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

Roland Meyer

Year: 2012
Volume: Volume 33
Number: Number 4
DOI: 10.5547/01956574.33.4.8
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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

The Rise of Third Parties and the Fall of Incumbents Driven by Large-Scale Integration of Renewable Energies: The Case of Germany

Gert Brunekreeft, Marius Buchmann, and Roland Meyer

Year: 2016
Volume: Volume 37
Number: Bollino-Madlener Special Issue
DOI: 10.5547/01956574.37.SI2.gbru
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The energy transition is dramatically changing the electricity supply industry in Germany implying two big trends. First, significant market entry by third parties (i.e., non-incumbents). Based on empirical evidence, we argue that the emergence of third parties is the immediate result of the large-scale integration of renewable energy sources. The electricity supply industry is changing quickly from a top-down, single-firm game to a decentralized multiple-player system, with far-reaching consequences for the governance and regulatory structure. Second, the incumbent players are facing disruptive challenges: under pressure of the energy transition, conventional centralized generation is losing profit margins very quickly. We analyze the disruptive challenges and sketch how the incumbents respond by splitting their activities into an old business, which is likely to be phased-out, and a new, future-oriented business: renewable energies, the distribution business, and customer-oriented solutions.

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