Japan. Canada. Japan. Canada. Malaysia. Mexico. Philippines. Chinese Taipei. across all market segments United States Economies that have implemented only some major reforms or have not yet extended the reform process to all market segments Chile. or most of the elements of reform New Zealand. limited reforms or are yet to Malaysia. Singapore.9 China.12 Assumed productivity and price impacts in the gas sector Productivity impacts % Average price impacts % –5.2 Deregulating energy markets in APEC . China. Thailand.2 13 Assumed productivity and price impacts in the downstream oil sector Productivity impacts % Average price impacts % –0. Viet Nam 35 –3. Mexico. Thailand. Philippines 5 10 –8. Korea. Chile. Hong Kong. Viet Nam 20 –15.

and subsequent reforms adopted to allow competition to develop. Similarly.OECD estimates that any future comprehensive electricity market reform in the United States could lead to electricity prices that are approximately 5 per cent lower than they would be in the absence of regulatory reform (OECD 1997). a publicly owned vertically integrated enterprise. Estimates of the potential efficiency gains from reform of gas markets in APEC economies are more difficult to obtain. This provides some indication of the potential productivity gains that could be expected when comprehensive structural and regulatory reform is initiated in economies with highly regulated electricity supply industries. A study undertaken by Blackman and Wu (1999) suggests that the efficiency of power plants in China is below world’s best practice by almost 30 per cent. This reduction in price corresponds to an increase in total factor productivity of 20 per cent relative to the reference case. Most of the measurement of the productivity impacts of gas market deregulation is confined to the United Kingdom where British Gas. Productivity in the electricity sector in APEC economies that have only implemented some major reforms is assumed to increase by 20 per cent following the implementation of complete liberalisation (table 11). On the basis of these studies. This expectation is also broadly in line with another OECD study that suggests that the electricity sector in the United States is behind international best practice by around 12 per cent (OECD 1999). Whiteman 1999). was privatised in 1986. This implies an overall improvement in total factor productivity of around 10 per cent. China is representative of APEC economies in this category. This assumption is based on OECD estimates for Japan where the implementation of comprehensive liberalisation initiatives is expected to reduce electricity prices by around 12 per cent (OECD 1997). In this context. reflecting the fact that completed and proposed gas reforms are not as extensive as reforms in the electricity sector. In the case of APEC economies classified in group 3. the productivity and price impacts are expected to be higher than in other groups because the deregulation programs in these economies are relatively less advanced. studies undertaken on the liberalisation of the Australian electricity market point to potential productivity gains ranging between 4 and 15 per cent (Quiggin 1997. the results of a study by Price and Weyman-Jones (1996) are used Deregulating energy markets in APEC 79 . productivity or efficiency gains from further reforms are assumed to be 10 per cent for economies where most reforms are already complete (table 11).

This estimate is lower than the corresponding assumption for electricity markets. For example. APEC economies that have introduced only limited reforms or are yet to implement any reform in gas markets are assumed to benefit from a productivity improvement of 20 per cent when gas markets are fully liberalised. Assuming that there are no technical barriers to reaching full capacity utilisation. At one end of the reform scale. Based on EIA data (2002a). 80 Deregulating energy markets in APEC . Downstream oil markets in the majority of APEC economies have undergone significant deregulation in recent years. reflecting the generally more liberal environment affecting gas industries relative to electricity industries. it is estimated that the productivity of oil refining industries in economies with highly regulated regimes could rise by as much as 35 per cent following the implementation of comprehensive liberalisation programs (Horsnell 1997 and ABARE estimates). the potential productivity implications of liberalisation are approximated by the potential increase in the utilisation rate of oil refinery capacity in different APEC economies. Because the results presented in this study are based on assumptions. However. the United States is representative of economies that already have fairly deregulated and competitive downstream oil sectors. This is also reflected in the relative magnitude of the reductions in gas prices that are expected to occur across different groups of APEC economies. To reflect the relative position of other APEC economies on the reform spectrum at the beginning of the simulation period. Based on refinery utilisation rates in China. economies that have already implemented some of the major reforms are assumed to realise only half of the productivity gains that are assumed to accrue to those that are yet to implement most reforms.to estimate the maximum potential productivity impacts that could be derived from the implementation of comprehensive liberalisation programs in natural gas sectors characterised by extensive regulatory barriers. this implies a maximum potential efficiency improvement of 8 per cent from further reform. they should be viewed as illustrative only of the general impacts and direction of change that can be expected from regulatory reform. the productivity improvements for economies that are further ahead in terms of gas sector reform are adjusted downward (table 12). At the other end of the reform scale. given the lack of data on the impacts of these policies. the utilisation rate of refinery capacity in the United States is around 92 per cent. the oil industry in China is still characterised by dominant vertically integrated state owned enterprises.

reflecting the importance of network industries as the target of reform agendas in a wide cross-section of APEC economies. and liberalisation of petroleum products pricing. Within this framework. Given that coal industries within the APEC region operate mostly under liberalised regimes. Implementing policy simulations To assess the impacts of regulatory reform in energy markets in APEC member economies. Global oil markets are driven to a significant degree by factors that are exogenous to the APEC region. and the underpricing of coal resources in some developing economies. removal of restrictions on the number and location of petroleum retail outlets. Most of the remaining distortions affecting international coal markets are in the form of production subsidies. centred primarily on the easing of controls on private and foreign investment in crude oil production. and the significant potential benefits from the introduction of competition in these areas. open access to port terminals. the coal industry in major coal producing APEC economies has undergone major restructuring over the past decade and is generally free of government intervention. In addition. within the oil sector. Implementation of comprehensive liberalisation of key energy sectors in all APEC economies by 2010: This simulation is designed to demonstrate the impacts of a comprehensive and simultaneous approach to energy market reform across all energy sectors. Proposals for further structural reforms and privatisation in APEC economies are mainly focused on the downstream segment of the oil industry and cover deregulation of oil refinery businesses. For these reasons. natural gas and downstream oil sectors. the impacts of coal sector deregulation are not included in the study. particular attention is given to electricity and natural gas sectors. natural gas and petroleum markets. including the strategies adopted by OPEC producers. primarily in the European Union. the following simulations have been examined: 1. These are the areas where the expected gains from regulatory reform are greatest because of their currently relatively high degree of regulation.The focus of the policy simulations in the study is on the electricity. Economies are assumed to implement Deregulating energy markets in APEC 81 . the productivity assumptions presented in table 13 are applied only to the downstream petroleum sector. reform of the upstream part of the industry has already occurred to a large extent. In comparison with electricity.

12 and 13 by 2010. 4. Implementation of comprehensive liberalisation of the gas sector in all APEC economies by 2010: In this simulation economies are assumed to implement policies that remove all regulations that constrain the development of competition in gas markets only and realise all the productivity gains specified in table 12 by 2010. Implementation of partial liberalisation of the electricity sector: This simulation recognises that the actual timing and pace of liberalisation may differ from the assumptions adopted in the above analyses. This analysis is designed to identify the contribution of electricity market reform to the potential gains derived from reforming all key energy sectors. This analysis is designed to identify the contribution of gas market reform to the potential gains derived from reforming all key energy sectors. it is possible that market reforms may not be implemented as rapidly as assumed in the above simulations in all APEC economies. resulting in the achievement of only partial liberalisation by 2010. In this sensitivity analysis. Implementation of comprehensive liberalisation of the electricity sector in all APEC economies by 2010: In this simulation economies are assumed to implement policies that remove all regulations that constrain the development of competition in electricity markets only and realise all the productivity gains specified in table 11 by 2010. APEC economies that are yet to implement most of the major reforms required to reach competitive electricity markets (groups 2 and 3) are assumed to move only half way toward the achievement of competitive markets by 2010. In particular. 2. Given that electricity is generally the highest priority for energy market reform in a wide range of APEC economies. the productivity assumptions in this scenario are only 50 per 82 Deregulating energy markets in APEC . Further. the simulation provides insights into the potential outcomes if policy makers in APEC chose to focus liberalisation initiatives on the electricity sector alone. 3. The productivity assumptions are implemented in equal annual increments over the period from 2002 to 2010. this simulation provides insights into the potential outcomes if policy makers in APEC chose to focus liberalisation initiatives on the gas sector alone.policies that remove all regulations that constrain the development of competition in electricity. as natural gas is the fastest growing source of energy demand in APEC and also a key priority for reform in the APEC region. gas and downstream petroleum markets and to realise all the productivity gains specified in tables 11. Consequently.

Korea. Mexico. liberalisation may not lead to competitive outcomes in energy markets because of the presence of residual market power resulting. China. Viet Nam 15 Deregulating energy markets in APEC 83 . Malaysia. Chinese Taipei. Market power can also be a feature of particular segments of the energy supply chain where competition may not be feasible because of natural monopoly characteristics (see chapter 3). United States 10 Canada. Wholesale electricity markets are particularly vulnerable to the exercise of market power because of the economic and physical characteristics of electricity production and delivery. from poor market or regulatory design. In this sensitivity analysis. Hong Kong. it is assumed that liberalisation of electricity markets in APEC economies is not fully effective in removing the scope for the exercise of market power by generators. Thailand. Japan. Philippines.cent of those in the standard simulations for these economies (table 14). In these circumstances. Indonesia. Singapore 10 China. 5. Chile. Consequently. Residual market power in electricity markets: In some cases. On the other hand. the cost savings achieved by electricity producers through liberalisation are not passed on to electricity consumers in the 14 Assumed productivity gains in the electricity sector under partial liberalisation APEC economies Productivity impact % Classification Economies that have already implemented all or most of the elements of reform across all market segments Economies that have implemented only some major reforms but have not yet extended the reform process to all market segments Economies that have introduced only very limited reforms or are yet to implement any reform Australia. thus. achieve the full productivity benefits of liberalisation by the end of that period. New Zealand. for example. the productivity gains from deregulation may not result in lower prices to energy users. APEC economies that are already advanced in terms of electricity market reform (group 1) are assumed to complete the reform process by 2010 and.

consider that reference case GDP at 2010 is projected to be $100 billion (distance ab). it is assumed in this simulation that electricity prices to households and industry are unchanged relative to the reference case. These include the prices of producer and consumer goods. To provide a numerical example. as illustrated in figure 6. The estimated impacts of policy changes. Following the introduction of regulatory reform in the energy sector. trade and investment flows and regional income and expenditure levels.form of lower prices but contribute instead to increasing the profit margins of electricity utilities. GDP at 2010 is projected to be $102 billion (distance ac). on economic variables are expressed as the percentage deviations between the equilibrium levels of those variables in the reference case and their equilibrium levels in the policy simulation. In particular. the impact of electricity market liberalisation on the level of gross domestic product in an APEC economy can be identified by comparing the growth in GDP in the policy simulation against GDP growth in the reference case. 84 6 102 Deviation from the reference case in a GTEM simulation GDP $ billion c Policy simulation b Reference case 100 a 1995 2010 Deviation from the reference case % 2 e 0 1995 d 2010 Deregulating energy markets in APEC . sectoral and regional output. For example. Interpreting results General equilibrium models of the world economy such as GTEM are able to capture the impacts of policy changes on large numbers of economic variables. Hence the effect of electricity market liberalisation in this example would be to increase GDP by 2 per cent at 2010 compared with the reference case projection. This corresponds to a 2 per cent increase in GDP from the reference case (distance de). such as the introduction of competition in energy markets.

However. Total primary energy consumption in these economies is projected to rise by 1.5 per cent or more over the period to 2010.3 per cent a year over the period to 2010. especially in the developing and newly industrialised economies as opportunities for technological catchup are exploited. In China. provides the basis for these projections. However. because these economies account for more than two-thirds of APEC energy consumption. reflecting different resource endowments and energy policy priorities. this implies large increases in the absolute quantity of energy consumed in the region. Lower economic and population growth in the developed APEC economies translates into lower energy consumption growth over the outlook period.Reference case projections Total primary energy consumption in the reference case is projected to increase by 28 per cent in the APEC region over the period to 2010. In line with growing energy consumption. In particular. APEC consumption of fossil fuels in 2010 is significantly higher than in 1999 (figure 8). the relative growth rates for coal and gas consumption differ substantially across APEC economies. The developing and newly industrialised economies (see table 1) are expected to account for much of the growth in APEC energy consumption. with some economies such as China and Malaysia projected to sustain average annual growth of 4. The increase in primary energy consumption in the APEC region is not evenly distributed across all economies (figure 7). Relatively strong economic growth. combined with an expanding population and emerging demand for personal services such as transport and air conditioning. Deregulating energy markets in APEC 85 . This applies primarily to the developing and newly industrialised economies where economic growth is high and expected to continue to support further electrification. electricity output is projected to be approximately 84 per cent higher in 2010 than in 1999 and in other developing economies around 65 per cent higher. This significant growth implies that the region’s energy consumption reaches 6371 million tonnes of oil equivalent in 2010. Growth in energy consumption is moderated over the projection period by continued improvements in energy efficiency that are assumed to occur. APEC consumption of coal and natural gas is expected to grow by 30 per cent and 36 per cent respectively over the outlook period. compared with 4996 million tonnes of oil equivalent in 1999. driven to a large extent by the expansion of electricity generation (figure 9).

