The impact of regulatory quality and corruption on residential electricity prices in the context of electricity market reforms

Abstract

The European electricity markets have been undergoing significant regulatory reforms since the introduction of the first liberalisation directive in 1996. Theory predicts that liberalisation promotes cost-efficient production and competition and hence leads to lower prices. The goal of this paper is to assess the impact of regulatory quality and non-compliance with the law on electricity prices in the context of electricity market reforms. We address problems of endogeneity by using the Blundell-Blond System GMM estimator and find that vertical integration and market concentration lower end-user prices, all else equal. Moreover, improving regulatory quality and reducing corruption, both have a negative impact on prices when holding other factors constant. The intensity of the reforms has limited impact on electricity prices when these reforms are introduced in an institutional environment characterised by high levels of corruption and low quality regulation.