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Investing in vertical integration: electricity retail market participation

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  • de Bragança, Gabriel Godofredo Fiuza
  • Daglish, Toby

Abstract

Electricity industries are frequently characterised by a high degree of vertical integration. We explore the option for a generator to enlarge its participation in the retail market, and show that the firm will choose to delay if market demand is too high or low. In the former case, high wholesale prices may make fixed price retail customers unattractive, while in the latter, too little revenue is earned to justify the option's expense. Increased volatility can, under some circumstances, lower the value of the option, contrary to conventional real options theory. Firms expand their retail positions more aggressively in concentrated markets, vertically integrated markets, and markets where financial hedging is prevalent.

Suggested Citation

  • de Bragança, Gabriel Godofredo Fiuza & Daglish, Toby, 2017. "Investing in vertical integration: electricity retail market participation," Energy Economics, Elsevier, vol. 67(C), pages 355-365.
    • Handle: RePEc:eee:eneeco:v:67:y:2017:i:c:p:355-365
    DOI: 10.1016/j.eneco.2017.07.011
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    5. Simshauser, P., 2020. "Merchant utilities and boundaries of the firm: vertical integration in energy-only markets," Cambridge Working Papers in Economics 2039, Faculty of Economics, University of Cambridge.
    6. Li, Pei & Tan, Dan & Wang, Guangyong & Wei, Hang & Wu, Jilan, 2021. "Retailer's vertical integration strategies under different business modes," European Journal of Operational Research, Elsevier, vol. 294(3), pages 965-975.
    7. David P. Brown & David E. M. Sappington, 2022. "Vertical integration and capacity investment in the electricity sector," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 193-226, February.
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    More about this item

    Keywords

    Electricity; Real options; Vertical integration; Investments; Market structure; Market power;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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