The Economics of Electricity Markets: Theory and Policy.

• Author: Felder, Frank A.

The Economics of Electricity Markets: Theory and Policy, PIPPO RANCI and GUIDO CERVIGNI (eds.), (Edward Elgar, 2013) 226 pages, ISBN 978-0-85793-395-9, Hardback.

This book is an excellent primer on electricity markets with a strong focus on the European context. Almost every paragraph in the seven chapters connects an important definition, idea or result to its motivation and then uses those building blocks to describe and evaluate electricity markets and their multiple variations. The book is compact and the chapters are concise but complete, which enables readers to quickly grasp the material. Those that are relatively new to studying electricity markets or want to get up to speed on the major issues in European markets would benefit from this book.

It begins with the motivation for electricity markets noting that what makes electricity special is its social and political concerns (i.e., it is a merit good) and discussing the unique (and well known) features of electricity that distinguish it from other commodities. Successive chapters cover wholesale electricity markets, generation capacity, congestion management, competition policy, retail competition and climate change. The collection is organized around European electricity markets, which do not manage congestion using locational marginal prices (LMPs) as is done in much of the United States. The authors present the advantages and disadvantages of various market designs without revealing their views too much regarding where they land on different options. For instance, the editors in their introduction note the politicizing of capacity investment decisions combined with the difficulties that intermittent renewables pose for short-term coordination. This reduces the advantages of electricity markets compared to the prior fully regulated approach. But this point is presented as much as an observation of evolving trends in Europe as to leveling a criticism of current European policies.

The book's dominant chapter concerns congestion management and transmission rights, which is the centerpiece of any electricity market. It divides congestion management schemes into two classes. The first class restricts transactions that market participants can enter into to feasible power flows such as is done in markets with LMPs; the second class, known as redispatch, compensates market participants for deviating from schedules they would have selected but for transmission constraints. To motivate...