Electricity Market Reform: Lessons for developing countries

One of the main targets of power market reforms in the world has been price-cost margins. This paper focuses on this issue by looking at the impact of the power market reforms on the convergence of residential and industrial electricity price-cost margins in diverse countries towards their average value and on cross-subsidy levels between consumer groups. Using panel data for 63 developed and developing countries covering the period 1982–2009, empirical models are developed and analyzed. The research findings suggest that, in most cases, reform process causes price-cost margins in different countries to move towards their average value. Besides, it is found that there is a negative relationship between absolute value of deviation from unit industrial/residential price ratio and the shift towards a competitive market model, meaning that as countries take more reform steps the size of cross subsidy between consumer groups tends to decline. Overall, based on empirical evidence, the study found that application of competitive market models in electricity industries makes electricity price-cost margins converge towards the average and prices more cost-reflective by reducing the size of cross subsidies between industrial and residential consumers, after controlling for industry and country-specific variables. Furthermore, the study suggests that power consumption, income level, electricity losses and country specific features constitute other important determinants of convergence towards average electricity price-cost margin and cross-subsidy levels between consumer groups.