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Distributed Generation in Unbundled Electricity Markets

Author

Listed:
  • Johannes Wagner

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

Abstract

Electricity systems are increasingly characterized by distributed generation technologies, e.g. rooftop photovoltaic systems, which are used by end consumers to directly produce electricity. Additionally, empirical evidence suggests that electricity retailers exercise market power in many unbundled electricity markets. Against this backdrop this articles analyzes the impact of distributed generation on imperfect retail markets for electricity in a spatial competition framework. I find that distributed generation puts competitive pressure on retailers and induces lower retail prices. Therefore even consumers, who do not use distributed generation, benefit. Based on this effect regulators can shift welfare to consumers by subsidizing distributed generation in order to position it as a competitor to grid based electricity. However, if only a limited share of demand can be supplied with distributed generation, there is a point at which retailers disregard the substitutable share of demand and focus on the non-substitutable consumption in order to realize higher mark-ups. As a result, increased subsidies for distributed generation can increase retail prices and harm consumers. With optimal subsidies this strategy of retailers is prevented by limiting usage of distributed generation.

Suggested Citation

  • Johannes Wagner, 2018. "Distributed Generation in Unbundled Electricity Markets," EWI Working Papers 2018-1, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2018_001
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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