Things Cheaper, World Greener, When We Link Electricity Together Kwanruetai Boonyasana Supervisors: Department of Economics Prof. Wojciech Charemza Correspondence: kb200@le.ac.uk Dr. Subir Bose WORLD ELECTRICITY CO-OPERATION - electricity prices - CO2 emission levels - government subsidies for generation Decrease Increase - security of electricity supply - income from electricity export - co-operation between countries Things Cheaper, World Greener, When We Link Electricity Together 3 4 5 1 2 Original picture from: iStockphoto LP INTRODUCTION: 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. “The Absolute Advantage” (1776) of Adam Smith and “Pareto Principle” (1906) of Vilfredo Pareto both suggest mutual advantages that can arise from efficient import and export of electricity. This study examines whether electricity co-operation (import & export) between countries can help redress the problem of high electricity prices. What action is being taken by governments? 4 Countries 1 & 2 : import & export electricity Countries 3 & 4 : negotiate co-operation Country 5 : no import & no export Other countries : undecided POSSIBLE SOLUTION: Energy Information Administration (EIA) reports that growth in world electricity generation has outpaced consumption. This suggests that import and export would be beneficial. Not only prices, but also Carbon Dioxide (CO2) emission levels would decrease from this co-operation. MODEL: Representation of Electricity Market History Projection Electricity Demand We consume resources to produce electricity, but we don’t use it. Electricity Inventory Electricity Price Electricity Supply External Influences: - Import - Export - Transmission Loss - Government Subsidy Generation Capacity Developed from “Model Representation of a Commodity Market” (Walter C. Lays & Peter K. Pollack, 1984) HYPOTHESIS: 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, but is this hypothesis true? METHODOLOGY: This study employs Panel Data Analysis, Ordinary Least Square (OLS) by using 29 OECD countries’ yearly data (1980-2008) from IEA. RESULT: ln (Pit) = α + β1 Cit + β2 Git + β3 Mit + β4 Xit + εit Electricity generation produces lower household and industry prices than import + export, which is opposite from the hypothesis. However, generation subsidies in OECD countries are higher than 10%, hence the real prices of electricity for generation (+ subsidies) are higher than for import + export. Subsidies come from taxes, and taxes come from people’s income. So when governments subsidize, the people pay for electricity indirectly. Subsidies involve Moral Hazard by discouraging efficiency of electricity generators – the result being prices may not decrease in the long run. CONCLUSION: Both import and export countries will gain a benefit from electricity co-operation. Electricity prices in import countries will decrease, and export countries will gain more income. FURTHER STUDY: - What impact does electricity co-operation have on CO2 emission levels? - What role should government subsidies take in encouraging electricity co-operation? Country B Country A M & X Import: M Export: X no M & no X p2 , p2 p4 , p1 p2 , p4 p3 , p3 p1 , p4 p5 , p5 p1 , p4 p5 , p3 p4 , p2 p4 , p4 p4 , p3 p3 , p3 p3 , p5 p3 , p4 ElectricityPrice: P Consumption: C (+ Demand) Generation: G (+ Supply) Import: M Export: X (- Supply) M + X Household +9.37% - 8.73% -12.28% +7.71% -4.57% Industry +8.84% -8.23% -11.83% +6.57% -5.26% The table shows coefficients (βj) of price function at significant level 1%. P is electricity price and p1< p2 < p3 < p4 < p5 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. Thank you THAILAND USA