Heterogeneous impacts of regulatory policy stringency on the EU electricity Industry:A Bayesian shrinkage dynamic analysis

Environmental and technical efficiency in the electricity sector is a major focus of regulatory policies aimed at hastening greenhouse gas reduction and lowering energy prices for final consumers. Understanding the impact of market and environmental regulations on efficiency is crucial for the design and choice of policy packages. At the national level, the productivity response to regulations depends on unobserved country-specific factors that current empirical analyses have not modelled. In this framework, we analyse the regulation effects on efficiency in the electricity sector for a panel of European Union countries. We explicitly consider the effects of the environmental regulation along with the market regulation. Our estimation strategy uses the Bayesian shrinkage estimator, which can deal with the bias aggregation problem and cross-country heterogeneity. It allows us to identify the different transmission channels through which regulatory policy is implemented. The results highlight divergent behaviours at the country level. The direct impacts of the market and environmental regulatory policies on productivity are negative—around −2.7% and −2.3%, respectively—but the countries vary in the degree to which they are able to compensate these negative effects.