Effects of the opening of the energy markets on the cost efficiency of the big European players: A stochastic frontier approach

The aim of the work is to examine the potential impact of liberalization on the cost of the main energy firms in Europe. To the best of our knowledge there are no studies that consider the effect of liberalization, where all customers will be able to choose their energy (electricity and/or gas) supplier, on firms' efficiency. We consider the estimation of a stochastic frontier cost function for a panel dataset, covering 20 among the largest European energy companies observed over the period 2000-2009. We simultaneously estimate the cost function and the inefficiency model, i.e. a linear specification that includes a set of environmental or external factors as explanatory variables of the inefficiency term, composed by a set of indicators for the proportion of the market actually open to competition, switching rates, the market concentration ratio. In general inefficiencies decrease when the market is open and more competitive, especially in the electricity market. On the contrary, a certain level of market concentration seems to act improving performances, especially in the gas sector.