5 index China Other developing Newly industrialised Developed Total APEC 86 Deregulating energy markets in APEC .0 Change in APEC electricity production. 2010.0 2.5 index China Other developing Newly industrialised Developed Total APEC 8 1999=1. oil and gas consumption.0 2.0 Change in APEC coal.0 2.7 1999=1.0 Change in APEC energy consumption. 2010. 2010. reference case 1. reference case China Other developing Newly industrialised Developed Total APEC 1. reference case 1.5 index Coal Oil Gas 9 1999=1.

the increase in coal consumption is significant in absolute terms. And because China accounts for more than 65 per cent of the growth in energy consumption in APEC it has a marked impact at the regional level as well. Oil consumption in the power generation sector in APEC increases less than consumption of coal and gas. as well as policies related to diversification of the electricity generation fuel mix. Australia. coal fired electricity generation is expected to increase more rapidly in economies such as Indonesia where large indigenous coal reserves give coal a cost advantage over other technologies.The increase in gas consumption is particularly notable in some of the advanced APEC economies. where the cost of imported LNG is significantly higher than the cost of imported thermal coal. While coal’s share of total energy consumption in China is expected to fall over the period to 2010. Environmental considerations. The shift to gas fired technologies for power generation in these economies is underpinned by a range of factors including competitive supplies of pipeline natural gas and the implementation of electricity market reform initiatives. Deregulating energy markets in APEC 87 . To the extent that liberalisation of the electricity sector implies higher rates of return requirements by private or corporatised investors in electricity capacity. to a lesser extent. and declining direct use of coal in the residential sector as personal incomes rise. gas fired technologies are likely to be favored because of their lower capital intensity and shorter construction lead times. oil is expected to remain the dominant fuel in total primary energy consumption in developed economies such as Japan and the United States and in some developing economies. However. Similarly. The main impetus for increased oil consumption in both developed and developing economies is demand from the transport sector where there are limited fuel substitution possibilities. reflecting the relatively high marginal cost of oil fired power generation and ongoing energy security considerations in many economies. also have a bearing on the adoption of gas fired technologies in the APEC region. However. the contribution of coal to the fuel mix is expected to increase in Japan. Gas also increases its share of electricity generation in many of the developing and newly industrialised economies in APEC over the outlook period. including Mexico and Thailand. The projected increase in coal consumption in China is underpinned by robust economic growth assumptions that are offset to some extent by continuing improvements in the efficiency of coal use in the industrial sector and in electricity generation. including the United States and.

production of iron and steel. reference case 1. 2010. is leading to an overall decline in energy intensity.5 2. With the exception of oil. energy trade between APEC and non-APEC economies also plays an important role in providing access to low cost energy supplies. energy production in APEC is projected to grow by 30 per cent over the outlook period (figure 11). energy production in APEC is sufficient to meet energy demand requirements within the region. including services and information and communications technologies. rubber and plastics products increases significantly in developing economies. especially China. nonmetallic minerals and chemicals. In particular.0 Change in APEC production of energy intensive goods. The growth in these industries is relatively modest in developed APEC economies. nonferrous metals. Nonetheless. and the inclusion of the world’s largest energy consumers provides the basis for significant intraregional energy trade within APEC. primarily as a result of continued problems with the siting of projects and the relatively high cost of power generation from these technologies.10 1999=1. In parallel with the growth in energy consumption.5 index China Other developing Newly industrialised Developed Total APEC The shares of nuclear and hydropower in total electricity generation are projected to decline over the outlook period.0 2. The combination of cost effective production by the world’s major energy producers and exporters. 88 Deregulating energy markets in APEC . A major factor underlying the growth in energy consumption in the APEC region is the expansion of energy intensive industries (figure 10). where structural change toward less energy intensive sectors. including the United States.

2010.5 index Coal Crude oil Gas Refined oil 12 1999=1. oil and gas exports.11 1999=1. 2010. oil and gas production.5 index Coal Crude oil Gas Refined oil Deregulating energy markets in APEC 89 .0 2. reference case Developing Newly industrialised Developed Total APEC 1. oil and gas imports.0 Change in APEC coal.0 2. reference case Developing Newly industrialised Developed Total APEC 1. 2010.0 Change in APEC coal.0 2. reference case China Other developing Newly industrialised Developed Total APEC 1.0 Change in APEC coal.5 index Coal Crude oil Gas Refined oil 13 1999=1.

for the APEC region as a whole. On balance. for example. Increased gas exports are projected to be sourced mainly from Australia and Indonesia. reflecting the increasing reliance on coal for power generation. increasing competitive pressures from other major thermal coal suppliers in the APEC region — particularly China and Indonesia — will influence Australia’s coal export performance. energy imports are projected to increase strongly. the growth in energy imports is expected to be lower than the growth in energy exports from the region. This applies to Japan and Chinese Taipei. 90 Deregulating energy markets in APEC . maintaining APEC’s position as a net exporter of nonoil energy to the rest of the world (figure 13). particularly in economies with limited indigenous energy resources (figure 12). Higher coal exports are anticipated to be supplied primarily by Australia.Within APEC. However.

Results in this chapter are presented for groups of economies according to their level of development. These groups are the developed economies. energy production and consumption patterns and trade profiles of individual APEC Deregulating energy markets in APEC 91 . gas and downstream petroleum sectors in all APEC economies by 2010. Similarities in terms of the characteristics of energy markets and broader economic structure within these groups mean that the general pattern of responses to energy market liberalisation are comparable. The direct impacts will occur as impediments to market forces in energy industries and services are removed. However. • comprehensive liberalisation of the gas sector only in all APEC economies by 2010. China. • partial liberalisation of the electricity sector by 2010 in APEC economies where most of the major reforms are yet to be implemented. However.5 quantifying the impacts of energy market liberalisation The liberalisation of energy markets in APEC economies is expected to have far reaching implications. there are important differences within these broad groups that can be expected to lead to divergent outcomes. The energy sector liberalisation scenarios described in chapter 4 and analysed in this chapter are: • comprehensive liberalisation of electricity. the newly industrialised economies. and • liberalisation of the electricity sector with residual market power as a result of inappropriate market and regulatory design. In particular. affecting energy prices. reform processes are likely to have both direct and indirect impacts on the regional energy sector. output and trade. as energy is a fundamental input to economic activity. By enhancing the efficiency of energy supply and investment in the region. resource endowments. • comprehensive liberalisation of the electricity sector only in all APEC economies by 2010. and the other developing economies. changes in relative energy prices will have economywide implications for the composition and level of economic output.

At the APEC-wide level. • structural changes in economic output. the Philippines and New Zealand (figure 15). gross domestic product (GDP) at 2010 is 0. Comprehensive liberalisation of energy markets in APEC economies The liberalisation of energy markets in APEC economies will have both direct and indirect impacts on the energy sector. total demand for goods and services expands in the APEC region relative to the reference case. These include: • macroeconomic impacts. This is equal to an increase in regional GDP at 2010 of around US$71 billion (in 1999 prices) relative to the reference case. 92 Deregulating energy markets in APEC . the efficiency gains that are realised when an economy’s resources are employed in their most productive end use as energy consumers and producers respond to price signals. This effect is reinforced by the resource allocation benefits of liberalisation — that is. production and trade.3 per cent higher than its level in the reference case (figure 14). Examples of where these factors play a determining role in the outcomes of energy market liberalisation are highlighted in the text. and • microeconomic or direct impacts on energy consumption. Macroeconomic impacts As a result of the productivity improvements generated in the electricity. This is broadly comparable to the current size of the individual economies of Chile. gas and downstream oil sectors by the removal of regulatory and structural barriers to competition and the associated fall in energy prices. It is also equivalent to around half the size of the Indonesian economy.economies will affect their responses to energy market reform. at both the national and global levels in response to changes in relative energy prices and comparative advantage. or the increases in productivity and output that are driven by competition in energy sectors — these indirect economywide impacts arise as efficiency in energy markets is enhanced and lower energy prices flow through to the rest of the economy. Detailed results for individual economies are presented in appendix C.

reflecting. In developing APEC economies. Consequently. the magnitude of the increase in GDP varies widely across APEC economies.2 0. excluding China.4 0. following comprehensive liberalisation Relative to the reference case China Other developing Newly industrialised Developed Total APEC However.4 per cent for the newly industrialised 15 Change in APEC GDP. partly. regulatory and structural impediments to competition at the beginning of the simulation period tend to be more significant in these economies and the potential gains from reform are higher. 2010.3 0.5 0.6 per cent higher than the reference case level.1 % Change in APEC GDP. This compares with a corresponding increase of 0. partly. the different degrees of liberalisation required in each economy to achieve fully competitive outcomes in energy markets and. compared to GDP of selected APEC economies Relative to the reference case 140 120 100 80 60 40 US$b (1999 prices) New Zealand APEC Chile Philippines Indonesia Deregulating energy markets in APEC 93 .14 0. the gains in economic output are relatively higher for developing APEC economies where significant reform of energy markets remains to be implemented. 2010. specific resource and structural contexts in each economy. In particular. GDP in 2010 is on average around 0. following comprehensive liberalisation.

3 per cent relative to the reference case in 2010. other factors also play a role in determining the scale of expected GDP gains. One of the key factors is the composition or structure of economic output. rubber and plastics and nonferrous metals (figure 16). In China. lower energy prices have a favorable impact on the cost structures of energy intensive industries such as iron and steel. The increase in output of specific industries varies extensively across APEC economies and depends on a range of factors. Developing 94 Deregulating energy markets in APEC . The reallocation of resources to energy intensive sectors is more pronounced in the developing economies than elsewhere in the APEC region. especially the contribution that energy based sectors. including oil and gas. including the energy intensity of production. Where this is significant. chemicals. This leads to an increase in the competitiveness of the region’s energy intensive sectors relative to other sectors of the economy and relative to energy intensive production in economies outside APEC.25 per cent for the developed economies. make to total economic output. GDP increases by around 0. The largest expansion in output is projected to occur in electricity intensive industries such as iron and steel. Consequently. While it be can be inferred that economies implementing more extensive reforms are likely to achieve relatively higher percentage increases in income growth relative to the reference case. together with the share of energy intensive industries in total economic output from the region. In particular. nonferrous metals and other manufacturing. economies will receive commensurately large direct benefits from liberalisation because a greater proportion of their economic output benefits directly from regulatory reform. Structural impacts Underlying the increase in GDP in APEC economies are improvements in the competitiveness of industrial and commercial output resulting from higher productivity in energy industries and lower energy prices. These sectors tend to be relatively larger in developing economies such as Indonesia than in the newly industrialised or developed economies where the manufacturing and services sectors account for a higher share of GDP. This is because electricity is an important input to economic activity and the price effects of deregulation are assumed to be strongest for electricity relative to other energy sources. demand for energy intensive goods rises relative to the reference case.economies and 0.

following comprehensive liberalisation Relative to the reference case China – Nonferrous metals Japan – Iron and steel Indonesia – Nonmetallic minerals Philippines – Thailand – Nonmetallic Chemicals. following comprehensive liberalisation Relative to the reference case Energy intensive Other manufacturing Services Agriculture 0.4 Change in APEC production in selected sectors. In China.0 0. therefore. rubber and plastics industry expands by 1.16 0. 17 1. minerals rubber and plastics Deregulating energy markets in APEC 95 . output of nonferrous metals increases by 1. for example. the shift of resources to energy intensive sectors is more limited in the newly industrialised and developed regions (figure 16) but these sectors still expand relative to their reference case levels. Given that the productivity impacts of further deregulation are assumed to be lower in economies that have already introduced competition in their energy markets. 2010.5 % Change in energy intensive production in selected APEC economies.4 per cent relative to the reference case (figure 17).2 % China Other developing Newly industrialised Developed Total APEC economies are least advanced in the electricity reform process and.6 0. the gains from comprehensive deregulation are most significant. 2010. the chemicals.5 1.5 per cent relative to the reference case at 2010 while in Thailand.

2010. where electricity prices are projected to fall substantially as a result of the fundamental restructuring required to achieve competitive outcomes in their electricity markets. Energy consumption impacts Energy market reform leads to an increase in APEC electricity consumption at 2010 of 2. Mexico and Thailand.4 per cent relative to the reference case (figure 19). 2010. following comprehensive liberalisation Relative to the reference case Other developing Newly industrialised Developed Total APEC 96 Deregulating energy markets in APEC . following comprehensive liberalisation Relative to the reference case 1 % China Other developing Newly industrialised Developed Total APEC The net effect of these structural changes is that economic activity in APEC at 2010 is more energy intensive than in the reference case (figure 18). 19 6 5 4 3 2 1 % China Change in APEC electricity consumption.18 3 2 Change in APEC energy intensity. Electricity consumption grows strongly in economies such as Indonesia.

Second.5 per cent in 2010 relative to the reference case (figure 20). by the residential sector. importantly. the energy sector implications of energy market liberalisation are different across the region. to be purchased. including electricity. For example. where rising incomes have led to an increase in residential electricity use as more urban dwellers move into apartments with central heating and consumers switch to more convenient and cleaner forms of energy for cooking and other energy services. and lower energy prices. This is illustrated in China. Deregulating energy markets in APEC 97 . Growth in energy consumption relative to the reference case is highest in developing economies where structural changes following deregulation favor more energy intensive production. On an APEC-wide basis. Liberalisation of electricity markets affects household electricity consumption through two major channels. This significant increase in gas consumption is driven primarily by the enhanced competitiveness of gas as a fuel for power generation relative to coal and oil — sectors where the scope for productivity driven price reductions is more limited. therefore. rising personal incomes allow a larger volume of all goods and services. First. natural gas consumption is most affected by the removal of structural and regulatory barriers to competition in energy markets (figure 21).The increase in electricity consumption in developing economies is driven not only by industrial and commercial sectors but also. Aligned with the increase in electricity consumption and economic output. total primary energy consumption in the APEC region rises by 1. total primary energy consumption rises by more than 4. as the price of electricity falls relative to other items consumed by households. for example. While energy consumption rises in all APEC economies. Consumption of natural gas in the APEC region is projected to increase by close to 5 per cent relative to the reference case in 2010.5 per cent in Mexico and 3 per cent in Thailand relative to the reference case levels in 2010 following the strong expansion of energy intensive industries in these economies. residential consumers substitute electricity for other energy sources for personal services such as heating and cooking. Energy markets in both Mexico and Thailand are currently highly regulated and. as productivity of the electricity sector is enhanced and the efficiency gains flow through to other sectors of the economy. the implementation of comprehensive liberalisation programs leads to significantly higher productivity performance in energy sectors.

