Vertical integration in energy-only electricity markets

Paul Simshauser (), Yuan Tian and Patrick Whish-Wilson

Economic Analysis and Policy, 2015, vol. 48, issue C, 35-56

Abstract: Australia’s electricity market blueprint involved the vertical and horizontal restructuring of State Electricity Commissions and the creation of multiple merchant generators and retailers. State governments progressively exited the merchant market by privatising their retailers and generators but the combination of an energy-only market design and the exit of government from the merchant market introduced an entirely new risk—the presence of investment-grade credit. Investment-grade credit is an essential precondition for meeting physical and systemic energy market security objectives and maximising welfare. In this article we model a Pure Play Retailer, a Pure Play Generator, and a Vertically Integrated Firm (‘Gen-tailer’) in Australia’s energy-only electricity market using market data over a 10 year period to 2013/14. We find Pure Play businesses are unable to sustain investment-grade credit metrics whereas the Vertical Firm does in all years, despite the wild commodity price cycle contained within our data set. The starting premise of industrial organisation is that vertical arrangements are an organisational form of last resort. Our findings explain why vertical reintegration of retail and generation became an enduring trend from the mid-2000s.

Keywords: Vertical integration; Energy-only markets; Credit ratings (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:48:y:2015:i:c:p:35-56

DOI: 10.1016/j.eap.2015.09.001

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