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Effects of Market Reform on Facility Investment in Electric Power Industry: Panel Data Analysis of 27 Countries

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Effects of Market Reform on Facility Investment in Electric Power Industry: Panel Data Analysis of 27 Countries sustainability Article Effects of Market Reform on Facility Investment in Electric Power Industry: Panel Data Analysis of 27 Countries Juyong Lee 1, Youngsang Cho 1,*, Yoonmo Koo 2 and Chansoo Park 3 1 Department of Industrial Engineering, College of Engineering, Yonsei University, 50, Yonsei-Ro, Seodaemun-Gu, Seoul 120-749, Korea; [email protected] 2 Graduate School of Engineering Practice, Seoul National University, 1, Gwanak-ro, Gwanak-Gu, Seoul 151-742, Korea; [email protected] 3 Science and Technology Policy Institute, Sejong National Research Complex 370, Sicheong-Daero, Sejong-Si 30147, Korea; [email protected] * Correspondence: [email protected]; Tel.: +82-2-2123-5727 Received: 26 August 2018; Accepted: 5 September 2018; Published: 10 September 2018 Abstract: In this study, we analyzed the effects of electricity market reform on investment in generation facilities. We used the data of 27 OECD member countries and considered ownership structure, horizontal and vertical unbundling, change of transaction method, and government regulation as explanatory variables for market reform. We used four regression models, in which we examined the effects of market reform on the capacity of generation facilities, supply reserve ratio, total investment, and base-load share, respectively. For each panel regression model, we performed a Hausman test to identify the model between random effect and fixed effect. Based on the estimation results, we found that electricity market reform has a negative effect on generation facilities in most countries. Both privatization and regulation have negative impacts on the generation facility and base-load share. On the other hand, the level of liberalization of transactions have positive effects on the generation facility, supply reserve ratio, and base-load share. The empirical analysis also showed that horizontal unbundling does not have a meaningful effect on investment, but vertical unbundling contributes to increasing the supply reserve ratio. Keywords: electricity market reform; investment; unbundling; privatization; supply reserve ratio 1. Introduction A long-term investment plan is essential for stable power supply because the construction process takes a long time from the investment decision to completion of the facilities. Investment decision-making in the event of a power shortage cannot resolve the imbalance of the supply and demand of electricity. In the case of South Korea, construction times are 6–7 years for a nuclear power plant, 4–5 years for a bituminous coal-fired power plant, and 2–3 years for a gasification combined cycle power plant [1] (NB. In this paper, Korea refers to the Republic of Korea (ROK)). Especially in Korea, it is impossible to import electricity in an emergency due to the isolated power grid. Therefore, optimum investment beforehand is crucial to maintaining a stable power supply. In Korea, the supply reserve ratio had decreased consistently by 2013 (see Figure1), and people experienced rolling blackouts in 2011 due to the imbalance of electricity supply and demand. Although the supply reserve ratio has increased since 2014 because of repaired or newly-constructed plants, a long-term electricity-generation mix is another challenge associated with the 2015 Paris Climate Change Conference (COP21), because coal-fired power ranks number one in total power generation by 38.7% [2]. The COP21 reached an agreement on reducing greenhouse gas emissions, and the Korean Sustainability 2018, 10, 3235; doi:10.3390/su10093235 www.mdpi.com/journal/sustainability SustainabilitySustainability2018 2018,,10 10,, 3235 x FOR PEER REVIEW 22 ofof 1616 Sustainability 2018, 10, x FOR PEER REVIEW 2 of 16 and the Korean government proposed a decrease in the proportion of coal-fired power and an andgovernmentincrease the Koreanin nuclear proposed government and a renewable decrease proposed in energy the proportion a [3].decrease of in coal-fired the proportion power and of ancoal increase-fired power in nuclear and and an increaserenewable in energynuclear [ 3and]. renewable energy [3]. 