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Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK

Jing Shao Orcid Logo, Jinke Li, Guy Liu

Energy Economics, Volume: 94, Start page: 105093

Swansea University Authors: Jing Shao Orcid Logo, Jinke Li

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Abstract

Under the Renewable Obligation (RO) scheme implemented in the UK, electricity suppliers are required to present a certain number of RO certificates (ROCs) depending on the quantity of electricity they sold. Insufficient availability of ROCs, guaranteed by the amendment of headroom, helps boost inves...

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Published in: Energy Economics
ISSN: 0140-9883
Published: Elsevier BV 2021
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URI: https://cronfa.swan.ac.uk/Record/cronfa55934
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spelling 2021-07-13T12:04:43.0366063 v2 55934 2020-12-28 Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK 4957a0af8a9dd429738c64c124c3f8e8 0000-0003-0587-317X Jing Shao Jing Shao true false 1d12dcf12aad73117a2a5f43cf233aae Jinke Li Jinke Li true false 2020-12-28 ECON Under the Renewable Obligation (RO) scheme implemented in the UK, electricity suppliers are required to present a certain number of RO certificates (ROCs) depending on the quantity of electricity they sold. Insufficient availability of ROCs, guaranteed by the amendment of headroom, helps boost investors’ confidence about their values, but we observe that there was a large variation in compliance by suppliers. Using data from 17 reporting years from 2002-03 to 2018-19, our estimation results show that compliance of subsidiaries of the big six energy companies was 15.46% higher than that of independent suppliers. We trace the movement of ROCs from six generators to show that they prefer to sell ROCs to suppliers within the vertical integration. We develop scenarios and a theoretical model to show that, when the recycling mechanism is in place, integrated generators have the motivation to sell ROCs to integrated suppliers, rather than independent suppliers, while holding spare ROCs is the least favourite option. These predictions are consistent with observations that (i) integrated suppliers have better compliance than independent suppliers, and (ii) nearly all issued ROCs were presented. Therefore, we suggest that, when both vertical integration and the recycling mechanism exist, independent suppliers were disadvantaged in accessing ROCs given insufficient supply. Nonetheless, as a way of refunding unjustified penalties due to insufficient supply of ROCs, the recycling mechanism can promote competition among suppliers for ROCs, compared with a simple refunding method. Journal Article Energy Economics 94 105093 Elsevier BV 0140-9883 Vertical integration; Recycling mechanism; Compliance; Renewable obligation; Insufficient supply 1 2 2021 2021-02-01 10.1016/j.eneco.2020.105093 COLLEGE NANME Economics COLLEGE CODE ECON Swansea University 2021-07-13T12:04:43.0366063 2020-12-28T12:27:35.3826376 School of Management Economics Jing Shao 0000-0003-0587-317X 1 Jinke Li 2 Guy Liu 3 Under embargo Under embargo 2021-01-07T16:40:09.6127636 Output 1031842 application/pdf Accepted Manuscript true 2022-07-02T00:00:00.0000000 ©2021. All rights reserved. All article content, except where otherwise noted, is licensed under a Creative Commons Attribution Non-Commercial No Derivatives License (CC-BY-NC-ND) true eng https://creativecommons.org/licenses/by-nc-nd/4.0/
title Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK
spellingShingle Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK
Jing Shao
Jinke Li
title_short Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK
title_full Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK
title_fullStr Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK
title_full_unstemmed Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK
title_sort Vertical integration, recycling mechanism, and disadvantaged independent suppliers in the renewable obligation in the UK
author_id_str_mv 4957a0af8a9dd429738c64c124c3f8e8
1d12dcf12aad73117a2a5f43cf233aae
author_id_fullname_str_mv 4957a0af8a9dd429738c64c124c3f8e8_***_Jing Shao
1d12dcf12aad73117a2a5f43cf233aae_***_Jinke Li
author Jing Shao
Jinke Li
author2 Jing Shao
Jinke Li
Guy Liu
format Journal article
container_title Energy Economics
container_volume 94
container_start_page 105093
publishDate 2021
institution Swansea University
issn 0140-9883
doi_str_mv 10.1016/j.eneco.2020.105093
publisher Elsevier BV
college_str School of Management
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hierarchy_top_title School of Management
hierarchy_parent_id schoolofmanagement
hierarchy_parent_title School of Management
department_str Economics{{{_:::_}}}School of Management{{{_:::_}}}Economics
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description Under the Renewable Obligation (RO) scheme implemented in the UK, electricity suppliers are required to present a certain number of RO certificates (ROCs) depending on the quantity of electricity they sold. Insufficient availability of ROCs, guaranteed by the amendment of headroom, helps boost investors’ confidence about their values, but we observe that there was a large variation in compliance by suppliers. Using data from 17 reporting years from 2002-03 to 2018-19, our estimation results show that compliance of subsidiaries of the big six energy companies was 15.46% higher than that of independent suppliers. We trace the movement of ROCs from six generators to show that they prefer to sell ROCs to suppliers within the vertical integration. We develop scenarios and a theoretical model to show that, when the recycling mechanism is in place, integrated generators have the motivation to sell ROCs to integrated suppliers, rather than independent suppliers, while holding spare ROCs is the least favourite option. These predictions are consistent with observations that (i) integrated suppliers have better compliance than independent suppliers, and (ii) nearly all issued ROCs were presented. Therefore, we suggest that, when both vertical integration and the recycling mechanism exist, independent suppliers were disadvantaged in accessing ROCs given insufficient supply. Nonetheless, as a way of refunding unjustified penalties due to insufficient supply of ROCs, the recycling mechanism can promote competition among suppliers for ROCs, compared with a simple refunding method.
published_date 2021-02-01T04:11:15Z
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