20 4 3 2 1 % China Change in APEC energy consumption. In both economies. following comprehensive liberalisation Relative to the reference case China Other developing Newly industrialised Developed Total APEC Gas Oil Coal 98 Deregulating energy markets in APEC . the impact of deregulation in the downstream oil sector on oil 21 12 10 8 6 4 2 % Change in APEC gas. the share of gas in the fuel mix for power generation in Malaysia increases from 65 per cent in the reference case in 2010 to 70 per cent. With the majority of APEC economies having relatively competitive oil markets. Similarly. 2010. 2010. the gas sector is currently subject to a wide array of regulations and the fuel mix for electricity generation is dominated by natural gas. following comprehensive liberalisation Relative to the reference case Other developing Newly industrialised Developed Total APEC The shift toward natural gas in the fuel mix for electricity generation features in all APEC economies. with the most substantial increases in gas consumption arising in economies that are furthest from competitive energy markets at the beginning of the simulation period. For example. oil and coal consumption. the share of gas fired generation in Thailand expands by 3 percentage points relative to the reference case in 2010. and in which gas already plays an important role (figure 22).

Even though no liberalisation of coal markets is assumed in this study. where coal already accounts for more than 40 per cent of the fuel used in electricity generation. 2010 Reference case Comprehensive liberalisation Other developing Newly industrialised Developed Total APEC consumption is less strong than in the case of natural gas and electricity (figure 21). Consequently.22 40 30 20 10 % China Share of gas in electricity generation fuel mix. With coal accounting for close to 50 per cent of the fuel mix in electricity generation. oil consumption in Malaysia declines following the deregulation of energy markets. Substitution possibilities for oil are more extensive in residential and industrial sectors than in the transport sector. deregulation of other energy sectors has indirect implications for coal. the liberalisation of energy markets in Malaysia leads to a high degree of fuel switching in the nontransport sector — primarily toward electricity and natural gas. The largest price and demand impacts occur in developing APEC economies such as Mexico and Indonesia — the third and fifth largest oil producing economies in the APEC region — where oil industries are large and highly regulated. APEC consumption of both crude oil and refined oil rises by less than 1 per cent relative to the reference case in 2010. This occurs because. This is most noticeable in the newly industrialised economies. higher electricity consumption in APEC leads to an increase in coal consumption across the region (figure 22). In contrast with most other APEC economies. particularly in Korea and Chinese Taipei. Both of these economies have limited indigenous energy Deregulating energy markets in APEC 99 . the transport sector in Malaysia accounts for only one third of total oil consumption. unlike other APEC economies. Demand for transport services accounts for the largest share of oil consumption in APEC and is the main driver of increased oil consumption in the region.

The expansion of natural gas production is concentrated in APEC economies that are furthest from competitive gas markets and that have large indigenous gas reserves (figure 23). Malaysia and Mexico where gas production is expected to be 14–20 per cent higher at 2010 than in the reference case. the competitiveness of natural gas for electricity generation is enhanced relative to coal. The relatively smaller impacts on coal consumption in developed economies such as Australia and the United States reflect not only relatively competitive energy markets in these economies but also their substantial natural gas reserves. 2010. These include. coal and oil. the relatively higher growth in production implies that APEC becomes a more important supplier of natural gas to the world as a result of liberalisation of energy markets. principally. 23 China Australia Mexico Indonesia China Mexico Malaysia Indonesia Canada Change in gas. The increase in natural gas output is most significant and larger than the increase in gas consumption in APEC. As APEC’s production and consumption of natural gas are largely in balance on a regional scale in the reference case. Energy production impacts Stronger demand for energy following the liberalisation of energy markets in APEC is matched by higher regional production of gas. developing APEC economies such as Indonesia.resources. This is underpinned by the substantial efficiency improvements in gas extraction and reticulation industries following deregulation in the region. following comprehensive liberalisation Relative to the reference case Coal Oil Gas % 5 10 15 20 100 Deregulating energy markets in APEC . As the gas market is liberalised further in these economies. oil and coal production in selected APEC economies. with imported coal being highly cost effective relative to imported LNG and oil.

APEC oil production is projected to grow only marginally following energy market reform. reflecting limited cross-border electricity trade in the region. China. the enhancement of competition. The main exceptions to this observation are electricity sales between the United States and Canada. and between China and Hong Kong. as electricity generated in Canada and Mexico becomes more competitive relative to electricity generated in the United States because of more fundamental reform in the former two economies. the changes in consumption and production are almost identical across most APEC economies. However. particularly Mexico and Indonesia. leads to a small increase in coal output. This occurs because of the more limited scope for reform and productivity improvements in the oil sector in most APEC economies. For example. this is of little significance for overall electricity consumption in the United States because electricity imports account for just 1 per cent of consumption. imports of electricity into the United States increase by 17 per cent compared with the reference case in 2010. The bulk of the expansion in the oil industry is attributed to refined oil products in major oil producing economies.In contrast. The limited impact on coal production in other coal producing APEC economies reflects the reallocation of resources toward other sectors such as natural gas and energy intensive manufacturing where competitiveness increases most as a result of reform in the energy sector. Deregulating energy markets in APEC 101 . For electricity. the United States and Mexico. Even though the coal sector is assumed not to undergo further deregulation in this study. Energy trade impacts The impacts of energy market liberalisation on energy trade are determined in large measure by the changes in regional energy consumption and production. with an increase in total oil production of less than 1 per cent relative to the reference case in 2010. The changes in relative competitiveness resulting from the reform of energy markets determine the electricity trade impacts in economies with established transborder transmission networks. particularly in the electricity sector. China is the single largest contributor to the expansion in regional coal production (figure 23). that are assumed to implement substantial reform in their downstream oil industries (figure 23).

These economies not only have a comparative advantage in gas production because of their large gas reserves but. Australian coal exports at 2010. oil and coal trade. representing more than half of total gas trade in APEC. are largely unchanged as a result of energy market liberalisation. Gas exports from Canada are dominated by pipeline gas to the United States and as gas markets in both Canada and the United States are already widely liberalised. as well as in Japan. In addition. Similar but less pronounced trends are anticipated in other smaller markets for imported natural gas such as Chile and Mexico. Indeed. realise a substantial improvement in their international competitiveness relative to other gas exporting APEC economies such as Canada. 24 10 8 6 4 2 % Change in APEC gas. 2010. following comprehensive liberalisation Relative to the reference case Gas Oil Coal Exports Imports 102 Deregulating energy markets in APEC . in particular Indonesia and Malaysia. the impacts of further deregulation are small. Increased demand for imported gas is particularly strong in key north east Asian markets where substantial deregulation is implemented. For example. creates an additional demand for coal imports to these resource poor economies. Increased demand for gas imports. relative to the reference case is supplied primarily by major gas exporters to the region. gas trade is highly affected by the removal of barriers to competitive energy markets (figure 24). Low cost coal producers that do not increase their domestic coal consumption substantially as a result of energy market deregulation are the main suppliers of the higher regional demand for coal. liberalisation of electricity markets in the newly industrialised economies of Korea and Chinese Taipei. Japan and Korea are expected to increase their LNG imports by around 8 per cent and 10 per cent respectively relative to reference case levels in 2010. more importantly. gas exports from Canada. mainly in Asian economies.In contrast.

dependent on imports from the Middle East for the vast majority of their domestic oil requirements. are projected to decline relative to the reference case as resources are attracted to deregulated oil and gas sectors and coal exports are constrained by higher domestic consumption. for example. there are significant differences across individual APEC economies. such as China and Indonesia. reflecting their oil resource endowments and oil industry structures. for example. Deregulation of the downstream oil sector in developing economies that are assumed to require more extensive reforms to reach a fully competitive market. Larger changes in oil trade are expected to occur in developing APEC economies relative to newly industrialised and advanced economies. For example. Conversely. falling by 8 per cent compared with the reference case. oil imports are virtually unchanged as a result of liberalisation initiatives (figure 24). The increase in exports of refined oil by developing APEC economies largely displaces exports from other APEC economies. In the case of Indonesia and Mexico. with major oil importers in the Asian region. such as China and Indonesia. the results Deregulating energy markets in APEC 103 . Despite the small trade impacts for APEC as a region. albeit from a low base. This implies that. the gains in international competitiveness in the oil refining industry are sufficiently large to generate a substantial increase in exports of refined oil products from these economies relative to the reference case. Indonesia’s total oil imports increase by around 2 per cent relative to the reference case in 2010. are 16 per cent higher than the reference case level in 2010. On the other hand. it is more cost effective to import crude oil for domestic processing than to import refined oil for domestic consumption. coal exports from other major suppliers to the APEC region. more than two-thirds of APEC oil imports are sourced from non-APEC economies. Crude oil imports in Indonesia. Further. namely Japan and Korea. This result is consistent with the relatively small changes in APEC oil consumption and production. In comparison with gas and coal. At the aggregate regional level. leads to an increase in crude oil imports in these economies relative to the reference case. with Indonesian imports. as the refined oil sector becomes more competitive relative to the upstream oil sector following deregulation. are around 1 per cent higher than in the reference case.for example. In net terms. oil trade in APEC is less affected by energy market liberalisation. imports of refined oil products are projected to fall in these economies.

Canada and Indonesia the leading oil exporters. The need to strengthen the security and reliability of energy supply to meet energy demand requirements in APEC economies has been reinforced in the light of the terrorist attacks in the United States in 2001. In this context. Reflecting widely disparate patterns of oil production and consumption. deregulating the oil sector in tandem with electricity and gas industries leads to slightly lower oil imports relative to consumption. the United States and Korea the largest oil importers. Against this background. The impact of energy market deregulation in APEC on oil imports is characterised in this study by a small increase in crude oil imports matched by a small Continued ➮ 104 Deregulating energy markets in APEC . the introduction of competition in energy markets can have wider repercussions for the reliability and security of energy supply (see box 4). the concentration of proven global oil reserves in the Middle East and concerns about the security of shipping routes linking the Persian Gulf to Asia. In 1999. APEC Leaders and Ministers endorsed the APEC Energy Working Group’s strategic approach to implementing the APEC Energy Security Initiative as part of the Shanghai Declaration in October 2001. with Japan. From an APEC perspective. Both newly industrialised and developed APEC economies are projected to import less crude oil but more refined oil products in response to the shifts in relative competitiveness arising from the different patterns of productivity gains within APEC. reflecting the high dependence of APEC economies on oil imports. crude oil imports accounted for around 55 per cent of regional oil consumption. Energy security considerations in APEC are dominated by oil. For APEC as a whole. oil supplies from the Middle East accounted for approximately 28 per cent of oil consumption. The lower reliance on oil imports could be interpreted as an improvement in energy security.indicate that exports of refined oil products from Canada are likely to be lower than the reference case level in 2010 by approximately 1. Nonetheless. 4 Energy market liberalisation and energy security in APEC Energy security has long been a key policy priority in many APEC economies. and Mexico. net oil import requirements vary strongly across APEC member economies.5 per cent. while the corresponding figure for Asian member economies was as high as 55 per cent. it is pertinent to consider the implications of energy market liberalisation for energy security in the APEC region.

Energy security is highly contingent on the improved efficiency of energy markets and an outward looking regime that ensures reliable trading networks. particularly in the Asian APEC region where network industries are relatively less developed. In net terms. it is likely that some economies will focus on priority sectors and implement liberalisation policies in a less comprehensive manner within the timeframe of this study. namely electricity. this involves the opening of trade regimes. the achievement of energy security objectives in APEC is closely linked to the liberalisation of other key energy markets — in particular electricity and natural gas. there are other aspects of energy sector deregulation that are not captured by the concept of oil import dependence but which contribute to enhanced energy security in a broader sense. is likely to be advanced through regulatory and structural reform in energy markets. Further. These sensitivity analyses provide some insight 4 Energy market liberalisation and energy security in APEC continued decrease in imports of petroleum products. The sensitivity analyses presented in this section are designed to identify the sectors where most of the significant impacts arise under a multisectoral approach to liberalisation. the pursuit of energy security objectives. natural gas and downstream oil sectors. Such developments not only provide opportunities for APEC economies to complement each other in the provision of energy resources but also to lower the cost of energy supply. and the removal of impediments to the efficient operation of domestic oil markets. However. Deregulating energy markets in APEC 105 . defined narrowly in terms of lower oil import dependence. In relation to oil. given that energy market reform is a complex and resource intensive process. oil imports are virtually unchanged for the region as a whole. Deregulation of these markets can be expected to improve the reliability of access to energy resources by providing economic incentives to expand interregional gas pipelines and electricity networks. the development of adequate infrastructure in terms of receiving terminals. pipelines and refineries. from an APEC wide perspective. More generally.Sensitivity of results to the coverage of liberalisation The analysis presented above is based on the assumption that liberalisation initiatives are adopted in the APEC region concurrently across all key energy sectors where there are still significant impediments to competition. Given the relatively larger increase in regional oil consumption. this suggests that.

into the potential impacts of deregulation if it is limited to only one key energy sector.

