IUE e-chapter 1: value chains, utility value chains, energy and water economics

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This introductory chapter explains electricity, gas, water and wastewater economics in simple pictorial terms, showing the similarities and differences, and making contrasts with simple transport economics. It starts by explaining what an industry value chain is for fresh milk and bread in a modern economy, and then explains the four main components of utility value chains: generation, transmission, distribution, and retail or supply. This introduction explains what these four stages really are, in practice, in the heavy utilities of electricity, gas, water and wastewater, and points out the similarities between similar stages in different industries, and the differences – e.g. gas can be stored, electricity at present cannot be on an industrial scale. Also, due to the growth of renewable electricity generation the distribution grids may become collection grids. The chapter next examines the general similarities and differences between distribution and collection networks in nature, such as trees or rivers, and in man-made grids such as canals or railways. Finally the exact nature of electricity demand, gas demand, clean water demand (which is largely a demand for an effective cleaning fluid, rather than a demand for drinking water) and wastewater demand (which is mostly a communal externality, and the opposite of a public good) are rigorously examined.

An idea of sunk costs is built up that will be used directly in Chapter 3 IUE e-chapter 3: sunk costs and a general sequence model for all industries, while the evidence for the traditional explanation of natural monopolies in the utilities is carefully scrutinised in Chapter 2 (IUE e-chapter 2: scale and scope economies in the utilities – theory & evidence )

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