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Investing in vertical integration: electricity retail market participation

Gabriel Godofredo Fiuza de Bragança and Toby Daglish

Energy Economics, 2017, vol. 67, issue C, 355-365

Abstract: Electricity industries are frequently characterised by a high degree of vertical integration. We explore the option for a generator to enlarge its participation in the retail market, and show that the firm will choose to delay if market demand is too high or low. In the former case, high wholesale prices may make fixed price retail customers unattractive, while in the latter, too little revenue is earned to justify the option's expense. Increased volatility can, under some circumstances, lower the value of the option, contrary to conventional real options theory. Firms expand their retail positions more aggressively in concentrated markets, vertically integrated markets, and markets where financial hedging is prevalent.

Keywords: Electricity; Real options; Vertical integration; Investments; Market structure; Market power (search for similar items in EconPapers)
JEL-codes: D81 G11 L1 L94 M37 (search for similar items in EconPapers)
Date: 2017
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