Electricity liberalization in the European union: Balancing benefits and risks

The electricity liberalization is contested by many European consumers who hold it responsible for the electricity price increase, but such a conclusion is questionable. As the various spot markets are connected, liberalization will imply a convergence of electricity prices for all European countries if any congestion is observed on the networks. We observe today that German gas power stations are often "marginal power stations"; thus the German spot market is often the price maker. High price for oil means high price for natural gas and indirectly high price for electricity. Moreover increasing interconnection of electricity markets leads to surplus transfers among European consumers and producers of electricity. But for some people the price increase observed today results also partly from a rise in the market power of electricity producers. This paper examines the position of the main European incumbents in this field.