Network Unbundling, Ownership Structure and Oligopolies: A Case Study for the Belgian Electricity Market

Abstract

This paper studies how different types of unbundling – accounting, management, legal and ownership unbundling – influence the electricity wholesale market. Starting from the current market situation as observed in many countries, with imperfect competition in generation and imperfect regulation of the network operator, it is not obvious that any kind of unbundling will result in a better outcome in terms of efficiency and welfare. With the imperfections just mentioned, unbundling can create better incentives for entry in the generation market, but it can also create a double marginalisation problem. We study the effect of unbundling in a numerical model that captures two kinds of ownership interactions between the generation and the transmission sector. Passive ownership – or legal unbundling – where the generation firm simply cashes its share of the transmission firm's profit without having a direct impact on its decision process, and active ownership – or management unbundling – where the generator still has a direct influence on the transmission firm's decision process. Simulations, calibrated on Belgian electricity market data, show that the fastest road towards a more efficient electricity market is a road that implies a welfare reduction at an intermediate stage. The results also strongly suggest that the current European electricity directive, imposing legal unbundling, is not sufficient. European legislation should move further and impose ownership unbundling if a level playing field and a competitive electricity market is the objective.