Center for the Study of Energy Markets

The paper presents an empirical model of the "make or buy" decision faced by independent power producers (IPP) in restructured U.S. wholesale electricity markets. The model is applied to plant-level data that track the investment decisions of major IPPs from 1996 to 2000, yielding estimates of each firm's investment cost and expected profit functions. The estimates 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 power plant investments were "crowded out" by divestiture and that divestiture encouraged greater (short-run) entry, especially among utility-affiliated IPPs.