Liberalisation of the electricity sector only
Because electricity is an important input to economic activity and reform of the sector has the potential to deliver a significant productivity boost to economies implementing wide ranging deregulation programs, the electricity supply industry has led the reform agenda to date. It is also the focus of proposed reform programs in many APEC economies. The results of the simulation presented in this section illustrate the potential impacts when the coverage of liberalisation policies is limited to the electricity sector. The results suggest that a large proportion of the gains in GDP from comprehensive liberalisation is attributable to the liberalisation of electricity markets (figure 25). This is supported by the significant role that electricity plays as an input to production processes and in household expenditure. The results also reflect the highly regulated regimes that currently characterise the electricity industry in many APEC economies. As a result of the liberalisation of electricity markets only, GDP in the APEC region at 2010 is 0.25 per cent higher than the reference case compared with a difference of 0.3 per cent in the comprehensive liberalisation scenario. A shift in the production structure to energy intensive sectors is also evident in this scenario as electricity intensive sectors enhance their competitiveness relative to other sectors in the economy.

25
5 4 3 2 1 %

Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and electricity liberalisation only Relative to the reference case
Electricity only All energy sectors

GDP

Electricity

Gas

Oil

Coal

106

Deregulating energy markets in APEC

While the impacts of electricity sector liberalisation on income and energy intensive output are broadly comparable with the impacts of comprehensive deregulation on these variables, the effects on the composition of primary energy consumption are significantly different. When the electricity sector is liberalised as part of a comprehensive reform package that includes the gas and oil sectors, there is a marked shift to natural gas in the energy consumption mix. Alternatively, when liberalisation is restricted to the electricity industry alone, coal assumes a greater role in primary energy consumption (figure 25). Coal consumption in the APEC region rises by 1.7 per cent relative to the reference case at 2010 while the corresponding change under a comprehensive deregulation scenario is 1.4 per cent. Conversely, gas consumption increases by only 0.6 per cent with partial liberalisation compared with 5 per cent under comprehensive liberalisation. This is because coal is an important substitute for gas in electricity generation. When the gas market is not liberalised, the relative competitiveness of natural gas and coal is unchanged, thereby reducing the incentive to switch to gas in the power generation sector.

Liberalisation of the gas sector only
As the fastest growing source of energy demand, natural gas is likely to play an increasingly important role in the fuel mix in the APEC region. It is already the dominant fuel used for electricity generation in several developing APEC economies. In this simulation, it is assumed that energy market liberalisation initiatives in APEC are focused on the natural gas sector alone.

26
4 2

Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and gas liberalisation only Relative to the reference case
Gas only All energy sectors

%

–2 GDP Electricity Gas Oil Coal

Deregulating energy markets in APEC

107

Compared with the benefits achieved under comprehensive liberalisation, the income, structural and energy sector outcomes of gas market liberalisation undertaken independently of reform in other key energy sectors are relatively modest (figure 26). This is because natural gas represents only a small component of energy consumption and production in APEC. Further, around 80 per cent of natural gas production in APEC is in the United States, Canada and Australia — economies that already have relatively open and competitive gas markets. The benefits of liberalising natural gas markets alone are concentrated in developing APEC economies where substantial reform is assumed to occur and where gas production and distribution sectors contribute to a larger share of economic output. These include economies such as Indonesia, Malaysia and Mexico where significant domestic gas resources are available. The competitiveness of gas and energy intensive industries in these economies is enhanced substantially relative to competing industries in the United States, Canada and Australia in particular. Gas exports from developing economies therefore expand significantly at the expense of exports from developed economies. For example, exports of natural gas from Indonesia and Malaysia are more than 20 per cent higher at 2010 than in the reference case. For these two economies, the export results are broadly in line with those achieved under a comprehensive liberalisation scenario. Even though the macroeconomic impacts of liberalisation of the gas sector are relatively modest, the substantial increase in gas consumption that is likely to result from regulatory reform underscores some important policy implications for APEC. In particular, the enhanced role of natural gas will require significant investment in both gas supply infrastructure and end use equipment.

Sensitivity of results to the timing of liberalisation
In addition to the coverage of energy market liberalisation, the timing of liberalisation is another element of reform that can vary from the assumptions adopted in this study. Given the considerable uncertainty about the timing and pace of reform proposals across APEC economies, it is possible that the actual time horizon for liberalisation will be much longer than that assumed in this study. Indeed, adjustment to original reform schedules has already been evident in a number of member economies, often in response to political pressures, and to a lesser extent, as a result of technical issues.
108 Deregulating energy markets in APEC

the benefits obtained in terms of real output growth are smaller. This is more evident in developing and newly industrialised economies where delayed or slower reform processes reduce the scope for achieving a more efficient allocation of resources over the period to 2010 27 2. 2010. The results are indicative of the potential impacts of reaching fully liberalised energy markets. APEC economies that are already advanced in terms of electricity market reform (group 1 in chapter 4) are assumed to complete the reform process by 2010 and achieve the full benefits of liberalisation by the end of that period. as outlined in table 11. In particular. On the other hand. in 2002 and realise the full benefits of reform by 2010. These economies are assumed to realise only 50 per cent of the productivity gains that are assumed in the standard simulations. The productivity assumptions for these economies are the same as in the original simulation. APEC economies that are yet to implement many or most of the major reforms required to attain fully competitive electricity markets (groups 2 and 3 in chapter 4) are assumed to move half way toward the achievement of fully competitive markets by 2010.5 % Change in APEC GDP and energy consumption.The analysis presented above assumes that APEC economies commence the liberalisation process.0 1.0 0. In order to illustrate the impacts of potential setbacks in the reform process. as defined in the simulations. following full and partial electricity liberalisation Relative to the reference case Full electricity liberalisation by 2010 Partial electricity liberalisation by 2010 GDP Electricity Gas Oil Coal Deregulating energy markets in APEC 109 . Reflecting the weaker productivity performance when most APEC economies implement only a proportion of the reforms necessary to create a liberalised electricity market by 2010.5 1.5 2. The revised productivity assumptions are outlined in table 14. it is assumed in this simulation that some economies progress electricity liberalisation agendas at a slower pace than others.

energy consumption rises less strongly in 2010 relative to the reference case. However. For the APEC region as a whole. A competitive market structure will only develop if energy suppliers are not in a position to exercise market power by raising prices above competitive levels or restricting output below that which would prevail in a competitive environment. Further. developed economies are also affected by partial liberalisation in newly industrialised and developing economies.6 per cent relative to the reference case at 2010 while the corresponding increase under a faster timetable is 0. As a corollary of the strong trade linkages within the APEC region. Sensitivity of results to market and regulatory design Appropriate market and regulatory design is critical to ensuring that liberalisation of energy markets delivers the expected benefits. When liberalisation is implemented over a longer time frame. enhanced international competitiveness in these developed economies is largely offset by lower economic growth in APEC economies that only partially reform their electricity industries by 2010. where exports of energy intensive commodities are principally targeted to newly industrialised APEC economies. Advanced APEC economies that realise all the potential benefits of liberalisation by 2010 improve their competitiveness relative to most developing and industrialised economies compared with the situation where liberalisation of the electricity sector is finalised across all APEC economies by 2010.25 per cent when liberalisation objectives are met by 2010. GDP in 2010 is 0. total primary energy consumption rises by 0. The energy consumption impacts of slower electricity market liberalisation are strongly correlated with the impacts on GDP.15 per cent higher than in the reference case compared with an increase of 0.8 per cent. This is highlighted by the significant expansion of energy intensive output in Australia. as markets are allowed to play a more important role in influencing energy consumption and production decisions.(figure 27). for example. the regulatory framework required to address issues associated with natural monopolies and externalities needs to be compatible with a system that seeks to foster competition and efficiency. 110 Deregulating energy markets in APEC . In the developing economies (excluding China).

In this sensitivity analysis. if poor market design and regulatory policies are adopted. 28 2 Change in APEC GDP and energy consumption. the exercise of market power by generators. In addition to tight supply and demand conditions. In particular. liberalisation efforts may fail to deliver the expected outcomes. competitive and noncompetitive electricity market outcomes Relative to the reference case Fully competitive electicity market Residual market power 1 % GDP Electricity Gas Oil Coal Deregulating energy markets in APEC 111 . it is assumed that the improvements in efficiency and reductions in production costs that result from increased competition are passed on to the consumer in the form of lower energy prices. However. 2010. it is assumed that energy sector liberalisation undertaken in APEC economies is designed in a way that achieves fully competitive market outcomes. Electricity wholesale markets are highly vulnerable to the exercise of market power because of the economic and physical characteristics of electricity production and delivery.In the earlier simulations analysed in this chapter. Policy failures of this nature are well demonstrated by the events related to the energy problems in California in 2001. Consequently. the cost savings achieved by electricity producers through liberalisation are not fully passed on to electricity users in terms of lower prices but instead contribute to increasing the profit margins of the electricity utilities. This experience provides the basis for considering the potential impacts of residual market power in electricity markets. compounded by the lack of demand-side participation were key factors that led wholesale electricity prices to escalate to levels well beyond expectations (Swan and Short 2001). it is assumed that liberalisation of electricity markets in APEC economies is not fully effective in removing the scope for the exercise of market power by generators.

For the APEC region. liberalisation with residual market power leads to lower electricity consumption and primary energy consumption than would be the case under full competition (figure 28). In the case of electricity. principally. around 205 gigawatts would be required in the developing and newly industrialised economies. By limiting the availability of lower priced electricity to end users. In this case. The reference case projections indicate that electricity generation capacity in all APEC would need to rise by more than 25 per cent over the period from 2001 to 2010 to accommodate the expected increase in electricity consumption. the largest increases in consumption occur in electricity and natural gas. Increases in gas pipelines and LNG processing facilities would also be substantial.In line with expectations. When markets are liberalised comprehensively and simultaneously. substantial investment in electricity and gas infrastructure could be required. This compares with a corresponding increase of more than 2 per cent relative to the reference case where end users are also direct beneficiaries of the reform process. This implies that in order to realise the benefits of liberalisation. as discussed in the first simulation. This investment will be additional to that which is necessary to satisfy the increased demand for electricity in the reference case. Of this. Investment in deregulated energy markets All of the simulations presented above indicate that energy market liberalisation is likely to lead to increases in energy consumption that could be quite significant. electricity consumption increases by 0. This is because the economywide impacts of liberalisation and the underlying shift of resources toward energy intensive sectors are reduced. This implies investment in generation capacity for all APEC of approximately US$530 billion (1999 dollars). the results of this analysis suggest that the implications of liberalisation under these circumstances are likely to diverge from those in a fully competitive market. These investment cost estimates are based on a number of assumptions relating. to the discount rate used and the electricity generation capacity factor.2 per cent relative to the reference case in 2010. it is estimated that additional generation capacity of approximately 330 gigawatts would be required to meet the projected increase in electricity consumption throughout the APEC region. a discount 112 Deregulating energy markets in APEC .

The plant capacity factor. Information on the cost of investing in new capacity by fuel is from NEA/IEA (1998).5 per cent higher than its reference case level. This is equal to 9 per cent of the total investment in electricity generation capacity over the reference case period.rate of 5 per cent is used to approximate the opportunity cost of capital. A significant proportion of these additional investment requirements will also be in the developing and newly industrialised economies. In the comprehensive liberalisation scenario described earlier. is assumed to be 75 per cent. following comprehensive liberalisation Relative to the reference case Capacity factor: 75% Capacity factor: 65% 60 40 20 1999 US$b Discount rate: 5% Discount rate: 10% Deregulating energy markets in APEC 113 . In fact. These estimates of investment requirements in the electricity sector are lower than they are likely to be in reality because they are related to generation capacity expansion only. In the developing and newly industrialised economies the increase relative to the reference case is much higher at up to 6 per cent. total electricity consumption in APEC at 2010 is almost 2. or the proportion of total capacity that is used to generate electricity. Using the same assumptions as above. Additional investment costs would increase if a lower capacity factor were assumed. additional investment will also be required in other areas of electricity supply such as transmission and distribution networks. the additional investment required to ensure that this level of electricity consumption can be met is estimated to be around US$48 billion (1999 dollars) (figure 29). About 54 per cent of this investment will be required in the developing and newly industrialised economies (figure 30). The total investment costs would rise if a higher discount rate were used. 29 Change in investment in electricity generation capacity to 2010. reflecting the relatively large potential changes in energy consumption in regions where most of the major elements of reform are yet to be introduced.

30

Investment in electricity generation capacity at 2010, following comprehensive liberalisation Relative to the reference case

Developed 46%

Developing 40%

Newly industrialised 14%

The enhanced role of natural gas in APEC economies will also create the need for more investment in gas supply infrastructure relative to the reference case. Gas consumption in APEC in the comprehensive and simultaneous simulation expands by 5 per cent, or approximately 55 million tonnes of oil equivalent, by 2010 relative to the reference case. Again, a large proportion of the increase is projected to occur in the developing and newly industrialised economies. Delivering additional gas of this magnitude will involve investment in both gas producing and consuming economies in the region. In gas producing economies this will involve the further development of gas pipelines or the expansion of LNG export terminals and related infrastructure. In gas importing economies, expansion of LNG receiving terminals and gas distribution networks will be required. The total additional investment in gas supply infrastructure that will be necessary to support the substantial increase in natural gas consumption in APEC is difficult to estimate because of the considerable variation in gas consumption, production and trade profiles throughout the region. Nonetheless it is likely to be high. Ensuring that sufficient investment is available to support growth in energy markets is a particularly important issue for the developing and newly industrialised economies. This is because it is in these economies that the largest energy supply capacity expansions are projected to occur. Further, new capacity additions will represent a greater proportion of total capacity in these economies and they are, therefore, at greater risk of not achieving secure energy markets if the necessary investment is not forthcoming. This can be compounded by the actual and perceived risk attached to investment in

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Deregulating energy markets in APEC

developing regions by lending institutions. Underdeveloped or uncertain regulatory or investment frameworks can add to this assessment. Liberalisation of energy markets can, of course, be a key factor for attracting investment in the sector. By removing impediments to private investment, both domestic and foreign, by establishing property rights and by otherwise increasing returns to capital, regulatory reform can create an attractive environment for investment flows. Nevertheless, if the benefits of liberalised energy markets are to be fully captured it is important that economies ensure that their investment regimes, including foreign investment, are open and supportive. APEC initiatives that encourage the facilitation of investment flows in parallel with energy market reform will be particularly beneficial in this regard.

