Infrastructure investment after liberalization The case of electricity

The liberalization of electricity markets is complicated by the fact that electricity networks have a natural monopoly. To create a 'level playing field' in the electricity market, operation and management of electricity networks need to be unbundled from competitive activities like electricity generation, trade and retail. From a technical point of view, however, electricity networks and generating facilities are strongly interdependent. This chapter explores four dilemmas with respect to the development of electricity networks that arise as a result. Two common factors underly these dilemmas: the presence of network externalities, as a result of which it is not possible to establish unambiguously the costs of individual network transactions, and the difference between the life cycle of generation facilities and the life cycle of networks. This chapter frames the issues and outlines possible solution paths.