Managing the liberalization of Italy’s retail electricity market: a policy proposal

Abstract

Italy’s 2015 Annual Competition Law2 provides for phasing out electricity retail prices regulation by July 1st, 2019. Under the current regulatory framework, compliant with the EU regulations,3 all electricity customers are free to choose their preferred supplier. However, residential customer and small and medium enterprises (SMEs)4 retain a right “not to choose”, in which case they are supplied by the local distribution system operator (DSO)5 at a price set by the regulator. This (transitional) scheme, known as “maggior tutela” or “greater protection”, has been in place since July 1st, 2007 . Full liberalization of retail electricity markets is strongly advocated by the EU Commission, as an instrument to achieve both a greater integration among national markets and as a way to enable all consumers to fully participate in the energy transition (EC 2015a, 2015b). As of 2015, end-user price regulation was in force in 12 out of 28 EU member states6. Of these, 6 had already started a roadmap for its repeal7 Italy introduced retail electricity competition in 2007, but kept in place an ex-ante intervention in price-setting which shares many features of price regulation and may have an impact on competition itself (Acer 2016) (similar policies have been adopted in Belgium and Croatia, too). Retail electricity competition has been comparatively less studied than other features of the system, such as wholesale markets or regulated infrastructures. This is in part due to the relatively low level of harmonization in the way markets have been opened in the several EU countries or elsewhere, as well as in the underlying regulation. As a general statement, there is a relatively widespread consensus that larger customers can draw significant benefits from retail competition, whereas smaller customers, who face comparatively higher transaction and switching costs, may or may not gain from the power to choose. Potential market power may also play a significant role in determining whether retail competition is beneficial to small customers (Joskow 2008). All in all, the effect of retail competition is still an open question; for sure it largely depends on the underlying regulatory framework, market structure, and how the liberalization roadmap is designed. Building upon previous experience, Italy may provide an interesting case study on how to manage retail electricity market opening. This paper is structured as follows. Section 2 reviews the relevant literature. Section 3 first describes Italy’s existing price-setting mechanisms, and then moves on in performing a structure-conductperformance analysis of the market. Customer engagement and (potential) market power are identified as the major challenges ahead. Section 4 proposed a roadmap for phasing out the regulated regime. Section 5 summarizes and concludes.