Deregulating energy markets in APEC

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6
conclusions
Energy markets in APEC are undergoing significant reform in response to competitive pressures to deliver lower energy prices and secure adequate private sector capital for the expansion of energy infrastructure. While the specific objectives of reform vary across APEC economies, the overriding aim is to encourage efficient energy supply and use. Even though the details and timing of reform proposals vary widely, several key elements characterise the reform models that are being considered or implemented throughout the APEC region. In general, the reforms are focused on limiting government intervention, allowing market forces to work in segments of energy industries where competition is feasible and establishing an effective regulatory framework for the segments that are not amenable to competition. The findings in this study indicate that comprehensive liberalisation of electricity, natural gas and downstream oil markets could have significant implications for economic growth in the APEC region, as well as for energy consumption, production and trade. The most substantial impacts are expected to occur in developing APEC economies where energy market reform is least advanced. For APEC as a whole, the gain in GDP translates into an increase in regional economic output at 2010 of around US$71 billion (in 1999 prices) — larger than the current size of the New Zealand economy and approaching the size of the current economy of Chile. The results from the modeling simulations also demonstrate that the increase in economic activity in APEC following energy market reform leads to increases in energy consumption. This is in response to lower energy prices and a shift in the structure of economic output to more energy intensive sectors. Most of the productivity gains following energy market reform occur in the electricity and gas sectors where regulation is currently strongest. Indeed, the results indicate that liberalisation of electricity sectors in APEC economies
116 Deregulating energy markets in APEC

This is. relative to the reference case. for example. This is because electricity plays a fundamental role in most economies as an input to production processes and as a component of household expenditure. The study highlights some important implications for APEC energy policy makers. The increase in gas consumption reflects in large part its increasing competitiveness for power generation. As a result. particularly in the electricity and natural gas sectors. particularly strong for natural gas. including private and foreign investment. This could result in generators retaining the efficiency dividends of liberalisation as higher profits rather than passing them through to end users in the form of lower prices. This will necessitate significant investment in energy infrastructure. Investment in the developing economies. In the case of oil. will be critical to ensuring that the benefits of liberalisation are achieved. especially in the wholesale market that is vulnerable to noncompetitive behavior. with the most substantial increases occurring in economies that are furthest from liberalised markets and in which gas already plays a significant role. Because of the productivity boost to the natural gas industry in the region APEC also becomes a more competitive gas supplier to international markets and total gas trade increases. The shift toward natural gas is a feature in all APEC economies. production of fossil fuels in APEC economies also increases following the implementation of regulatory reform. although lower dependence on imports of oil products is partly offset by increased imports of crude. will be important. The size and structure of member economy energy sectors will change following comprehensive liberalisation of energy markets. consumption of electricity and natural gas rises more strongly in APEC economies after regulatory reform than consumption of other fuels. allow electricity generators to exercise market power. In response to stronger regional energy demand. APEC’s net dependence on imports declines following energy market reform. again.makes the single largest contribution to the overall GDP gains. In this context. The APEC Deregulating energy markets in APEC 117 . in particular. The results of the modeling simulations also demonstrate the importance of effective energy market design if the benefits of liberalisation are to be fully realised by APEC economies. Poor market design could. the development of policy initiatives to facilitate investment.

regulatory and trade regimes affecting natural gas markets in APEC economies. Reform can also assist APEC economies to achieve their important policy objective of ensuring stable. The initiative recognises that. fiscal. with growing demands on limited government resources. the private sector will play an increasing role in meeting gas infrastructure financing requirements. 118 Deregulating energy markets in APEC . The initiative highlights the need to establish stable. the pursuit of open energy markets. The study also indicates that energy market reform can contribute to meeting some of the key energy policy principles endorsed by APEC Energy Ministers. These include the development of more efficient production. distribution and consumption of energy.Natural Gas Initiative provides a useful example of a framework for accelerating investment in natural gas supplies. secure and reliable energy supplies. and the promotion of capital flows. transparent and predictable legal. infrastructure and trade networks in the APEC region.

The contestability of consumers is to be phased in according to state based timetables. Full retail contestability has already been introduced in some states. transmission and distribution. Since 1995. while deregulation has removed barriers to interstate trade in electricity. The ‘national electricity market’. The code also gives consumers the ability to choose their retail supplier. reforms have progressed in three key Deregulating energy markets in APEC 119 . The market is structured around a compulsory pool or spot market for the wholesale trade of electricity between generation and retail businesses. mostly state owned.appendix A energy reform plans and progress – selected APEC economies Australia The Australian electricity supply industry has undergone substantial reform since the federal and state governments together endorsed the introduction of a competitive national electricity market in 1995. The utilities generally relied on one or a few private producers to supply gas under long term contracts. The code requires nondiscriminatory access to the entire transmission and distribution network. Reforms to corporatise or commercialise all remaining government utilities have placed publicly owned electricity suppliers on a more competitively neutral footing with their private sector counterparts (Productivity Commission 1999). Before the initiation of a reform process in the mid-1990s. the downstream Australian natural gas industry was also largely characterised by separate state markets served by vertically integrated monopolies. Prior to the implementation of reforms. Assets have been privatised to varying degrees across the states. vertically integrated monopoly suppliers which operated in separate regulated state markets. Restructuring has included the vertical separation of generation. and retail supply. which commenced operation in 1998. the industry largely comprised publicly owned. is a mechanism for balancing electricity demand and supply in five states and territories in eastern and southern Australia. An independent system operator operates the national electricity market according to the national electricity code.

Coal production in Canada is mainly from privately owned surface mines. They also own retail petrol stations. Distribution is carried out by 16 utilities. All public gas utilities have been either privatised. However. Third party access is allowed to distribution networks. removal of legislative and regulatory barriers to competition. Aside from Alberta and Ontario. Four vertically integrated oil companies each own two of the eight refineries. With the exception of support for the government owned Cape Brereton 120 Deregulating energy markets in APEC . corporatised or prepared for privatisation. Canada Vertically integrated state owned monopolies have traditionally dominated the Canadian electricity industry. each with a regulated monopoly over certain regions. Reforms to promote downstream competition have been introduced since a major review in 1996 (IEA 2001b). major reforms have been implemented in some provinces. but it is planning to sell its share. Ontario planned to implement full retail access in May 2002 (National Energy Board Canada 2001). Ontario was one of the first jurisdictions in north America to allow residential and other small consumers to buy gas competitively. no other provinces are planning to introduce full retail competition.areas: the development of a national pipeline access regime. from 1984 (IEA 2000). All oil exploration and production is carried out by private firms under licences granted by federal and/or provincial governments. Most other provinces have implemented or are planning to implement wholesale competition. and structural reform of gas facilities and utilities (Productivity Commission 1999). Alberta has implemented a major reform program. starting with the introduction of wholesale competition in 1996 and culminating in the introduction of full retail competition in January 2001. Oil exploration and production in Australia is undertaken by private firms under permits granted by the federal government (for offshore resources) and the state governments (for resources onshore and in coastal waters). and continue to do so in many provinces. Transmission is also carried out by private firms (with the exception of one system in Saskatchewan). mainly privately owned. The upstream gas industry comprises around 1000 private companies. Petro Canada. The federal government holds a small stake in one oil company.

and owners are required to provide open access. Empresa Nacional de Petroleo (ENAP). to allow smaller consumers to deal directly with generators. and 100 per cent of coking coal demand. The industry now comprises 26 generation companies. with prices negotiated between generators and transmission companies. ENAP also owns the three domestic oil refineries. transmission and distribution have been separated. Imports account for almost 80 per cent of its thermal coal demand. Generators can sell to the spot market or directly to distribution companies or large consumers. State owned generators. Consumers have access to competitive retail markets. 5 transmission companies and 36 distribution companies. Consumers with annual consumption less than 2 megawatts are required to purchase from distributors. All natural gas transmission and distribution pipelines are privately owned. Private firms are involved in exploration and production joint ventures with ENAP. Chile Chile was the first economy worldwide to restructure its electricity supply industry. with IPPs accounting for the rest. which have been allowed Deregulating energy markets in APEC 121 . Canada provides no subsidies to coal mining (IEA 2000). New regulations to make private investment in the industry more attractive are expected to be approved in 2002. Gas distribution companies do not have the right to be sole providers of gas in any region. Chile has limited coal production. which is to be privatised. account for approximately half of total supply. but plans to reduce the limit. are currently being considered. The state owned oil and gas company. China The State Power Corporation of China (SPCC) is involved in all stages of electricity supply in China.Development Corporation. which compete with imported petroleum products. Over the past decade the industry has been completely privatised and generation. which are affiliated with either SPCC or regional utilities. Domestic production is controlled by the national coal company ENACAR. Owners of transmission networks are required to offer open access. IPPs. dominates the upstream oil and gas industries. Private oil companies compete in an open retail market.

China Two vertically integrated private firms. HEC supplies Hong Kong Island. The two firms are also responsible for sales and marketing of petroleum products and petrochemicals. Regulatory changes made in 2000 open the way for foreign firms to take majority stakes. China’s upstream coal industry comprises more than 90 key state owned mines as well as local mines administered by provincial and county governments and township or private mines managed by small collective organisations or individuals. China. China plans to aggregate the large state mines into seven corporations by the end of 2005. Foreign companies are involved through production sharing arrangements. Hong Kong. while the distribution arms of SPCC and the regional utilities are responsible for distribution and retailing. Pilot programs involving competitive generators selling to a single buyer have been run in Zhejiang.since 1984. the Hongkong Electric Co. The 122 Deregulating energy markets in APEC . Price restraints apply to domestic sales of refined products. Ltd (HEC) and CLP Power Hong Kong Ltd (CLP Power) supply electricity in Hong Kong. The industry is regulated by central and local governments. A legal framework is in place to attract foreign investment in coal exploration and production. quotas and taxes. China National Petroleum Corporation (CNPC) and SINOPEC own most of the refining capacity and pipeline and storage infrastructure. Foreign firms have been involved in gas pipeline projects with minority stakes. Shandong and Shanghai (World Energy Council 2001). Ap Lei Chau and Lamma Island and CLP Power supplies Kowloon and the New Territories. must sell to SPCC or the regional utilities under long term contracts. Imports are subject to tariffs. IPPs and state owned generators will compete to sell electricity to a single buyer which will then be the single seller to the state owned distribution utilities. Downstream gas functions are largely controlled by China Petrochemical Corporation (SINOPEC). A new state owned enterprise will operate the unified transmission network. The six regional transmission networks are controlled by SPCC. Upstream oil and gas activities are dominated by four state owned enterprises. Proposed electricity reforms are designed to encourage competition between generators.

no firm plans have been put forward. Legislation to encourage new investment and competition in generation is currently before the parliament. among the highest in the world. Further major reform plans. Caltex and Mobil) occupying 90 per cent of the petroleum market and 80 per cent of the diesel market. All aspects of supply are controlled by private firms. Over the past year the government has taken some steps to encourage competition — restrictions on bidders for petrol station sites have been relaxed. Indonesia’s oil and gas industries are dominated by state owned Pertamina.Scheme of Control Agreement between the government and the power companies defines the regulatory framework. The Directorate-General for Electricity and Energy Development of the Ministry of Mines and Energy regulates the industry. existing sites have been put up for tender when leases have expired and petroleum product prices. Indonesia State owned Perusahaan Listrik Negara (PLN) is involved in all stages of the Indonesian electricity supply industry. Towngas and LPG are supplied to residential and commercial consumers by private firms. sourced from the South China Sea. multibuyer–multiseller. The market for petroleum products in Hong Kong. Pertamina owns the nine oil Deregulating energy markets in APEC 123 . There is some private sector involvement in upstream activities through production sharing contracts with Pertamina. markets in Java and Bali by 2003. There are no firm plans for reform. China is highly concentrated and vertically integrated. IPPs account for around 20 per cent of total output and are required to sell to PLN under power purchase agreements. While there have been calls for imports of natural gas as an alternative to towngas. outlined in the Power Sector Restructuring Policy 1998 include unbundling of PLN and establishment of competitive. The current agreement expires in 2008. are being monitored. The government recently raised regulated electricity tariffs by about 29 per cent in an effort to encourage private investment (World Energy Council 2001). with three oil companies (Shell. is used solely for power generation. Around 50 per cent of industrial demand is met by self generation. largely due to concerns about supply reliability. Natural gas.

The limited gas distribution network is owned and operated by private vertically integrated utilities with regional monopolies. It is mainly used for electricity generation. through the Ministry of Energy and Mineral Resources. The first step toward deregulation of the industry was an amendment to the Electricity Utilities Industry Law in 1995 to allow IPPs to tender to supply wholesale power to the ten regional monopolies. A review of the effectiveness of the reforms is due in March 2003. grants permits for coal production. and retails gas along with state owned PT Gas Negara. passed by the parliament in October 2001. There are plans to reduce the threshold for contestability to one billion cubic feet annual consumption. It also has a monopoly in transmission and distribution of natural gas. when on stream. Further reform was initiated in March 2000 with the partial liberalisation of retail sales to large users.refineries and has a monopoly over distribution and retailing of petroleum products. Consumers with annual consumption greater than two million cubic feet are permitted to negotiate directly with producers. The downstream industries were deregulated in the mid-1990s. Japan Ten privately owned vertically integrated utilities with regional monopolies dominate the Japanese electricity industry. will abolish Pertamina’s upstream and downstream monopolies and open the way for unbundling and privatisation after 2003. Indonesia is a major coal exporter — exports representing around three-quarters of total production. There are no specific export restrictions. A requirement that all new thermal power stations from 2009 be subject to competitive bidding from all sources was also introduced in 2000. Removal of restrictions on imports of petroleum products has resulted in consolidation of oil refining companies while deregulation of the retail sector has resulted in an increase in the number of service stations. There is no upstream oil industry in Japan. Imported LNG accounts for around 97 per cent of Japan’s gas supply. The government. New oil and gas legislation. Indonesia is the world’s largest LNG exporter. 124 Deregulating energy markets in APEC . provide around 3 per cent of power to the established companies. The successful IPP tenders should.

