Firm consolidation through mergers and acquisitions could be a strategic option for the
electricity industry which has recently witnessed several transformations such as renewable
integration and regulatory changes. This study uses a Cournot oligopoly model to examine
the profitability of electric utility mergers in the presence of distributed renewable energy
sources. We introduce two sector specific parameters that influence merger profitability: the
rate at which renewable energy raises the marginal grid integration cost and the extent to
which renewable energy reduces pollution intensity. Our model predicts that an increase in
the first parameter reduces the profitability of profitable mergers while an increase in the
latter increases the profitability of profitable mergers. We find that due to the strategic
substitutability between renewable and non-renewable energy, an increase in energy produced
from distributed sources reduces the profitability of profitable mergers and reduces
losses from unprofitable mergers. Furthermore, we show that the variability in electricity
produced from renewable sources induces utilities to produce more exacerbating the extent
that extra renewable energy affects merger profitability. Results from the theoretical model
are illustrated by simulating a hypothetical merger among investor-owned utilities in the
PJM market.
