Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

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

Anette Boom () and Stefan Buehler
Additional contact information
Anette Boom: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Porcelaenshaven 16A, 1., DK-2000 Frederiksberg, Denmark
Stefan Buehler: University of St. Gallen

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

JEL-codes: D42; D43; D44; L11; L12; L13

42 pages, March 14, 2014

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