Korea has no upstream oil industry. The nonnuclear generation companies are to be privatised. Agents provide transport and service facilities. The company responsible for supply facilities will be a regulated monopoly. while the other will be broken into three subsidiaries and sold to the private sector. announced in 1999. majority (51 per cent) state owned and vertically integrated. State owned Kogas is the monopoly supplier of natural gas in Korea. IPPs account for only 6 per cent of generating capacity (World Energy Council 2001). Malaysia State owned utilities Tenaga Nasional Berhad (TNB). It is the sole importer of LNG. KEPCO’s generation assets are being split into five separate companies plus a nuclear subsidiary. The downstream industry has been deregulated and the four local refineries compete with imports. currently dominates the Korean electricity supply industry. pipelines and storage infrastructure. Korea The Korea Electric Power Corporation (KEPCO). which Korea relies on for virtually all of its gas. followed by the retail market. the introduction of a competitive wholesale market from around 2003 and the eventual introduction of full retail competition after 2009. transmission and distribution. the other for supply facilities. The last coal mine in Japan ceased production in early 2002 (EIA 2002c). Berhad (SESB) and Sarawak Electricity Supply Corporation (SESCo) are Deregulating energy markets in APEC 125 . and must sell their output to KEPCO. including import terminals. Under major reform plans. distribution and retailing services. Kogas is to be split into two groups — one responsible for importing and wholesaling. Sabah Electricity Sdn. The first phase is currently being implemented. privatisation of KEPCO’s generation and distribution assets from 2002. proposes the phased unbundling of generation. The wholesale market is to be opened to competition in 2003.Japan also relies on imports to meet its coal demand. which is also the monopoly supplier of transmission. The Base Law for Restructuring the Electricity Supply Industry. Refineries are able to sell through agents or direct to petrol stations.

but TNB’s network (in Peninsular Malaysia) is connected to Singapore and Thailand. State owned PETRONAS dominates the upstream oil industry. Six independent private companies are responsible for refining. PETRONAS Gas has exclusive rights over transmission and distribution. PETRONAS Dagangan Berhad. Mexico The Mexican electricity supply industry is currently dominated by the Federal Electricity Commission (CFE). A gradual approach to industry restructuring will be adopted. Communications and Multimedia to reflect the financial cost of supply. involving the establishment of an appropriate infrastructure and regulatory framework. further IPPs are to be encouraged. Petrolium Nasional Berhad (PETRONAS) has exclusive rights to gas exploration and production. a vertically integrated public utility. often with PETRONAS as a minority partner. The main reform proposals are to encourage further private participation in upstream activities. The government regulates petrol prices. PETRONAS supplies about half of its gas production to TNB and IPPs for power generation at about half world gas prices. through partnerships with PETRONAS. although the state generators are to remain dominant. while Gas Malaysia. supply around 37 per cent of total demand. first established in the early 1990s. Under the current reform agenda. Private participation is allowed via production sharing arrangements.vertically integrated and have regional monopolies. As a result of the 1997 economic downturn. The single wholesale buyer and distributor arrangement is to be retained. is responsible for retail supply. with responsibility for both the technical and economic regulation of the industry. An Energy Commission. CFE faces limited competition from IPPs (around 6 per cent of total production) 126 Deregulating energy markets in APEC . The government does not intend to privatise PETRONAS. Private firms are involved in upstream gas businesses through production sharing arrangements with PETRONAS. the government postponed significant reform plans. A privatised subsidiary of PETRONAS. accounting for around 60 per cent of output. competes with international oil companies in retail supply. IPPs. Prices are set by a government authority. Electricity tariffs are regulated by the Minister of Energy. There are no interconnections between the three utilities. selling to TNB through power purchase agreements. has been established. a business unit of PETRONAS.

distribution and retailing. New Zealand Following extensive reform since the late 1980s. Proposals for privatisation and structural reforms were submitted to the Congress in 1999. has a monopoly over the transportation of crude oil and refined products and is authorised to manage the distribution network. are required to sell to CFE under long term contracts. Three state owned generators compete with a private generator. The Energy Regulatory Commission regulates the industry. Transpower. which supplies about 24 per cent of total demand. The competitive generation and retail sectors have been separated from the monopoly transmission and distribution sectors and there is private sector involvement in all functions except transmission. operates the transmission network with an access regime. The Mexican Energy Regulatory Commission regulates transportation. a state owned enterprise. The Mexican Constitution grants PEMEX a monopoly over exploration and production. Petrol and diesel stations operate as PEMEX franchises. a US based company which purchased the state owned vertically integrated Minera Carbonifera Rio Escondido (MICARE). but no firm plans have been submitted by the new government which was elected in 2000. PEMEX dominates the Mexican gas industry. There are currently ten firms operating in the retail Deregulating energy markets in APEC 127 . The coal industry is dominated by Mission Energy. storage and distribution. PEMEX also owns and operates Mexico’s six refineries. Reforms introduced in 1995 allow private involvement in gas transportation. the New Zealand electricity supply industry is now one of the most deregulated and competitive in the region. storage and distribution but PEMEX retains control over exploration and production. There are 31 distribution companies that are all separate from the generation and retail businesses. Ownership of distributors varies from publicly listed companies to locally owned community trusts. IPPs.in generation and has regional monopolies in transmission. PEMEX is required to provide third party access to its network and private pipeline owners are required to grant access to PEMEX. State owned Light and Power Company (LPC) and Petroleos Mexicanos (PEMEX) each account for small shares of total capacity (2 and 4 per cent respectively). permitted since 1992. PEMEX also dominates the petroleum industry. The Ministry of Energy regulates the oil industry.

Until the introduction of IPPs in the late 1980s. IPPs now account for almost 50 per cent of generating capacity. Exploration and production are carried out by private firms. Two companies. Philippines Electricity generation in the Philippines has undergone substantial change over the past decade. There is one refinery.market. competition has been extended to all consumers (World Energy Council 2001). There are five distribution companies and six retailers. As in the electricity. gas and oil industries. Contractural restrictions mean only gas from the large Maui field can use the Maui pipeline. NGC provides nondiscriminatory third party access to its network. The New Zealand coal industry is dominated by state owned Solid Energy New Zealand (SENZ). Approximately half of total coal production is exported. which is jointly owned by five oil companies. Oil exploration and production are carried out by private firms under permits granted by the government. state owned National Power Corporation (NPC) had a monopoly over power generation. with no specific gas regulator. They also retail through their own service stations. The wholesale market. Maui Developments Ltd and the Natural Gas Corporation (NGC) (privatised in 1988) own the transmission network. independent retailers and distributors in rural areas. Regulation is ‘light handed’. Following the removal of franchise restrictions in 1994. the competitive behavior of coal companies is subject to the Commerce Act 1986. The industry is currently being reviewed. and since 1995 they can contract directly with distributors and large industrial 128 Deregulating energy markets in APEC . The natural gas industry in New Zealand is characterised by light handed regulation. New legislation that came into force in August 2001 enables the government to establish a new governance board and gives the Minister for Energy new regulatory powers. established in 1996. It is common for distribution companies and retailers to operate in both gas and electricity markets. Distributors can also be retailers but distribution charges must be unbundled from energy costs. which accounts for around three-quarters of total production. The oil companies compete to supply large customers. relying on the general provisions of the Commerce Act 1986 to control anticompetitive behavior and the Information Disclosure Regulations 1997. is a voluntary market with nodal pricing.

The petroleum refining and distribution industries were deregulated in 1999 and price controls on petroleum products were removed. The Philippines is currently a small producer of natural gas. Transmission and distribution functions will be carried out by regulated monopolies. A corporation has been established to manage the privatisation of NPC. Singapore The electricity supply industry in Singapore has undergone major changes over the past seven years. which is state owned. a new statutory board. The regulated transmission monopoly will not be permitted to own any assets outside the transmission network. Further planned changes include the sale of the state owned generating companies. establishment of a new voluntary Deregulating energy markets in APEC 129 . Retail supply is to be competitive by 2004. Three generating companies were created. PowerGrid. In 1995 the generation. the largest of three refining companies in the Philippines. Power Supply holds the franchise to supply small consumers. The wholesale market will be a mix of an electricity pool and direct contracting between large consumers and generators. The Department of Energy is to establish wholesale spot market rules before June 2002. The Singapore Electricity Pool commenced operation in April 1998. The transmission system is owned and operated by NPC. Domestic oil production is also small. along with a single transmission and distribution company. while other retailers compete to supply those with annual demand above 2 megawatts. and a retail company. Singapore Power has sold its two generating companies. also commenced its role as a regulator for the electricity and gas industries. Power Supply Ltd. The Electricity Power Industry Reform Act 2001 contains further extensive reforms. The Energy Market Authority. Following the passing of legislation in March 2001. Power Seneka and Power Seraya are now controlled by Temasek Holdings. The government owns a 40 per cent share in Petron. Private firms with regional monopolies are responsible for distribution and retailing.users (World Energy Council 2001). but the new Malampaya field is expected to produce significant quantities that will mainly be used for electricity generation. transmission and distribution functions of the vertically integrated public utility were separated.

which is supplied via pipelines and distribution facilities owned by PowerGas. which is solely responsible for transmission. 130 Deregulating energy markets in APEC . The major reform proposal is for the PowerGas pipeline network to be converted to carry natural gas. Under the proposed changes to the Electricity Act. Consumers have access to manufactured gas.wholesale market with nodal pricing and extension of retail competition to all consumers by 2003. Gas pipelines are owned and operated by the Taiwan Marketing and Transportation Division of CPC. Chinese Taipei The electricity supply industry in Chinese Taipei is dominated by state owned vertically integrated Taipower. but international bids are being taken for construction of a second LNG terminal and supply of gas for power generation. Singapore has no upstream oil or gas industries. including the LNG import terminal and gas storage facilities. CPC is also involved in the downstream oil industry. Private firms own and operate approximately 70 per cent of retail petrol stations and CPC around 30 per cent. Natural gas is used only in power generation and pipelines are owned by private firms. Major reforms are contained in new electricity legislation currently before the parliament. IPPs have been permitted since 1995 and two are currently operating. An independent regulatory authority is to be established. The Formosa Petrochemical Corporation operates a refinery that opened in 1999 (EIA 2000). a state owned company. distribution and retailing. PowerGas will not be involved in any other aspect of gas supply. the industry will be split into separate generation. Distribution facilities. together with several private firms. A wholesale pool is to be established and eventually all consumers will have a choice of supplier. State owned Chinese Petroleum Corporation (CPC) is responsible for all exploration and production of Chinese Taipei’s gas and oil resources. LPG is distributed by private oil companies. are also currently owned by CPC. Taipower will eventually be privatised but may be allowed to remain vertically integrated. They sell power to Taipower. transmission and distribution segments and private investment will be allowed in all segments.

and petrochemical plants. must sell their output to EGAT. opens the import and export of all petroleum products to competition. Regulation and planning is under the control of EGAT. acts as the sole purchaser. Provincial Energy Authority (PEA) and Metropolitan Energy Authority (MEA) dominate electricity supply in Thailand. PEA and MEA purchase electricity from EGAT and are responsible for distribution and retail supply. As part of the Thai government’s privatisation plan. with only a few minor exceptions. the transmission system will be separated from generation to prevent monopoly abuse and to promote competition. mainly PTT Exploration and Production (PTTEP) and two private oil and gas companies. third party access is to be introduced for transmission pipelines. The government will no longer have access to CPC’s security reserve as CPC is to be privatised by 2005. each of the four refineries. IPPs. Deregulating energy markets in APEC 131 . pipeline functions are to be separated from gas supply and marketing. which account for the rest of capacity. as part owner of exploration and production companies. EGAT owns 84 per cent of generating capacity. PTT is also involved in both the upstream and downstream oil industries. Oil importers will be required to contribute to a security reserve. PTT purchases all locally produced gas from the producers. passed in October 2001.The new petroleum management law. The Master Plan for State Enterprise Sector Reform of 1998 specifies that competitive generation companies will bid into a power pool as well as having individual bilateral contracts with major customers. transporter and distributor. The retail petroleum market was deregulated in 1991. Private participation in pipeline construction has been introduced. Gas supply in Thailand is dominated by the Petroleum Authority of Thailand (PTT) which. a petroleum pipeline company. The National Energy Policy Office (NEPO) regulates transmission and distribution tariffs. Thailand State owned Electricity Generating Authority of Thailand (EGAT). Under reforms announced in 1999. The transmission network is owned and operated by EGAT and the distribution network by PEA and MEA. PTT was privatised in 2001 as PTT Public Company Ltd and an independent regulatory agency is to be established (NEPO 1999).

