Title: World Electricity Co-operation

Authors: Kwanruetai Boonyasana
Institution: University of Leicester
Date: 2009-2010
Subject area(s): Energy Economics
Relevance to other area(s): Micro Econometrics, Political Economy, International Trade, Game Theory
Project type: PhD thesis, University of Leicester

Summary

Photo by: Bert K, Creative Commons, Flickr
Currently, there is a serious problem with regard to the high price of electricity around the world. There is also the issue of electricity shortage in some countries coexisting with surplus in others. Energy Information Administration (EIA) reports that growth in world electricity generation has outpaced consumption. This sheds light on the problem implying that electricity co-operation (import and export) would be beneficial in solving this problem.

“The Absolute Advantage” of Adam Smith (1776), “The Comparative Advantage” of David Ricardo (1817) and “Pareto Principle” of Vilfredo Pareto (1906) all suggest mutual advantages that can arise from efficient import and export. However, many countries have yet to make a decision regarding electricity co-operation.

This study employs “Panel Data Analysis, Ordinary Least Square (OLS)” to demonstrate that import and export can reduce electricity prices, by using 29 Organization for Economic Co-operation and Development (OECD) countries’ yearly data  from 1980-2008. The conclusion is that electricity co-operation (import and export) significantly decreases electricity prices. When the world prices of electricity decrease, it will help people to have a higher standard of living and also reduce the cost of industry and business.

Datasets used

• International Energy Agency (2009): World Energy Statistics (Edition: 2009). ESDS International, University of Manchester.

Aims and objectives

This study examines whether electricity co-operation (import and export) between countries can help redress the problem of high electricity prices.

Methodology

The analytical work was based on two steps. Firstly, “The Model Representation of Electricity Market” was developed to define what factors affect electricity price in order to obtain the price function. Secondly, “Panel Data Analysis, Ordinary Least Square (OLS)” was employed to demonstrate coefficients of electricity price.

Results/Outcome

The results initially show that electricity generation produces lower household and industry prices than electricity co-operation (import and export). However, generation subsidies in OECD countries are higher than 10%. When these subsidies are taken into account, the real prices for generation (plus subsidies) are higher than for electricity co-operation (import and export).

Coefficients (βj) of Price Function

ln (Pit) = α + β1 Cit + β2G it + β3 Mit + β4 Xit + εit

significant level:1%  

From the table, it appears that electricity generation produces lower household and industry prices than import + export.

Generation  <  Import + Export

Household Electricity Price: -8.73%  <  -4.57%
Industry Electricity Price: -8.23%  <  -5.26%

However, generation subsidies in OECD countries are higher than 10%. When these subsidies are taken into account, the real prices for generation are higher than for import + export.

Generation + Subsidies (assume 10%) > Import + Export

Household Electricity Price: +1.27%  >  -4.57%
Industry Electricity Price: +1.77%  >  -5.26%

Subsidies come from government income i.e. taxes, and taxes come from people’s income. So when governments subsidize, the people pay for electricity indirectly.

From this study, we can see that both import and export countries will gain a benefit from electricity co-operation. If countries which have excess supply export electricity to countries which have excess demand, the prices in excess demand countries will decrease, and export countries will gain more income.

Additional information:

1.   Electricity Prices of Countries A & B:
      based on “The Absolute Advantage” of Adam Smith, 1776

P is electricity price and p1< p2 < p3 < p4 < p5

This table addresses the hypothesis that import and export produce lower prices (p2, p2) than no import and no export (p3, p3) which is a “Nash Equilibrium” payoff.

2.   MODEL: Representation of Electricity Market

Developed from “Model Representation of a Commodity Market” (Walter C. Labys & Peter K. Pollak, 1984)

References and/or acknowledgements

Baltagi, B. H. 2005. “Econometric Analysis of Panel Data” 3rd ed., England, John Wiley & Sons Ltd, West Sussex.

Labys, W. C. and Pollak, P. K. 1984. “Commodity Models for Forecasting and Policy Analysis”, Sydney, Australia, Croom Helm Ltd.

Pareto, V. translated by Schwier, A. S. and Page, A. N. 1972. “Manual of Political Economy”, The Macmillan Press Ltd, London and Basingstoke.

Ricardo, D. 1821. “On the Principles of Political Economy and Taxation” 3rd ed., Ontario, Canada, Batoche Books Kitchener 2001.

Smith, A. 1776. “An Inquiry into the Nature and Causes of the Wealth of Nations, Book 4”. http://www.gutenberg.org/etext/3300

Acknowledgements

Comments and suggestions from Prof. Wojciech Charemza, Dr. Subir Bose, Dr. Nicholas V. Vasilakos and Mr. Rob Neill were very helpful in finalising the analysis and text.