LIBERALIZATION OF ELECTRICITY RETAILING IN EUROPE: WHAT TO DO NEXT?

Abstract

The aim of this article is to provide a mid-term evaluation of liberalization of electricity retailing in Europe, taking into account four limitations to policy analysis: different and often conflicting theoretical points of view, shortage of routinely collected data, problems in disentangling the effect of retail liberalization from those of other related reforms and pervasive regulatory interventions. Lacking a common analytical framework to assess the costs and benefits of electricity retail competition, we firstly built a comprehensive theory on retail liberalization and we then use European Union data on market structure and its dynamics to test the consistency of theory and practice. The analysis highlights the presence of an oligopolistic supply structure, as well as a limited level of customer engagement in the market, which in the case of small consumers is partially justified by the presence of switching costs and informational complexities. Asymmetries in the rate and speed of cost-pass through make the market opaque, challenging the sole reliance on “light-hand” regulation to guarantee a sound market functioning. We identify the situations in which some form of “hard” regulation appear to be necessary to secure the continuity of supply even after the introduction of competition and we propose several implementation solutions according to the weight attributed to the objectives of supply continuity and customer protection. In the light of evidences about European markets, we suggest that the attribution of the Default/Last Resort service through an auction mechanism may favor both the development of upstream and downstream competition, without deterring customer switching.