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

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  • Roland Meyer
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    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 5 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 15 percent and more due to a significant risk increase.

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    File URL: http://www.bremer-energie-institut.de/download/bewp/bewp06.pdf
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    Bibliographic Info

    Paper provided by Bremer Energie Institut in its series Bremen Energy Working Papers with number 0006.

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    Length: 36 pages
    Date of creation: Apr 2011
    Date of revision:
    Handle: RePEc:bei:00bewp:0006

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    Web page: http://www.bremer-energie-institut.de/

    Related research

    Keywords: ownership unbundling; vertical integration; economies of scope;

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    1. Machiel Mulder & Victoria Shestalova & Mark Lijesen, 2005. "Vertical separation of the energy-distribution industry; an assessment of several options for unbundling," CPB Document 84, CPB Netherlands Bureau for Economic Policy Analysis.
    2. de Nooij, Michiel & Baarsma, Barbara, 2009. "Divorce comes at a price: An ex ante welfare analysis of ownership unbundling of the distribution and commercial companies in the Dutch energy sector," Energy Policy, Elsevier, vol. 37(12), pages 5449-5458, December.
    3. Beard, T Randolph & Kaserman, David L & Mayo, John W, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 319-33, September.
    4. Jara-Diaz, Sergio & Ramos-Real, Francisco Javier & Martinez-Budria, Eduardo, 2004. "Economies of integration in the Spanish electricity industry using a multistage cost function," Energy Economics, Elsevier, vol. 26(6), pages 995-1013, November.
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