Vertical unbundling, the coordination of investment, and network pricing

Gert Brunekreeft and Nele Friedrichsen

No 3, Bremen Energy Working Papers from Bremen Energy Research

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.

Keywords: cheap talk; unbundling; game theory; network; investment; coordination (search for similar items in EconPapers)
JEL-codes: C72 D23 L22 L51 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2010-08
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Competition and Regulation in Network Industries, 16(5), 2015, pp. 378-403

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Persistent link: https://EconPapers.repec.org/RePEc:bei:00bewp:0003

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