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

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 8 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 20 percent or more due to a significant risk increase. Keywords: Ownership unbundling, Vertical integration, Economies of scope

https://dx-doi-org.web.bisu.edu.cn/10.5547/01956574.33.4.8

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