Regulation and markets

Developing market instruments and a strong regulatory framework are essential in order to ensure that energy is delivered reliably and at least cost.

There is considerable UK and international experience in this area; however there are still issues that require more attention particularly in light of climate change and energy security challenges. In our work, we focus not only on the UK but also on international experience and debates.

Our research in this area

Liberalised electricity markets open up many new opportunities but also present a number of challenges. Understanding this dynamic environment, its complexities, risks and uncertainties, is central to our research agenda.

We investigate issues of market design and competition within the context of wider challenges such as climate change and energy security.

Topics in this area include:

  • market design for efficient investment in balancing and wholesale markets, generation and low-carbon technologies
  • obstacles to competition and design of strategies to mitigate market power
  • the changing role of regulation and competition policy in liberalised markets
  • retail competition and its impact on consumers
  • restructuring and reforming electricity industries in other countries


The data

Data for the project was provided by ECN. This can be accessed at their electricity market web page.


Access the results generated by each model:

Comparing the results generated by the different models shows how the structural and market design assumptions can affect the solutions generated by numerical electricity market models. Under the assumption of a competitive market, each model predicts a similar price. In the Strategic case, where large generators can exercise market power, the predicted prices differ significantly. Here, the results are highly sensitive to assumptions regarding market design, market timing and constraints on the rationality of generators. However, where the same assumptions are made, the models generate similar output.

These models and their results were discussed in two workshops held at Universidad Pontificia Comillas, Madrid and at the German Institute for Economic Research (DIW) in Berlin in 2003. The second workshop was attended by representatives from French, Belgium and Dutch Regulatory Agencies and researchers from a Danish System Operator, the ECN, and universities in Spain, the UK, Germany and the US.

The results were published in a CMI working paper, “Network-constrained models of liberalized electricity markets: the devil is in the details”.


ECN Model:

  • Ben Hobbs, The Whiting School of Engineering, Johns Hopkins University
  • Fieke Rijkers, NMa / DTe, The Hague
  • Maroeska Boots, Energy Research Centre of the Netherlands (ECN) Policy Studies, Amsterdam

Madrid Model:

  • Julian Barquin, Instituto de Investigación Tecnológica, Universidad Pontificia Comillas, Madrid

Cambridge Model:

  • Karsten Neuhoff, Department of Applied Economics, University of Cambridge
  • Andreas Ehrenmann, Cambridge Judge Business School, University of Cambridge

As natural monopolies, electricity and gas transmission and distribution networks are generally subject to some form of regulation to ensure that energy is delivered reliably and at least cost. The UK has a long and successful experience of effective incentive-based network regulation.

The challenges now include:

  • identifying best practice in the use of efficiency analysis and benchmarking techniques for network companies
  • investigating the role of network regulation in delivering climate change targets
  • exploring how market mechanisms and competition could play a more central role in the future


As the process of liberalisation of the European energy markets progresses, there is a need for promoting efficient operation and regulation of the natural monopoly transmission networks. The Council of European Energy Regulators (CEER) has commissioned a study of the feasibility of comparative efficiency analysis and benchmarking as a tool for regulation of the European natural gas transmission system operators (TSOs).

The aim of the study is to help national energy regulators to gain experience with and develop a methodology for the use of benchmarking in assessing network tariffs. The benchmarking methodology can be used to identify performance and tariff differences for the purpose of further examination. The small number of gas TSO in most European countries requires that a benchmarking of the companies should have an international approach. The study will assess the availability of suitable international data and will advice on suitable approach, techniques, and models for comparative efficiency analysis of the gas TSOS.

The work on the project was completed in June 2006.

The study was conducted by Michael Pollitt, Tooraj Jamasb and Thomas Triebs.

Consumers have a central role to play in supporting a market-oriented and more flexible energy system over the coming years.

Understanding the potential for and impact of flexibility, the barriers to more responsive demand, and the costs and benefits of overcoming these barriers is central to our work in this area. Our current areas of interest include:

  • technologies and policies that promote greater demand response
  • barriers to demand-side participation and strategies for overcoming them
  • future trends in demand and their implications for the energy system and for the environment