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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 02-2014:
Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction

Anette Boom () and Stefan Buehler

Abstract: We study the role of vertical structure in determining generating capacities and retail prices in the electricity industry. Allowing for uncertain demand, we compare three market configurations: (i) integrated monopoly, (ii) integrated duopoly with wholesale trade, and (iii) separated duopoly with wholesale trade. We find that equilibrium capacities and retail prices are such that welfare is highest (lowest) under separated (integrated) duopoly. The driving force behind this result is the risk of rent extraction faced by competing integrated generators on the wholesale market. Our analysis suggests that vertical structure plays an important role in determining generating capacities and retail prices.

Keywords: Electricity; Investments; Generating Capacities; Vertical Integration; Monopoly and Competition; (follow links to similar papers)

JEL-Codes: D42; D43; D44; L11; L12; L13; (follow links to similar papers)

42 pages, March 14, 2014

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