IUE e chapter 1: value chains, the utility value chain, 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 components of the general utility value chain: 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. It also explains general energy flow charts and such concept as primary energy and energy delivered. 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.

After the general utility value chain has been explained, an idea of the sunk costs involved in creating a distribution or collection grid is built up that will be used directly in Chapters 3 and 4, while the evidence for the traditional explanation of natural monopolies in the utilities is carefully scrutinised in Chapter 2. The concepts of the general utility value chain are core pre-requisites for understanding the proper measurement of utility outputs and efficiency described in Chapters 6 and 7.

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