Vertically Integrated Electricity Generators - Villains, Victims or Heroes?

Abstract

Given the market power of electricity generators should they be allowed to own electricity retailers - i.e. to vertically integrate - or should vertical separation from retailers be required? How does vertical integration change the operation of forward contract spot wholesale and retail markets? If generators themselves choose to be vertically integrated doesn't that mean consumers will suffer? Richard Meade presents his recently completed Masters thesis from the Toulouse School of Economics in which he develops a formal model to address these questions. His previous work suggests there are benefits to vertical integration - his latest modelling demonstrates that VI is clearly superior in welfare terms to vertical separation. This remains true even though vertically-integrated generators can engage in apparently anti-competitive behaviour. Indeed generators may need to integrate in order to protect themselves against the countervailing behaviours of retailers.