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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: D21: Firm Behavior: Theory, Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, L94: Electric Utilities, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, L98: Industry Studies: Utilities and Transportation: Government Policy

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.