Allocative Efficiency towards Energy Transition: The Cases of Natural Gas and Electricity Markets

Conventional economic theory indicates that the free market contributes to allocative efficiency. However, specific energy markets present network industry characteristics which distance them from perfect competition. These markets, therefore, need effective regulation. The liberalizing reforms which took place in the Organization for Economic Cooperation and Development (OECD) and emerging countries from the 1990s onwards have reduced the share of state ownership in the energy sector, but not its functions of regulation, coordination and planning. It is also worth noting the expansion of the government's agenda due to the energy transition that has unequivocally imposed itself in the 21st century. This article uses the Slacks-Based Measure of the Data Envelopment Analysis (SBM-DEA) methodology to investigate the relationship between market liberalization and sustainability in a low-carbon energy transition context. Taking the cases of the natural gas and electricity markets, we verify whether liberalization contributes to the progress of the energy transition, driven by the emergency need to tackle climate change. The results show that the most advanced markets, in their processes of opening up, tend to be positively associated with a more vigorous energy transition. European nations, such as the United Kingdom and Norway, have experienced a relatively more advanced market liberalization leading to an efficient path toward energy transition. Chile, Canada and Colombia also have efficient scores regarding their energy transitions. For low performing countries, such as Brazil, the study suggests some calls for action that should be pursued to improve their energy market indicators, resulting in a stronger energy transition towards renewables, more competitive energy prices and a larger participation of natural gas in the energy mix, which will contribute to decreasing its external dependency.

Automated summary

Conventional economic theory suggests that the free market promotes allocative efficiency. However, energy markets with network industry characteristics require effective regulation. Liberalizing reforms in the OECD have reduced state ownership in the energy sector, but the functions of regulation and planning remain. This study examines the relationship between market liberalization and sustainability in the context of low-carbon energy transition using the SBM-DEA methodology. The results indicate that advanced markets with liberalization tend to have a more vigorous energy transition, such as the UK, Norway, Chile, Canada, and Colombia.