Energy policy and European utilities’ strategy: Lessons from the liberalisation and privatisation of the energy sector in Romania

In the context of energy sector reforms pursued by Romanian government since 1990s, we compare and contrast the market outcomes of European utilities’ investment with the host government policy objectives. We begin with energy market reform in Romania and review governments’ efforts to attract foreign direct investment (FDI) and to gradually withdraw from the distribution and supply segments of electricity market. Subsequently, we illustrate the scope European utilities have had, market policy and design notwithstanding, for consolidating market power through regional dominance. We examine the extent to which these utilities have sought to enhance their positions through horizontal and vertical integration, counter to the EU plans for a competitive market structure. We find that the investments of European incumbents have not been resoundingly successful: although market entrance may have been justified on long-term strategic grounds, in the immediate term, segments acquired through competitive auctions have yielded modest regulated returns. Finally, we discuss the extent to which policy makers have achieved their goals. Although the short-term benefits of a competitive market structure have reached some consumers, a renewed interest in promoting ‘national champions’ reflect frustration with market mechanisms as a means of ensuring long-term strategic investments in the sector.

Research highlights
► We analyze the European Utilities activities in Romania after market liberalization.
► We find government efforts to reform energy sector attracted foreign direct investment.
► We find utilities consolidated market power horizontally in Central European region.
► The short-term benefits of competitive forces contrast the weak returns by utilities.
► To encourage further investment, government should not promote national champions.