Level Playing Field for Renewable Electricity Investment: Evidence from Transmission Network Unbundling in Germany
December 9, 2020
TKFD Working Paper Series No. 20-02
- I examine ownership unbundling of the transmission system operator in Germany
- Geographic quasi-experiment estimates local average treatment effect of unbundling
- The unbundling has very little impact on renewable electricity investment
- Legal unbundling with behavior regulation removes entry barriers and levels the field
While economics reveals that insufficient internalization of negative environmental externalities from nonrenewable electricity generation is one of the major barriers to renewable electricity investment, the lack of a level playing field in the generation or retail market can be another serious impediment. Incumbent vertically integrated utilities face an incentive to prevent the penetration of renewable electricity when competition with entrants reduces their revenue from their own power plants. A bottleneck monopoly of power-transmission-network assets allows them to create several barriers to entry.
The purpose of this study is to investigate this hypothesis by using a geographic quasi-experimental approach to the electricity industry in Germany. I take advantage of the fact that Germany has two transmission system operators (TSOs) that were ownership unbundled (separated) and two other TSOs that chose legal unbundling. I estimate the local average treatment effect of ownership unbundling of the transmission system operator on renewable electricity investment.
The result indicates that the installed capacity of solar, onshore wind power, and biomass power plants is not increased by vertical separation, even though the effect is likely to be overestimated by generation divestiture effects. This evidence suggests that the generation market in Germany is competitive without ownership unbundling. In other words, legal unbundling with behavior regulation can create a level playing field, just as ownership unbundling can.
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