Analyzing the factors influencing the formation of the price of electricity in the deregulated markets of developing countries

Abstract

The aim of this paper is to measure the impact of certain factors on the formation of the price of electricity, which is obtained from conventional and renewable energy sources, in the deregulated markets of developing countries, such as Montenegro. Another goal is to identify and analyze the criteria that can lead to a change in the electricity market structure. This study was especially inspired by the fact that no similar research has been conducted in this domain, according to the authors’ knowledge. A regression model is applied in the paper, which can be used to display the fluctuation of electricity prices based on the analyzed factors. In addition to price as a dependent variable, the model also examined eight factors that are independent variables. Apart from the basic model, another model has been formulated which, in addition to a price as dependent variable and the examined factors, also takes into consideration the production of electricity from renewable sources. The results of the research showed that an increase in the amount of electricity produced will lead to a slight increase in price, which is to be expected considering there is still one large producer servicing the market, which, despite the deregulation of the market, still has significant monopoly power. The generation of electricity by small hydropower plants will not significantly affect price change, and these entities will behave as if they were in a market of perfect competition. Further opening up the market to new competitors would lead to a fall in the price of electricity. Based on the predicted capacity of electricity generation from small hydropower plants, the electricity deficit could be reduced; in another words it could lead to the reduction of imports. Based on the results of the study, energy policy makers will be able to adopt informed strategies and make decisions related to developments in the energy market, most notably the creation of a common EU energy market. Also, the results of the conducted research expand the theoretical body of work dealing with the determination of the price of electricity. Future studies could address the issue of using natural potential for the generation of electricity from renewable sources, such as solar energy, wind energy and other sources.