The objective of the paper is to analyse the economic justification of introducing deregulation to Israel's regulated electricity market and infer whether such a policy change makes sense for the country.
The paper employs an analytical model of electricity market equilibrium under regulation and deregulation. It considers two technologies – coal‐fired generators and combined cycle gas turbines, and two time‐of‐day prices – peak and off‐peak. It analyzes pricing, revenues, profits and consumer surplus both for the regulated industry and the deregulated industry where firms compete, during the peak and off‐peak periods, according to the Cournot conjecture. The model is then applied to the Israeli case.
The analysis shows that a workably competitive electricity market with financially viable firms does not improve net benefits to Israeli society. A deregulated market is likely to yield smaller net benefits than a regulated market, and certainly a smaller consumer surplus. This happens since efficiency improvements in generation costs under deregulation will not be sufficient to compensate for the reduction in consumer surplus due to higher electricity prices under deregulation.
The simplifications used in the analytical model for ease of analysis and presentation could have influenced some results.
The findings of the paper would have significant relevance for electricity sector deregulation in Israel and other regions that currently have a regulated electricity sector (e.g. Hong Kong, Africa, and many parts of North America).
The value of the paper lies in its ability to demonstrate the inherent weaknesses of the deregulation policy through an analytical model.
