The Effects of Electricity Retail Liberalization on Residential Consumer Tariffs

In the course of de-regulation and restructuring of European electricity markets, a major task was to liberalize retail markets for end-users. Contrary to the initial situation of having regional monopolist suppliers, with retail liberalization customers can freely choose their electricity supplier. Nevertheless, it is still an open question whether this (costly) regulatory measure has brought about the hoped welfare gains for customers through a decrease in end-use tariffs. We, thus, investigate the causal effect of retail liberalization on residential tariffs by exploiting tariff data of residential customers in 21 European countries for the annual period 1995–2014. We employ several estimation methods (2SLS, LSDVC, GMM) in order to circumvent issues of bias from path-dependency in dynamic panel models and endogeneity of control variables. Our results point to a mild and static reduction in residential electricity tariffs of around 2.5% in the year following market liberalization. At the regional level, Central Europe has benefitted from the market reform, whereas in Eastern Europe tariffs even increased. Moreover, there is evidence that privatization tends to slightly decrease tariffs, whereas unbundling has no measurable effect. We also find that investment in renewables increases the taxes directly related to the electricity bill (but not the sole tariffs).