with consumers able to choose their electricity service provider. with major reforms initiated in 1994 and the new competitive wholesale and retail markets commencing operation in 1998 (Joskow 2001a). Seven states have either passed legislation or issued regulatory orders to delay implementing choice. There are three separate transmission grids. One (California) has suspended choice for residential and small business customers and 26 have not enacted legislation to restructure the industry and introduce choice (EIA 2002b). The investor owned utilities. Ownership of regional grids within these three systems varies. California was the first. federal) utilities and IPPs.United States Electricity industry structure. IPPs account for around 20 per cent of total electricity supply. The natural gas industry in the United States has undergone substantial reform since the mid-1980s and has provided a model for restructuring the electricity supply industry (Joskow 2001a). The pipeline 132 Deregulating energy markets in APEC . utilities have exclusive franchises to serve all consumers in designated regions. As part of the reform process. The Pennsylvania – New Jersey – Maryland market has developed a standard market design that is being adopted by New England and considered by New York. market organisation and reform progress vary widely across the United States. ownership. are the largest suppliers. Distribution is carried out by regulated monopolies that are privately or government owned. state. which have traditionally been vertically integrated monopolies. put transmission assets under the control of an Independent System Operator and provide nondiscriminatory access to their distribution networks for electricity service providers. Seventeen states have either enacted enabling legislation or issued a regulatory order to implement retail access. the investor owned utilities have been under pressure to separate their generation and transmission assets. public (local. Competitive wholesale markets have been established in only a few states. power companies and large users purchased gas from interstate pipelines under long term contracts. as does the degree of vertical integration. The local distribution companies then sold to small consumers at regulated prices. Generation is carried out by a mixture of investor (or privately) owned utilities. Prior to the reforms. local distribution companies. In most states.

and its subsidiaries dominate Viet Nam’s electricity supply industry. The upstream and downstream oil industries are privately owned. while the local and provincial electricity departments. In 1985 the Federal Energy Regulatory Commission issued an order requiring open access to interstate pipelines. All coal production in the United States is carried out by private firms. Petro Viet Nam. Deregulating energy markets in APEC 133 . There is a high degree of vertical integration. are to continue to be responsible for distribution and retailing. transmission company. Several states have extended the unbundling concept to retail customers. Private foreign firms are gradually becoming involved in generation. Most coal is transported on the largely unregulated rail system. About a third of the resources are developed under leases granted by the federal government. EVN’s generating units are to become independent accounting units and compete with IPPs. to allow utilities and large users to negotiate directly with producers and then purchase unbundled transport services from the pipeline companies. There are no direct controls on production levels. The Department of Energy maintains control over a strategic level of petroleum reserves. state owned. Electricity reform plans involve a shift to competing generators selling to a single transmission company which will in turn sell to distributors and large consumers. a state owned corporation. with refiners owning a significant proportion of retail petrol stations. dominates the oil and gas industries. no domestic price controls and no controls or duties on coal imports and exports. which are independent accounting identities within EVN. It is responsible for all oil and gas exploration and production. established in 1995. in some cases with foreign joint venture partners which have been allowed since 1998. The Electricity Department of the Ministry of Industry will continue to be the main regulator for the sector. Viet Nam State owned vertically integrated Electricity of Viet Nam (EVN). A new electricity law is currently being drafted. but it is not expected to be submitted to the National Assembly until 2004. The current four transmission companies are to be consolidated into a single.companies had long term contracts with gas producers. with the first major Build–Operate–Transfer project licensed in September 2001.

a joint project between Petro Viet Nam and a Russian company.Petro Viet Nam Gas Company. a Petro Viet Nam subsidiary. Foreign companies are involved in coal exploration and mining through joint ventures with Vinacoal. 134 Deregulating energy markets in APEC . is due to be completed in 2002. owns and operates the gas pipeline network and supplies gas. The coal industry is dominated by state owned Viet Nam Coal Corporation (Vinacoal). trading and engineering companies. Viet Nam is a significant coal exporter. which was formed in 1995 through a merger of state owned coal mines and coal processing. The downstream oil sector is controlled by several state owned companies. The economy’s first refinery. mainly to power stations.

Elbehri and Troung 1998). GTEM has a detailed representation of production sectors and regions in the global economy. Dynamics GTEM is a dynamic model that includes relationships between variables at different points in time. and energy policies. multiregion. general equilibrium model of the world economy. It is highly suited to analysis of policies that involve complex interactions between sectors and between regions.appendix B global trade and environment model GTEM is a dynamic. The reference case provides projections of growth in labor and capital in each economy or region. A nontechnical description of the major assumptions and features of GTEM is presented below. labor and natural resources. domestic and international trade policies.com). including energy market reform.abareconomics. Factors of production The four primary factors of production in GTEM are capital. land. GTEM was developed at ABARE to analyse global change issues and has been used in assessments of international climate change policies. The starting point for the GTEM database is the GTAP 4e database (McDougall. The results of policy simulations are then interpreted as deviations from the reference case. GTEM requires a reference case against which the results of policy simulations can be compared. The capital stock in each region accumulates by investment less depreciation in each period. It is based on the GTAP model (Hertel 1997) and the MEGABARE model (ABARE 1996). A detailed description of the model can be found on ABARE’s web site (www. Both capital and labor are mobile Deregulating energy markets in APEC 135 . one before a policy change and one following. multisector. and the associated growth throughout the rest of the economy in the absence of any policy measures. As a dynamic model. This is in contrast to comparative static models. which compare two equilibriums.

oil and gas extraction. capital and a natural resource (reserves of coal). other minerals. Land is used only in agriculture and is fixed in each region. In practice.between industries and. Population and labor supply for each region are determined endogenously (within the model) over time. The model uses estimates of the dependence of fertility and mortality rates on income and an exogenously imposed migratory pattern to predict age and gender specific population changes. it could be expected that changes in patterns of production caused by a policy shock such as the implementation of trade and investment liberalisation or the imposition of greenhouse gas emission constraints could lead to the emergence of some unemployment. the demand for coal declines. to a lesser extent. for example. Natural rate of unemployment It is assumed that the imposition of any policy change does not raise unemployment above the so-called natural rate of unemployment for any economy. If. GTEM explicitly models natural resource inputs as a factor of production in resource based sectors (coal mining. This assumption is often known as the ‘full employment assumption’ and its use is justified in cases where policy changes are introduced progressively. returns to the natural resource (its price) fall. allowing time for wages to adjust to new market conditions. Returns to the natural resource adjust to maintain its full employment. leading to a reduction in the supply price of coal. 136 Deregulating energy markets in APEC . Any downward shifts in the demand for labor are assumed to be offset by reductions in real wages growth sufficient to prevent the emergence of unemployment above the natural levels. especially if liberalisation has negative impacts in sectors where the skills of the labor force are not easily transferable. however. The natural resource is a factor used solely in the production of resource based commodities and is not mobile between sectors or regions. the coal mining industry uses three factors of production — labor. forestry and fishing). across regions through international capital flows and labor migration. GTEM contains an elaborate description of population dynamics. For example. increasing per person incomes lead to well defined changes in fertility and mortality rates. which captures the idea that as economies move along the economic development path.

with all returns paid to primary factors of production. prices adjust fully to equate the supplies of and demands for all factors and commodities in each region in each period. prices will be set to cover costs and GTEM industries earn zero profits at all times. Thus. Total consumption expenditure is calculated as the difference between current household income and savings. As a result. taxes on production. domestic user prices and the export price (including export taxes) for a commodity in the producing region and the import price (including international freight). National savings are assumed to move in line with national income. The representative household allocates its net income across private and public consumption and savings. Under these assumptions. including any returns paid to owners of natural resource assets. savings and consumption In GTEM. sales. Trade A key feature of GTEM is that it models bilateral trade flows of all commodities between all regions. from both domestic and imported sources. Producer behavior Producers in GTEM are assumed to operate in perfectly competitive markets using constant returns to scale technologies. with the ratio of private consumption to government consumption assumed to be constant. the representative consumer maximises current period utility by choosing consumption levels for each of the commodities in the database. a representative household in each region owns all factors of production and receives all payments made to the factors. market price. exports and imports are accounted for separately. In the standard model closure. duty paid market price and user prices in the importing region of a given commodity are clearly distinguished.Prices For each commodity and primary factor in the model. the supply price. all tax revenues and all net interregional income transfers. Given total private consumption. In GTEM an ‘Armington’ preference structure is Deregulating energy markets in APEC 137 . National income. changes in output prices are determined by changes in input prices of materials and returns to primary factors.

It allows the capital account to move in a compensatory direction to maintain the balance of payments. there is uncertainty about the appropriate size and relativities of the Armington elasticities for various commodities. The cost of international transport is added to the cost of imports to each region. rates of return may differ 138 Deregulating energy markets in APEC . As with all parameters in a global computable general equilibrium model. however. the exports of a good from one region to the rest of the world are equal to the import demand for that good in the remaining regions. global average rate of return. International capital mobility Global investment equals global savings in GTEM. In other words. The Armington elasticities in GTEM vary between commodities and are derived from current literature and from empirical work undertaken by Jomini et al.b). At the regional level. In equilibrium. (1991) in the construction of the SALTER world trade model. Consumers in a region can substitute goods produced in that region with the same goods produced in other regions. It is assumed that regional borrowers (investors) issue bonds to global savers at a risk free. Goods are transported between regions by an international transport industry. the same commodity from different sources can trade at different prices. GTEM does not require the current account to be in balance every year. This implies that a good produced in one region is an imperfect substitute for goods produced by the same industry in other regions (Armington 1969a. For any given consumption activity. These elasticities are important determinants of the model results as they affect the estimated trade impacts on commodities resulting from policy shocks. Substitution between domestic and imported commodities and between imported commodities from different sources will depend on movements in relative prices and the specified elasticity of substitution — the Armington elasticity. demand for a commodity is allocated between a domestic product and a composite imported product according to a constant elasticity of substitution (CES) function. The demand by a region for each composite imported commodity is then allocated between sources of imports according to a further CES function.adopted.

Exports will increase and imports decline. For example. changes in investment flows represent changes in demand from expansionary or contractionary effects (changes in real GDP) and expectation effects. a region that has borrowed from international capital markets in GTEM that experiences an exchange rate depreciation will have a greater level of debt denominated in foreign currency. if a policy such as trade liberalisation leads to a significant decline in export earnings from a particular region this will. result in an exchange rate depreciation for that region. It is the price that adjusts to keep the balance of payments in equilibrium. other things being equal. global savers tend to place a higher risk premium on investing in developing countries in GTEM to reflect the greater uncertainty of investing in these regions. For example. The debt servicing requirement (interest paid) will increase in domestic currency terms. Exchange rates The exchange rate in GTEM is the price of converting local currency into global currency. are determined by changes in regional GDP and regional expected rates of return relative to expected global rates of return. The depreciation in the exchange rate will improve the competitiveness of exporters and import competing producers in that region.to reflect country specific differences in the risk premium required by global savers. a region holding foreign assets through international lending will earn more interest income in domestic currency if its exchange rate depreciates. Any excess of investment over domestic savings for a given region causes an increase in net debt for the region. restoring balance of payments equilibrium. For example. crude oil and natural gas — are modeled explicitly. Deregulating energy markets in APEC 139 . On the other hand. Energy markets Energy markets are well represented in GTEM. A change in the exchange rate will also influence international transfers associated with foreign debt or lending. Investment demands. in turn. Electricity and the three fossil fuels — coal. The equilibrium rates of return in developing countries are therefore higher than in developed countries. Thus. Borrowers service the debt at the global rate of return (interest rate).

different production techniques are used to generate a homogeneous output from each industry. gas. Substitution is only possible between primary factors. interfactor and factor–fuel substitution possibilities in the production of other commodities make GTEM particularly suitable for analysing energy issues. thereby preventing technically infeasible combinations of inputs being chosen as model solutions. GTEM also has the capacity to separately identify three types of coal — brown coal. In GTEM. Technology bundle In the standard general equilibrium modeling approach. electricity generation and iron and steel production are modeled using the ‘technology bundle’ approach. together with interfuel. production in each region is assumed to use only one technology. Non technology bundle industries obtain a least cost combination of four energy commodities (coal. hydro or renewable based technologies. nuclear. petroleum products and electricity) to produce an energy composite and a least cost combination of the three primary factors to produce a primary factor composite. By modeling these energy intensive industries in this way. The detailed representation of various forms of energy. Industries are able to substitute between technologies in response to changes in their relative costs. petroleum.Petroleum products are also separately identified. The industry then forms a least cost combination of these two composites to obtain an energy–factor composite. while iron and steel can be produced using blast furnace or electric arc technologies. gas. with the exception of energy inputs and primary factors. industries produce a commodity by combining primary factors and intermediate inputs in fixed proportions. Production and interfuel substitution For industries other than those characterised by the ‘technology bundle’. Allowing for interfuel substitution and substitution between fuel and primary 140 Deregulating energy markets in APEC . With this approach. Electricity can be generated from coal. black steaming coal and coking coal. This technology requires fixed proportions of intermediate inputs. the incorporation of a technology bundle approach to modeling electricity generation and iron and steel production. While not used in this study. GTEM restricts substitution to known technologies.