14 14 12.2 12.2 11.3 11.5 11.6 12 11.5 11.6 12 11.3 10.5 10.5 10 9.1 9.1 10 7.9 8 7.2 7.9 8 7.2 6.2 6.2 5.5 5.2 5.5 6 5.5 6 5.2 5.5 4 4 Supply ratio (%) reserve Supply 2 Supply ratio (%) reserve Supply 2 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year Year Figure 1. Supply reserve ratio in Korea [1]. Figure 1. Supply reserve ratio in Korea [[1]1].. The scale or sector of investments in new power sources and facilities depends on fuel prices The scale or sector of investments in new power sources and facilities depends on fuel prices and and Thgovernmente scale or sectorpolicies, of suchinvestments as licensing, in new carbon power tax, sources renewable and facilities portfolio depends standard ons (RPSfuel sprices), and government policies, such as licensing, carbon tax, renewable portfolio standards (RPSs), and market andmarket government reform. Amongpolicies, thesuch government as licensing, policies carbon intax, the renewable energy sector,portfolio market standard reforms (RPS iss ),a andkey reform. Among the government policies in the energy sector, market reform is a key determinant of marketdeterminant reform. of theAmong scale ofthe investment government because policies it fundamentally in the energy affects sector, the competitionmarket reform and isincentive a key the scale of investment because it fundamentally affects the competition and incentive structure of the determinantstructure of theof the electric scale powerof investment industry. because For example, it fundamentally Figure 2 shows affects the the Organisation competition and for Economicincentive electric power industry. For example, Figure2 shows the Organisation for Economic and Co-operation structureand Co- operationof the electric Development power industry. (OECD) For example,member Figurecountries’ 2 shows annual the Organisationaverage growth for Economic rates of Development (OECD) member countries’ annual average growth rates of generation facilities before andgeneration Co-operation facilities Development before and after (OECD) 10 years member of market countries’ reform. Afterannual the averagetime of market growth reform, rates theof and after 10 years of market reform. After the time of market reform, the growth rate decreased in generationgrowth rate facilities decreased before in theseand after countries. 10 years Further of marketmore ,reform. Figure After3 shows the thetime base of market-load share, reform, which the these countries. Furthermore, Figure3 shows the base-load share, which tends to fall after market growthtends to rate fall decreasedafter market in reformthese countries. in the OECD Further membermore countries,, Figure 3 exceptshows Japan.the base -load share, which tendsreform to in fall the after OECD market member reform countries, in the OECD except member Japan. countries, except Japan. Before market reform After market reform 12 Before market reform After market reform 12 10 10 8 8 6 6 4 4 2 2 0 0 Australia France Germany Japan South United United Annual growth rate of generation facility (%) facility generation of rate growth Annual Australia France Germany Japan SouthKorea KingdomUnited UnitedStates Annual growth rate of generation facility (%) facility generation of rate growth Annual -2 Korea Kingdom States -2 Figure 2. Annual growth rates of generation facilities in major OECD countries [4]. In the case of the Figure 2. Annual growth rates of generation facilities in major OECD countries [4]. In the case of the United Kingdom, we compared five years before and after market reform due to the lack of data. FigureUnited 2. Kingdom, Annual growth we compared rates of five generation years before facilit andies inafter major market OECD reform countries due to [4] the. In lack the ofcase data. of the United Kingdom, we compared five years before and after market reform due to the lack of data. Sustainability 2018, 10, 3235 3 of 16 Sustainability 2018, 10, x FOR PEER REVIEW 3 of 16 Base-load share (%) 80 Australia Germany Japan United Kingdom United States 70 60 50 40 30 20 10 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Year FigureFigure 3. Base-load 3. Base-load shares shares ofof major major OECD OECD countries countries [4]. [4]. The electricThe powerelectric power industry industry had had been been operated operated in in the the form form of monopolistic of monopolistic public or public private or private companiescompanies under the under regulations the regulations due due to to its its technical technical and and economic economic characteristics characteristics [5,6]. However, [5,6]. However, with the advent of new technologies such as combined gas turbines, the economies of scale were with the adventweakened of in new the power technologies generation such sector, as and combined in some countries gas turbines, such as the the economiesUnited Kingdom, of scale were weakenedinefficiency in the power in the monopoly generation system sector, began andto appear in some as a national countries problem such [7]. In as addition, the United due to Kingdom, inefficiencypolitical in the orientation monopoly that systememphasizes began the role to of appear the market, as a neoliberalism national problem was diffused [7]. globally In addition, [8]. due to political orientationTherefore, in thatthe 1990s, emphasizes under such thebackgrounds role of the and market,purposes, neoliberalismmany
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