Costs and Benefits of Vertical Separation of the Energy Distribution Industry: The Dutch Case

This paper applies insights from the economic literature to evaluate costs and benefits of the policy decision recently taken by the Dutch government to introduce ownership separation between energy distribution on the one hand, and production and retail on the other. The major benefit of this measure is that it enables the privatisation of commercial activities if the infrastructure has to remain in public hands. This benefit can, however, also be realised by more efficient ways, such as improving the corporate governance structure. The other benefits arise from improved network performance, efficiency of regulatory activity and increased competition. The realisation of these results is, of course, not a free lunch. Ownership unbundling reduces economies of scope, creates one-off transaction costs, and may also affect investments in generation by the currently vertically integrated Dutch utility holdings. We conclude that mainly because of the uncertainty about the future role of small-scale generation and the uncertainty about the magnitude of the one-off transaction costs related to the crossborder leases, the net effect on welfare of ownership unbundling is ambiguous.