The particularly diverse structure of energy markets worldwide leads to much intransparency in the analyses of engineers and economists of the economics of the electricity sector. Although energy use can be objectively evaluated based on absolute levels of generation, mining, use and loss, a deeper understanding of the true driver of growth—innovation—requires country specific analyses which heed and incorporate the institutional and regulatory specifics. An example of two such national energy economies which are not comparable without detailed care in interpreting the contexts in which they are embedded are France and Germany. These two countries opened their electricity markets to competition at different times and followed widely differing strategies for promoting welfare-increasing national energy infrastructures. Germany separated electricity generation and retail from the natural regional monopolies of distribution network operators in 1998. This was followed by a strategy of investment by small and widely distributed landowners and regional firms in renewables such as solar and wind power. France’s retail electricity market was opened to competition in the same way a decade later in 2007 but investment strategy was focused instead on and around a portfolio of nuclear generation facilities, owned primarily by one very large publicly owned firm. The results of these differences in policy and investment in the energy portfolios of the two countries are striking. In France, 93 % of households purchased their electricity from the same incumbent firm in 2012. There is little regional movement to challenge this overwhelming market power and there is little incentive to invest in regional power generation as the market power of the national provider is strong in both the retail (delivery to households) and wholesale (subsidized generation of large amounts of nuclear power) markets. The liberalization of the German market in 1998 coincided with an increased interest of small actors in investing in distributed generation. Through further regulations incentivizing the investment in decentral renewable and combined-heat-and-power (CHP) power generation, Germany devoted a high proportion of national capital to regionally distributed, and diverse generation plants. According to Trend:research (2011), household-owned solar power generation accounted for approximately 40% of the total of all solar power in 2010 with farmers owning another 20 %. The market power for the retail sale of electricity of the four largest German firms has also decreased significantly with the increasing investment in regionally distributed generation, nationwide competition in price and service offerings in which smaller firms have also been successful in marketing individual advantages and innovative product offerings. By 2012, for instance, the industry group BDEW reports that 28.8 % of all German households had changed their electricity provider at least once (BDEW 2014a).
The effects of the differing strategies of the policy makers in France and Germany on their respective energy mixes are interesting, but, as the above discussion indicates, only part of the story. More critical, and of more interest from the perspective of the authors, is the effect on firm strategy and innovative activity (and thus on economic growth) that these policies have. In particular, what have the major effects on innovative activity been and how have the policies (and household behaviors) in these wildly different examples of energy economies set the stage for production and efficient innovation in the future? Adam Smith noted that a nation is built upon the interactions of rural (in his case, agricultural) production and urban consumption. Can the preferences of rural households for their local municipal electricity provider distort the gains of competitive price competition for the wider economy? Will these innovative changes in micro-level strategies of regional and national competition happen naturally or will polices and/or other incentives be required to nudge small rural and regional suppliers toward new business models, and/or to shift the economy onto the desired path of development? Will increased household preferences for their local region affect the economy overall? These broader questions lead us to investigate the development of prices in a simulation model of the liberalization of a retail electricity market.
In Sect. 2 we motivate the case for developing our study and simulation framework by reviewing relevant literature and empirical data on household and industrial prices in the German retail electricity market since its liberalization. Section 3 then describes our simulation model in terms of its actors and the dynamics of interaction among them. Section 4 presents the results of Monte Carlo studies of maximum, average and minimum firm markups and their depen- dance on social and structural assumptions in the model. In Sect. 5 we conclude and give an outlook on further avenues of research.