Evolution of Approaches to Heat Energy Market Regulation

Abstract:

The article presents the evolution of approaches to regulating the heat energy market and analyzes the modern experience of organizing heat energy markets in the world. On the basis of the retrospective analysis, the author defines theoretical concepts of approaches to the organization of the heat energy market and corresponding models developed in the world from the end of the 19th century to the present day. The analysis was carried out in the context of three participants’ heat energy market: a producer, a consumer and a regulatory authority. The paper shows that in the period from the 19th to the 20th century, according to the neoclassical theory, based on the concept of public utility, the natural monopoly regulated by government was the best alternative to the competition. Accordingly, a vertically integrated natural monopoly was considered to be the best model for organizing the heat energy market in that period. Understanding the damage from imperfect regulation has become the reason to develop an alternative (market-oriented) approach to the organization of the heat energy market. The market-oriented approach is based on the Baumol concept of competitive markets. This approach refused a direct control of a monopolist, but concentrated on conditions stimulating the competition in the heat energy market (elimination of barriers on an entrance, restriction of concentration and vertical integration). Thus, the models of vertical disintegration and a single buyer were developed in the 1980s and 1990s. The paper shows that favorable conditions for application of the model of vertical disintegration and the single buyer assume the existence of developed institutions and a low share of the low-income population, otherwise — a model of the vertically integrated monopoly. The analysis of approaches to the organization of the heat energy market is useful in understanding the potential benefits and threats when the model is changed. It is relevant in the context of the ongoing reform of the heat energy market in Russia.