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Vertical Economies and the Costs of Separating Electricity Supply--A Review of Theoretical and Empirical Literature

Abstract:
Motivated by the European movement towards a separation of electricity networks from the competitive functions generation and supply this paper reviews theoretical and empirical literature on vertical synergies in electricity supply. In the analysis a clear distinction is made between four different unbundling options leading to different forms and magnitudes of synergy losses. Apart from coordination economies a main source of scope economies seems to result from a market risk effect if generation and retail are separated. Accordingly, the European policy of network unbundling (either transmission or distribution) results in synergy losses between 2 and 8 percent due to coordination losses, while an unbundling option that includes a separation between retail and generation, as observed in some U.S. states, may lead to a permanent cost increase of 20 percent or more due to a significant risk increase. Keywords: Ownership unbundling, Vertical integration, Economies of scope

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Generation Technologies; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Q2 -
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

DOI: 10.5547/01956574.33.4.8

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Published in Volume 33, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.