Prostranstvennaâ Èkonomika (Dec 2018)
Economy of Scale in Russian Retail Electricity Market: On One Natural and One Unnatural Monopoly
Abstract
The paper presents an econometric analysis of the economy of scale in retail electricity markets in respect to the main service providers in the retail markets, which are territorial distribution grid companies and energy sales companies – guaranteeing suppliers. The research was made for the regions included in so-called ‘price zones’ of the wholesale electricity market (European part, Urals, Siberia). The paper provides econometric estimates of economies of scale both for distribution companies and for guaranteeing suppliers, obtained with the least squares method on cross-sectional regional data. The paper also provides the confirmation of the statistical hypotheses of the existence of the economy of scale in energy distribution and in retail supply. The existence of the economy of scale in energy distribution is quite natural and is consistent with the existing status of distribution grid companies as natural monopolies. Indeed, economy of scale usually results from significant capital expenditures. With small volumes of production, the role of capital costs in average costs is significant, but decreases with the increase of production volumes. In the case of distribution grid companies, which are responsible for the operation of power grid equipment, the obtained econometric results are consistent with economic theory. The existence of economies of scale in retail supply is not as natural as in the case of energy distribution. Energy sales do not require significant capital expenditures. Historically, apparently this fact (the absence of significant capital costs) is the reason why energy sales activity is considered as potentially competitive one, and was privatized. Nevertheless, retail energy supply today is, in fact, monopolized for some groups of commercial customers. The paper concludes with the regulatory recommendations about the sensibility of delivering the policies to implement competition in the energy sale sector in the retail markets
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