Evaluating the effects of european electricity restructuring. Evidence from generation price cost margin

In this paper, we assess the impact of the European reform for the electricity market on the industry profitability of the EU15 countries over the period 1980-2007. We measure industry profitability on the basis of the Lerner index. The index is defined as the difference of the electricity price paid by industrial consumers and industry generation costs, divided by the industrial electricity price. We focus on three elements of the reform: vertical separation of the entire sector as well as wholesale and retail market opening. Moreover, we analyse the effect of privatization of the main firm in electricity industry, although not explicitly stated by the EU reform. Our study examines the long-run equilibrium of achieving a single internal electricity market which would member states to converge freely to the steady state, as established by the harmonisation principle of the EU reform. Empirical evidence shows that wholesale market and retail market opening decreases industry performance, therefore resulting in an increase of industrial consumer welfare. However, vertical separation of the entire sector leads to an increase of industry profitability, highlighting a double marginalization problem and therefore decreasing industrial consumer welfare. Finally, we do not find significant evidence of privatization effects.