Does divestiture crowd out new investment? The “make or buy” decision in the U.S. electricity generation industry

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Abstract

An empirical model of the “make or buy” decision faced by independent power producers (IPPs)in restructured U.S. wholesale electricity markets is derived to analyze power plant investment decisions by major IPPs from 1996 to 2000. The estimated investment cost and expected profit functions are used to evaluate the effectiveness of divestiture programs (which sold utility power plants to IPPs)in encouraging greater IPP participation. The estimates and counterfactual simulations indicate that a minimal amount of new plant investments were “crowded out” by divestiture and that divestiture encouraged greater (short-run)entry, especially among utility-affiliated IPPs.

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