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

Roland Meyer

The Energy Journal, 2012, vol. Volume 33, issue Number 4

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.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2012
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