Does energy integrate

Energy Policy 31 (2003) 185–199

Does energy integrate?
Anil Hira*, Libardo Amaya
Department of Political Science, Simon Fraser University, 8888 University Drive, Burnaby, BC Canada V5A 1S6

Abstract Amidst the international movement to privatize and deregulate electricity and gas sectors of economies, the question of the integration of those sectors has been somewhat underestimated. Infact, the integration of energy markets across boundaries is occurring. We examine this process in three regions: Europe, Central America, and South America. We analyze the forces driving integration in each area, and estimate the prospects for progress. We take a close look at Nordpool, which is now the most integrated market in the world, to see if it can serve as a model for other regions. Weclose with a set of conditions that we suggest are necessary for a successful international integration of energy markets. r 2002 Elsevier Science Ltd. All rights reserved.
Keywords: Integration; Energy; International

1. Introduction Energy policy discussions today center on the evolving processes of deregulation and privatization of electricity and gas systems. There seems to be a learning curvein the deregulation process whereby countries that embark upon the process at a later date attempt to improve the regulatory structure of the industry. A parallel process has also begun in the area of the integration of energy markets, namely in the gas and electricity markets. While there has been increasing attention paid to planning in particular regions about energy market integration, therehas not yet been any comparative survey of these efforts. This article will compare the energy market integration efforts in Europe, Central America, and South America to bring out the most important issues and to see if there is a model of integration that could be used across regions, including North America, where energy market integration is still only in the discussion stage.1

2. Theparallel but distinct processes of deregulation and integration in electricity and gas markets We will not recount the history of electricity deregulation, which is well covered elsewhere. For our purposes, it is important to note that the processes of deregulation and privatization seem to follow parallel, but not overlapping courses of development. In Latin America, the combination of the debt crisis,the lack of adequate investment to meet new energy demand, and the general change in ideas towards neoliberalism pushed governments to move towards privatization of many state-owned companies, including those in the electricity sector. The process of integration has followed a different track, with the catalyst being the creation of the North American Free Trade Agreement in 1994. The developmentof NAFTA, and the privileged access to the US market thereby granted to Mexico, has created a new dynamic for integration efforts throughout the region. Thus, the MERCOSUR process of integration in South America really came on track after NAFTA, and the Central American Common Market seems designed to ready those countries for eventual access to a widened free trade agreement in the Americas. Interms of energy, the process of privatization and deregulation of the energy sectors did not anticipate the possibilities for regional market integration. Therefore, national regulatory structures in South America have only a patchwork, albeit one that is growing rapidly, of binational agreements and working groups to deal with

*Corresponding author. Tel.: +1-604-291-3286; fax: +1-604-2914786.E-mail addresses: ahira@sfu.ca (A. Hira), lamaya@sfu.ca (L. Amaya). 1 We should note as a caveat two important observations. First, our purpose here is to compare integration frameworks, thus we are not able to do adequate justice to the complexities of any one system. Second, energy regulations are incredibly dynamic, so we are using the best available information. We believe our basic analysis...