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

Italy’s 2015 Annual Competition Law2 provides for phasing out electricity retail prices regulation byJuly 1st, 2019. Under the current regulatory framework, compliant with the EU regulations,3 allelectricity customers are free to choose their preferred supplier. However, residential customer andsmall and medium enterprises (SMEs)4 retain a right “not to choose”, in which case they are suppliedby 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 aninstrument to achieve both a greater integration among national markets and as a way to enable allconsumers to fully participate in the energy transition (EC 2015a, 2015b). As of 2015, end-user priceregulation was in force in 12 out of 28 EU member states6. Of these, 6 had already started a roadmapfor its repeal7 Italy introduced retail electricity competition in 2007, but kept in place an ex-anteintervention in price-setting which shares many features of price regulation and may have an impacton 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 ofharmonization in the way markets have been opened in the several EU countries or elsewhere, as wellas in the underlying regulation. As a general statement, there is a relatively widespread consensus thatlarger 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 powerto choose. Potential market power may also play a significant role in determining whether retailcompetition is beneficial to small customers (Joskow 2008). All in all, the effect of retail competitionis still an open question; for sure it largely depends on the underlying regulatory framework, marketstructure, and how the liberalization roadmap is designed.Building upon previous experience, Italy may provide an interesting case study on how to manageretail electricity market opening.This paper is structured as follows. Section 2 reviews the relevant literature. Section 3 first describesItaly’s existing price-setting mechanisms, and then moves on in performing a structure-conductperformanceanalysis of the market. Customer engagement and (potential) market power areidentified as the major challenges ahead. Section 4 proposed a roadmap for phasing out the regulatedregime. Section 5 summarizes and concludes.