This is based on 1995 production and trade data (expressed in US dollars). The GTAP database has been substantially upgraded to form the GTEM database. Emissions of methane and nitrous oxide are represented in GTEM in carbon dioxide equivalents. for example. International Iron and Steel Institute 1996). the data underpinning the representation of two major fossil fuel using industries (electricity and iron and steel) have been enhanced to reflect input–output relationships in the range of known technologies. Underpinning the demographic module are historical data showing the age and gender composition of the population in each region in one year cohorts from age 0 to 100. Greenhouse gas emissions accounting GTEM models emissions of three greenhouse gases — carbon dioxide. In addition. is considered to be 310 times more potent in terms of radiative forcing than an additional tonne of carbon dioxide. For example.factors in this way means that industries can alter their production input structure in response to price changes by substituting between energy and primary factors or by changing the energy mix. 21 and 310 for carbon dioxide. significant demographic detail is required in GTEM to model population and labor force growth over time. methane and nitrous oxide. At current atmospheric concentrations. methane and nitrous oxide respectively over a one hundred year time horizon (IPCC 1996). The global warming potential values are 1. The carbon dioxide equivalent is derived by multiplying the emissions by the appropriate global warming potential. over a one hundred year time horizon. and additional data (principally energy sector. emissions and population data) have been collected. Database The starting point for the GTEM database is the GTAP 4e database that contains 50 commodities and 45 regions. particularly in the energy sector. a measure of the relative radiative forcing of different greenhouse gases. Also. the contribution of each technology to total electricity and iron and steel production has been derived to reflect external data (IEA 1998. an additional tonne of nitrous oxide in the atmosphere. Deregulating energy markets in APEC 141 . These are sourced from United Nations (1998).

and fossil fuel fired electricity output. The tables report the impacts of policy reforms. by region The following tables present the principal results from this study for each region and from each simulation. the simulation. Similarly. by fuel. Refer to chapter 4 of the report for further detail regarding the design of these simulations. ‘Residual market power. relative to the reference case. These are reported for all five of the simulations discussed in the report. energy consumption. in which it is assumed that economies that are yet to implement most of the major reforms achieve only half of the productivity gains assumed under comprehensive electricity liberalisation. ‘Partial electricity’ is a simulation of partial liberalisation of the electricity sector. These simulations are described briefly below. on the important variables of GDP. all APEC economies are assumed to implement comprehensive liberalisation of key energy sectors by 2010. In the simulation entitled ‘All sectors’. 142 Deregulating energy markets in APEC . ‘Electricity’ and ‘Gas’ are simulations of comprehensive liberalisation in all APEC economies by 2010 in the electricity and gas sectors respectively.C appendix simulation results. electricity’. indicates the consequences of electricity market reform that falls short of a competitive outcome as a result of the presence of market power.

24 0.06 1.35 0.36 2.37 Energy consumption.14 Electricity output.27 –0.20 –0.04 Crude oil –0. by fuel Electricity 1.31 0.01 0.05 –0.85 9.35 4.40 2.15 Electricity 0.60 –0.15 0.30 0.06 0.41 2.21 a 0.47 1.28 Gas 3.11 Refined oil 0.70 Gas fired 6.38 Chile GDP 2. electricity 0.07 0.20 0.23 1. by fossil fuel Coal fired 4. by fossil fuel Coal fired 0.14 1.42 –0.18 0.27 1.19 3.93 0.19 0.26 –0.01 Gas fired 12.16 Electricity output.04 3.62 2.36 –0.04 0.21 0.67 0.37 2.53 –0.24 1.75 0.43 0.03 0.13 a 0.46 1.15 Simulation results.05 0.37 Refined oil 0.16 1.31 0.08 0.14 Crude oil –0.14 0.17 1.15 7.29 0.55 Oil fired 1.59 0.15 Electricity output.45 0.00 0.21 Crude oil 0.47 Continued ➮ Energy consumption.14 Gas 0.21 Residual market power.00 Energy consumption.40 0.48 3.11 2.87 –0.39 0.33 Gas fired 5.11 1.05 1.21 0.71 –2.31 Oil fired 2.86 4. by fuel Electricity 2.12 0.76 2.65 2.01 0.71 Gas 3.16 0.12 0.17 0.06 1.35 1.16 0.20 0.48 Refined oil 0.09 0.60 2.06 6.91 Coal 1. by fossil fuel Coal fired 1.41 Gas 3.49 All sectors Australia GDP 0.71 Canada GDP 1.35 0.80 Oil fired 7.84 2.25 0.05 0.79 –1.80 4.43 0.06 2.79 –0.08 Coal 3.25 3.27 0.39 Coal 0.13 –0. by fuel Electricity 2.45 0.30 0.51 0.26 2.23 –0.86 0.69 –1.07 0.25 0.08 –0.85 Deregulating energy markets in APEC 143 .72 0.40 a 0. by region Partial electricity 0.58 –0.

48 0.17 Hong Kong. by fossil fuel Coal fired 2. by region continued Partial electricity 0.56 Continued ➮ Energy consumption.07 –0.11 2.10 0.02 Gas 13.43 Coal 3.16 9.03 1.03 2.97 Electricity output.24 0.45 20.72 –0.70 0.80 3.25 4.05 7.06 a 0.09 2.16 0.89 0.08 0.18 0.17 0.20 Coal 2.02 12.21 0.81 Indonesia GDP 1. China GDP 2.00 1.06 0.87 –0.25 2.19 –0.54 Refined oil 0.55 Electricity output.17 0.19 0. by fossil fuel Coal fired 4.37 –2.30 22.68 1.27 0.09 3.10 0.04 0.14 1.13 2.07 0.32 4.10 0.14 4.98 Crude oil 15.78 Gas 14.19 Gas fired 25.89 3.92 Crude oil 0.52 144 Deregulating energy markets in APEC .70 0.15 0.86 –0.89 0.68 0.79 0.77 Coal 3.08 a 0.00 –0.15 –0.12 0.03 Energy consumption.84 5.19 0.05 0.46 0.02 –0. by fossil fuel Coal fired 3.15 China GDP Simulation results. by fuel Electricity 2.02 –0.24 –2.01 –0.98 All sectors 0.02 2.07 0.40 0.34 0.59 Refined oil –0.64 Gas fired 18.32 Refined oil 4.87 4.71 –1.00 –8.08 Gas 0.22 5. by fuel Electricity 6.25 0.19 2.47 0.43 Electricity output. electricity 0.63 Gas fired 19.45 Oil fired 4.96 –0.59 3.05 12.27 2.21 Crude oil 9.03 0.12 0.18 –0.07 0.02 10.06 1.09 0.31 0.07 Oil fired 6.93 0.20 Residual market power.22 7.22 0.06 0.10 0.16 0. by fuel Electricity 3.19 0.30 0.00 –0.28 –0.12 a 0.00 Gas 3.47 Energy consumption.19 –0.10 –0.81 1.33 5.99 4.30 0.09 –0.33 Electricity 0.26 Oil fired 7.47 0.

76 –7.00 0. by fossil fuel Coal fired –9.18 Oil fired –6.16 0.21 –0.58 Electricity output.05 0.19 0.62 Republic of Korea GDP 3.04 0.27 1.32 1.91 –11.64 0.27 7.33 –1.24 0.74 1.54 Gas 9.28 a 0.86 Refined oil 0.00 Energy consumption. by fuel Electricity 4.85 –0.22 2.46 3.32 Deregulating energy markets in APEC 145 . by fossil fuel Coal fired 4.55 0.19 Gas 13.75 Gas fired 18.35 0.13 0.07 0.18 –1.19 –0.35 0.53 4.24 Gas fired 10.79 Coal 1.19 Oil fired 7.11 6.29 –1.06 0.33 0.17 3.09 a 0.81 0.56 0.15 0.61 0.98 2. by region continued Partial electricity 0.27 6.11 3.11 0.50 0.09 13.28 0.38 0.38 0.29 –0.96 1.91 0.64 Crude oil 0.84 Oil fired 6.20 0.13 7.70 4.83 3.43 0.25 2.43 0. by fuel Electricity 3.35 0.67 Refined oil 0.51 0.11 1.22 1.95 1.78 Coal 1.24 All sectors Japan GDP 0.65 0.34 0.99 Gas fired 14.38 a 0.78 0.60 –0.31 0.38 Malaysia GDP 4.99 1.13 0.25 Energy consumption.19 2.37 2.15 Simulation results.06 0.25 1. by fossil fuel Coal fired 6.48 0.11 –11.63 0.73 0.50 0.38 Refined oil –0.84 0.79 Gas 10.32 0.52 0.41 1.59 –0.41 0.76 5.86 Crude oil –1. by fuel Electricity 3.37 0.24 0.50 Residual market power.42 Electricity 0.17 3.35 0.90 10.92 12.40 8.25 Electricity output.06 –0.78 –1.29 Electricity output.47 Coal –6.03 6.72 1.60 –1.17 0.37 1.43 0.63 –0.64 Crude oil –0.09 3.66 3. electricity 0.40 Gas 0.18 8.05 Continued ➮ Energy consumption.

71 4.33 Electricity output.64 Refined oil 0.19 0.73 0.39 a 0.29 0.40 0.46 Oil fired 4.16 0.15 0. by fuel Electricity 7.49 –0.37 3. by fuel Electricity 4.20 –0.42 0. by fossil fuel Coal fired 2.88 –0.38 All sectors Mexico GDP 0.11 0.64 –1.58 1.45 1.42 Energy consumption.41 0.26 0.36 –7.67 5.03 0.49 Residual market power.03 3.37 Refined oil 1.05 0.47 Coal 2.22 2.65 3.01 1.28 3. electricity 0.12 0.47 5.20 6.28 –7.01 0.34 Gas fired 7.00 0.08 2.38 2.30 Coal 1.92 0.43 Gas 0.23 Crude oil 0.18 0.01 0.79 –0.31 Refined oil 3.18 a 0.31 –0.03 4.96 –0.96 Gas 11. by fuel Electricity 2.78 1.64 2.41 0.61 Crude oil 5.40 0.24 5. by region continued Partial electricity 0.71 1.04 0.14 2.03 0.21 0.41 0.23 Crude oil 0.46 Electricity output.69 0.15 Simulation results.30 0.57 0.69 0.38 0.38 0.15 Electricity output.96 0.10 –1.55 Oil fired 3.20 1.93 0.16 0.15 0.55 0. by fossil fuel Coal fired –3.79 3.07 6.53 Gas fired 12.65 3.04 0.08 0.90 23.43 Gas fired 26.81 0.26 1.90 Gas 11.38 1.12 0.40 Philippines GDP 3.19 2.32 0.32 2.83 0.84 0.50 0.77 0.92 10.00 0. by fossil fuel Coal fired 3.16 2.19 0.03 2.09 Energy consumption.01 5.13 a 0.81 0.55 2.79 1.81 4.36 Gas 3.13 Oil fired 5.72 3.49 Electricity 0.57 0.58 1.04 New Zealand GDP 4.60 Coal –0.03 0.14 3.31 0.39 –1.43 0.02 146 Deregulating energy markets in APEC .33 Continued ➮ Energy consumption.

21 0.32 0.79 11.93 2.06 0.48 0.15 14.90 0. by fossil fuel Coal fired 1.40 Gas fired 5. by fuel Electricity 6.57 0.65 –4.83 –1.67 3.25 Residual market power.14 0.81 0.39 0.53 0.65 –0.29 1.51 6.10 a 0.76 Gas fired 21.16 –0.46 0.00 2.06 9.51 0.78 0.11 1.87 –0. by region continued Partial electricity 0. by fuel Electricity 7.78 0.65 5.52 Refined oil 1.11 7.15 15.46 Coal 3.21 Refined oil 0.54 –0.53 a 0.76 Refined oil 0.12 0.03 1.76 1.65 6.58 0.63 0.80 Gas fired 17.15 Simulation results.51 0.34 0.21 Oil fired 6.80 Energy consumption.45 a 0.57 Crude oil 0.79 0.28 Oil fired 6.22 Electricity output.63 –3.99 0.11 –0.05 0.76 –0.43 0. by fossil fuel Oil fired –2.81 Chinese Taipei GDP 0.94 0.52 5.08 0.10 –0.99 2.46 5.15 Gas 20.29 0.31 0.30 All sectors Singapore GDP 0.10 1.30 2.99 2.46 0.41 4.30 0.35 Electricity output.02 0.21 3.41 4.23 3.43 –0.60 –4.34 0.66 0. by fossil fuel Coal fired 5.14 0.43 Gas 11.33 –2.03 Crude oil –1.71 5.37 0.43 8.86 5.72 Energy consumption.26 –0.44 0.55 0.37 Crude oil 0.68 0. by fuel Electricity 1.41 Continued ➮ Energy consumption.14 Electricity Gas 0.76 Electricity output.24 4.29 0.59 0.27 0. electricity 0.69 Gas 6.79 0.12 8.01 1.13 Coal 0.66 Deregulating energy markets in APEC 147 .59 0.40 Thailand GDP 5.48 0.75 –1.51 0.88 0.06 0.36 3.39 1.

20 1.48 1.63 0. by fossil fuel Coal fired –0.61 Energy consumption.38 0.01 Electricity output.07 0.16 Electricity 0.43 Crude oil 0.20 Coal 0.05 –0.91 0.02 0.57 –0.22 1.65 1.10 0.14 Gas 0.45 0.43 –0. by fuel Electricity 0.50 0.42 –2.50 Oil fired 3.02 –0.06 2. by fuel Electricity 4.82 0.04 0.16 0. by region continued Partial electricity 0.70 1.10 0.11 0.67 0.20 0.25 0.94 Gas 2.06 Refined oil 0.59 –1.05 0.82 3.32 1.74 0.38 0.87 0.14 0.67 1. 3.35 0.22 Oil fired 0.60 148 Deregulating energy markets in APEC .04 0.18 1.39 0.46 Viet Nam GDP 0.23 Refined oil 0.15 Simulation results.26 7.15 0.89 0. electricity 0.01 Energy consumption.07 Coal –0.02 0.04 0.26 3.77 10.40 Residual market power.17 3.29 0.24 0.40 –0.25 Gas 10.52 –1.80 Gas fired 15.59 0.59 0.09 Crude oil 0.29 All sectors United States GDP 0.86 6.35 Electricity output.57 Gas fired 4.11 0.38 0.10 0.48 –0. by fossil fuel Coal fired 1.72 1.07 0.90 a GDP at factor cost.19 2.25 a 0.36 0.13 a 0.05 0.46 0.

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