Impacts of integration of production of black and green energy

As the mandate for minimum renewable sources renders Tradable Green Certificates (TGCs) an essential input for power generation, it may induce mergers between power companies of conventional and renewable sources. Such mergers enable the integrated firms to extend market power from the TGC market to the physical energy market. We find that the price of TGCs is indeed higher in the integrated market than the disintegrated market, indicating the presence of market power leveraging. However, despite higher TGC price, the total supply of electricity is greater under integration than disintegration, reflecting efficiency gains from vertical integration, which eliminates double marginalization. The thrust of this paper is that market changes induced by environmental policies will in turn affect environmental and economic regulations. For example. increased supply resulting from integration induced by the renewable source mandate may reduce the effectiveness of programs that promote energy saving behavior, but at the same time creates room for raising the minimum of renewable sources without unduly depressing production and consumption. (C) 2009 Elsevier B.V. All rights reserved.