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vertical economies of scope in electricity supply – analysing the costs of ownership unbundling

Vertical Economies of Scope in Electricity Supply – Analysing the Costs of Ownership Unbundling

Meyer, R.: Vertical Economies of Scope in Electricity Supply –Analysing the Costs of Ownership Unbundling; Dissertation. Jacobs University Bremen on June 3, 2011

Roland Meyer

Motivated by the movement towards ownership unbundling in Europe’s energy sector, this PhD study analyses the cost effects of a vertical separation of the electricity supply stages from a theoretical and an empirical perspective. It covers the results of three research articles. The first article provides a literature review of previous theoretical and empirical studies on vertical scope economies. The measurement of these integration economies quantifies the expected cost increases that result from separating the electricity supply stages. Results are presented for different types of unbundling, as cost effects depend on the precise location of the ownership split along the supply chain. Efficiency losses may occur due to coordination effects and market risk effects. Reviewing previous studies shows that pure “network unbundling”, i.e. a separation networks from the competitive stages generation and retail, results in synergy losses between 2 and 5 percent due to coordination costs. Unbundling options that lead to a separation between generation and retail lead to a permanent cost increase of 15 percent and more due to the additional market risk effect. The second article confirms these results by applying a multi-stage cost function approach. Results show that separating generation from retail appears to be the most costly alternative with an average cost increase of 12 to 17 percent. The European case of transmission unbundling leads to a cost increase of approximately 4 percent. The third article presents an empirical study based on a frontier benchmarking approach that compares different “efficiency frontiers” for integrated and separate provision of electricity. Similar to the econometric study, a generation-retail split is the most costly option with an average cost increase of 18 percent (coordination and risk effects), while transmission unbundling leads to an average cost increase below 2 percent (coordination effects).

UNECOM - Unbundling of Energy Companies

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