Electricity prices in a competitive market: a preliminary analysis of the deregulated Thai electricity industry M. Pipattanasomporn, W. Ongsakul * , R. Pacudan, T. Lefevre Energy Program, School of Environment, Resources and Development, Asian Institute of Technology, Pathumthani 12120, Thailand Received 20 August 2001; received in revised form 21 December 2001; accepted 2 January 2002 Abstract The electricity industry throughout the world is currently undergoing a significant transition towards restructuring and deregu- lation. Following this new legislation, Thailand has initiated an institutional and structural reform with a belief that this could be the best way forward for the Thai electricity supply industry (ESI) to improve efficiency, lower electricity prices, and tackle financial debts. This paper presents an analysis of the extent to which prices for generation services in a competitive market may differ from regulated electricity prices, if competitive prices are based on marginal costs and regulated prices are based on average costs, by using Thailand as a case study.  2002 Elsevier Science Ltd. All rights reserved. Keywords: Electricity restructuring; Competitive prices; Stranded costs 1. List of Acronyms DISCO Distribution Company EGAT Electricity Generating Authority of Thailand EGCO Electricity Generating Company ESI Electricity Supply Industry GENCO Generation Company IPP Independent Power Producer ISO Independent System Operator LER Low Economic Recovery MCP Market Clearing Price MEA Metropolitan Electricity Authority MER Moderate Economic Recovery NEPO National Energy Policy Office PEA Provincial Electricity Authority PPA Power Purchase Agreement SMP System Marginal Price SPP Small Power Producer SRMC Short-run Marginal Costs TRANCO Transmission Company VOM Variable Operating and Maintenance * Corresponding author. Tel.: +66-2-524-5421; fax: +66-2-524- 6589. E-mail addresses: mpipatta@vt.edu (M. Pipattanasomporn); ongsakul@ait.ac.th (W. Ongsakul). 0957-1787/02/$ - see front matter  2002 Elsevier Science Ltd. All rights reserved. PII:S0957-1787(02)00002-4 2. Introduction For the past decades, rapid economic growth in Asia has significantly transformed the electricity supply industry to meet the ever-growing demand. The National Energy Policy Office of Thailand (NEPO) reacted to this increasing demand by letting the Electricity Generating Authority of Thailand (EGAT) sign many power pur- chase agreements (PPAs) with independent power pro- ducers (IPPs). However, after the financial crisis trig- gered in 1997, the electricity demand in Thailand has fallen. Thailand faced higher debts and higher interest payments due to its currency depreciation. Thus, insti- tutional and structural reform was initiated with a belief that this is the best way forward for the Thai electricity supply industry (ESI) to improve efficiency, lower elec- tricity prices and tackle financial debts. By 2003, the regulatory framework of the Thai elec- tricity market will be replaced by new legislation leading to competition. As this trend continues, the relationship between the cost of producing electricity and the price charged for it will change fundamentally. Under the regulatory system, electricity prices have generally been equal to “embedded costs”— the average costs of pro- ducing the electricity. All the functions performed by utilities to produce high-quality, reliable electric service are sold as a package, and the bundled costs are divided