Can Electricity Companies Be Too Big to Fail?

32 Pages Posted: 28 Nov 2017

See all articles by Erik Larsen

Erik Larsen

University of Lugano

Ann van Ackere

Université de Lausanne

Sebastian Osorio

PIK

Date Written: November 23, 2017

Abstract

The 2008 financial crisis has drawn attention to the concept of "too big to fail" companies, more recently relabelled "system-critical" institutions, referring to situations where the actual or near-bankruptcy of a company threatens the future of a service essential to the functioning of society. But such instances are not limited to the financial sector. We argue that if policymakers and regulators are not vigilant, a similar situation could occur in the electricity sector. So far this industry has only experienced occasional problems, but we can observe several precursory signals indicating that these problems might become more frequent. These include a tendency to globalisation in the absence of a supra-national regulator and the disruption caused by large amounts of renewable energies, resulting in companies to be stranded with loss-making thermal generators. Still, these units are essential for the security of electricity supply. We discuss several cases illustrating these trends. We conclude with a discussion of how electricity regulators and policymakers should approach the “too big to fail” problem, focusing both on preventive measures that can be taken to keep such a situation from occurring and on proactive actions aimed at avoiding a crisis once a system-critical company seems at risk of collapsing.

Keywords: electricity, "too big to fail", market concentration, energy security

JEL Classification: L1, Q5

Suggested Citation

Larsen, Erik and van Ackere, Ann and Osorio, Sebastian, Can Electricity Companies Be Too Big to Fail? (November 23, 2017). Available at SSRN: https://ssrn.com/abstract=3076588 or http://dx.doi.org/10.2139/ssrn.3076588

Erik Larsen

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, Ticino 6900
Switzerland
+41 58 666 4639 (Phone)

Ann Van Ackere

Université de Lausanne ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41216970454 (Phone)

Sebastian Osorio (Contact Author)

PIK ( email )

Potsdam Institute for Climate Impact Research
Telegraphenberg A 31
Potsdam, 14473
Germany
+493312882436 (Phone)

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