Electricty liberalization in Italy – Econlib

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The liberalisation of Italy’s electricity retail markets is the last mile in a process that started more than 20 years ago. Unfortunately, the public support that accompanied the initial steps (the breakup and partial privatization of former monopolists as well as the transposition of EU directives on market opening) has disappeared. Electricity had been nationalized in 1963. Things only began to change in the late 1990s, when the sector was restructured via vertical disintegration, freedom of entry, and the divesture of assets from Enel, the state-controlled incumbent. While EU directives required that retail markets for small customers were opened since 2007, Italy maintained a regulated tariff – along with the “free market” offers – that works as a standard tariff for those customers who do not choose a supplier on their own. The regulated tariff is supplied by the incumbent. This results in market segregation and increases the customer inertia, also hindering the market’s ability to innovate and differentiate its products.
Under the current regulatory scheme, a majority of Italy’s electricity customers are supplied by the local incumbents at a regulated price. This is the case for 53.5% of residential customers and 40.9% of the small and medium enterprises. While all customers are formally free to switch to an alternative supplier, the flow of consumers towards the free price regime has been disappointingly slow in the past 12 years – not least because the name of the regulated tariff, “greater protection”, creates a false perception of safety as opposed to the “jungle” of the market. To make things even worse, the largest operator – the former monopolist, Enel, which is still state-controlled – has a market share of about 70% among small customers. Of these, about two thirds are due to the regulated tariff. Hence, Italy’s electricity retail market is strongly concentrated by design. Things may change in 2022, when regulated prices are supposed to be phased out.
How to move out? Carlo Stagnaro, Carlo Amenta, Giulia Croce and Luciano Lavecchia speculate that a mandatory, opt-out collective switching could help in solving problems related with low consumer engagement and high market concentration. Their paper is forthcoming in Energy Policy.
Alas, the full switch to a free market in electricity has been postponed a number of times by the Italian government – a policy which enjoys a broad bipartisan support, as it frequently is the case with postponing: the phase-out date was initially set in 2019, then 2020, now 2022. The rationale for delaying is typically that the market is too concentrated and consumers are not informed enough to choose competently. The paradox is that market concentration is not a market failure, but the inevitable outcome of regulatory design. Stagnaro and his coauthors aims to show that, even if this was true, is by no means a reason to keep with the status quo.

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