Likely failure of electricity deregulation: Explanation with application to Israel

This paper presents a simple analytical model to compare electricity prices under regulation and deregulation. A deregulated electricity market cannot have too many producers because they will not be able to recover their investment costs. Nor can it have too few producers because the resulting market price will exceed the regulated rate. Constrained by the financial viability of privately owned generators and the policy goal of unregulated market price not exceeding the regulated rate, the set of feasible numbers of producers in the competitive market is very small, and at times empty. The small set of feasible numbers implies the likely failure of electricity deregulation, precisely because the post-reform number of producer is highly unlikely an element of the set. We verify this theoretical prediction using data applicable to Israel.