Department of Economics, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran
Abstract
The electricity industry traditionally has been considered as a vertically integrated structure in which generation, transmission, and distribution were provided simultaneously by public authorities. This led to the electricity industry regulation. Since the natural monopoly behavior as well as economic regulation did not meet the needs of the electricity industry in terms of investment, capacity expansion, and pricing at the end of 80s and early 90s, power generation privatization as well as transmission segregation were inevitable. The leading countries in the electricity industry restructuring were Argentina, Sweden, Norway, the United Kingdom and the United States. In fact, the proposal was if the electricity generation was managed by the market rules rather than natural monopoly while the electricity transmission still managed under a natural monopoly, the result would be Pareto optimum and social welfare improvement. The restructured electricity market is consisted of two models, one in the form of power pool and the other in the form of bilateral exchange. One of the main reasons for the success of the electricity market has been the existence of financial markets alongside the energy exchange markets which provide decision making opportunities for large customers. Recent studies indicate that in addition to forward and futures markets that play stabilizing roles, day-ahead markets are less volatile than spot markets.