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Electric utility mergers in the presence of distributed renewable energy

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  • Fikru, Mahelet G.
  • Gautier, Luis

Abstract

Firm consolidation through mergers and acquisitions could be a strategic option for the electricity industry which has recently witnessed several transformations such as renewable integration and regulatory changes. This study uses a Cournot oligopoly model to examine the profitability of electric utility mergers in the presence of distributed renewable energy sources. We introduce two sector specific parameters that influence merger profitability: the rate at which renewable energy raises the marginal grid integration cost and the extent to which renewable energy reduces pollution intensity. Our model predicts that an increase in the first parameter reduces the profitability of profitable mergers while an increase in the latter increases the profitability of profitable mergers. We find that due to the strategic substitutability between renewable and non-renewable energy, an increase in energy produced from distributed sources reduces the profitability of profitable mergers and reduces losses from unprofitable mergers. Furthermore, we show that the variability in electricity produced from renewable sources induces utilities to produce more exacerbating the extent that extra renewable energy affects merger profitability. Results from the theoretical model are illustrated by simulating a hypothetical merger among investor-owned utilities in the PJM market.

Suggested Citation

  • Fikru, Mahelet G. & Gautier, Luis, 2021. "Electric utility mergers in the presence of distributed renewable energy," Energy Economics, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:eneeco:v:101:y:2021:i:c:s0140988321003285
    DOI: 10.1016/j.eneco.2021.105436
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    References listed on IDEAS

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    Cited by:

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    2. Natalia Wasilewska & Mirosław Wasilewski & Serhiy Zabolotnyy & Dmytro Osiichuk, 2022. "The Impact of M&As on the Competitive Positioning of European Energy Firms and Market Power Concentration on EU National Energy Markets," Energies, MDPI, vol. 15(23), pages 1-19, November.
    3. Fikru, Mahelet G. & Azure, Jessica W.A., 2023. "Renewable energy technologies and carbon capture retrofits are strategic complements," Technological Forecasting and Social Change, Elsevier, vol. 196(C).

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    More about this item

    Keywords

    Mergers and acquisitions; Renewable energy; Grid integration; Emission tax; Pollution intensity;
    All these keywords.

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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