Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction

Posted: 16 Mar 2020

See all articles by Stefan Buehler

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences

Anette Boom

affiliation not provided to SSRN

Date Written: 2014

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.

Suggested Citation

Buehler, Stefan and Boom, Anette, Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction (2014). Available at SSRN: https://ssrn.com/abstract=3541676

Stefan Buehler (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

FGN-HSG
Varnbuelstr. 19
CH-9000 St. Gallen
Switzerland
+41-71-224-2303 (Phone)

Anette Boom

affiliation not provided to SSRN

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