Insights from Micro-level Data
Electrical utility companies are under pressure from regulators in almost every country to move to cleaner sources of energy. In Germany, household preferences for clean sources of energy have combined with regulatory pressure to change the business landscape for electricity producers and retailers. In Germany’s liberalized market, this has led to intense price competition for renewable and non-renewable electrical power. Faced with such intense price competition, smaller utilities have turned to marketing their strengths as regionally responsible, locally active and trustworthy firms (VKU 2009). In particular, municipally owned utility companies have proven resilient in the starkly competitive market for electricity, despite small sizes and their inability to take advantage of economies of scale (e.g., in production or IT systems). With nationwide competition in prices on the retail side, these regional firms have been forced to seek innovative strategies in the design and sales of their electricity tariffs. Both the largest of international corporations and the tiniest of local energy cooperatives are subjected to the same regulations and demands of end customers for an identical product in the retail electricity market. In addition to the focus on renewables as a way of differentiating their product (this having been spurred on by feed-in tariffs and embedded in national policy goals), other factors such as regionality, energy efficiency, smart-meter solutions and even social engagement have emerged as factors in retail sales strategies.1
In observing how electricity companies, and municipal utility companies in particular, have fared during the liberalization of the German energy market (and the introduction of the feed-in tariff system alongside an EU-wide carbon cap-and- trade scheme), we also observe the diversity of demands by household customers. Households are affine to different “qualities” of clean energy (disapproval of RECS certificates, emergence of specialized green energy retailers, etc.). Some consumers also prefer their local municipal utility simply based on a sense of local engagement and loyalty. 
These heterogeneous aspects of supply and demand in the electricity sector lead us to ask, “what roles do firm size and regionality play in the transition to a cleaner energy economy?” The implications of national energy policy for the municipalities with stakes in local generation are also too little understood. The role these regional actors can play (both on the supply and demand sides) in achieving policy goals has not yet been sufficiently examined. Answering these questions will lead us to highlight the developments in strategies followed by firms in the electricity sector, and how these are influenced by competitive, regional, stakeholder and political factors.
One of the most distinctive features of electricity markets is the degree to which they are heavily regulated. Monopolies of power-line network operators are naturally occurring in electricity markets, and their market power can be limited by employing various regulations (see Sect. 1). The regulatory structure which implements this in Germany is a nationwide “unbundling” of network operators from energy retailers and a “common carry” rule, requiring that network operators charge uniform network fees to all retailers delivering electrical power through their distribution networks. These complex regulations are implicit in our assumption here that households have free choice among all retail firms’ offerings. The common carry framework has, however, regional consequences: for example, network fees increase with the number of volatile generation facilities in the network. We abstract from the issue of network fees and physical limits on the flow of electricity in order to focus on the effects of retail competition.
In order to begin shedding light on these issues, and to study the effect that policy can have on the various market actors (and on the economy as a whole) we define a simplified model of retail competition in the electricity market which incorporates distance as a factor in customers’ decision making.