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Vertical unbundling, the coordination of investment, and network pricing

Author

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  • Gert Brunekreeft
  • Nele Friedrichsen

Abstract

This paper addresses the investment coordination problem in a vertically separated electricity supply industry in the absence of locational pricing. In an electricity system, investments in network and power plants need to be coordinated. Unbundling eliminates firm-internal coordination. Information exchange might restore coordination if communication is truthful. Based on model results we analyse whether cheap talk of generator investors would be credible and hence informative for network investment decisions. We show that due to perverse incentives, this is not generally the case. We propose cost-reflective, locational network pricing as a coordination device to internalize the incentive problem.

Suggested Citation

  • Gert Brunekreeft & Nele Friedrichsen, 2010. "Vertical unbundling, the coordination of investment, and network pricing," Bremen Energy Working Papers 0003, Bremen Energy Research.
  • Handle: RePEc:bei:00bewp:0003
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    Cited by:

    1. Nele Friedrichsen, 2015. "Governing smart grids: the case for an independent system operator," European Journal of Law and Economics, Springer, vol. 39(3), pages 553-572, June.
    2. Gert Brunekreeft, 2011. "Vertical Relations and Energy Networks: Selected Issues," Chapters,in: Competition, Contracts and Electricity Markets, chapter 5 Edward Elgar Publishing.

    More about this item

    Keywords

    cheap talk; unbundling; game theory; network; investment; coordination;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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