Economic Impacts of Investment in the Electricity Industry: A CGE Comparison of Regulated and Free Markets

Benefits of investment in the electricity industry can transmit to other activities through several channels. This is mainly through “the price channel” in free markets and “the capital return channel” in fixed-price regulated markets. In this study, we apply a comparative static analysis of the economic impacts of investment in the electricity industry in both controlled and free-market environments. We apply a CGE model which is calibrated using the 2001 Energy Micro Consistent matrix (MCM) of the Iranian Ministry of Energy. The model assumes a small open economy with imperfect capital and labor mobility between sectors. We found that regulated markets are less efficient than free markets. While under fixed electricity prices, one unit of investment increases household welfare by 0.16%, under a free market regime household welfare increases more than three times (about 0.52%).