Electricity market liberalization, price stability, and energy security: the case of Estonia

Abstract

The efficacy of this thesis‘ hypothesis, given the competing effects of liberalization on each of the components of the energy security model proposed in the theoretical framework in Chapter 1, cannot be evaluated. Each element of the energy security model is complex and diverges empirically from the predicted theoretical outcomes. And these factors are also highly-dependent on a country‘s pre-liberalization resource profile and market structure, further confusing the net effect of liberalization from an abstract, theoretical standpoint. While the effects of increased prices and increased price volatility following a liberalization program induce negative consequences on a country‘s energy security, the diversity and stability of supply provided by liberalization buttress it. These competing effects differ in magnitude and are difficult to quantify. For this reason, the hypothesis can be neither confirmed nor denied. Estonia is likely to face increased prices and increased price volatility as a result of its liberalization program. As explored in Chapter 5, the Nord Pool Spot market exhibits volatility clustering but not mean reversion, with a high degree of volatility. This volatility, as surmised in the theoretical framework, is difficult to hedge against, leaving Estonia‘s economic infrastructure susceptible to a high degree of input price risk which could be disruptive to the continuity of operations for electricity-intensive industries. Liberalization will however inspire confidence in the Estonian electricity market by foreign investors and provide Estonia access to external sources of electricity, which it will need to utilize as it adapts to EU directives mandating its reduction of oil shale use. While these external sources of electricity will be more expensive than internally-produced electricity, they will also provide diversity and security of supply to Estonia. The net effect of these changes on Estonia‘s energy security is impossible to predict.