What is the X-Factor in the German Electricity Industry?

A new legislation in the German electricity market requires the implementation of an incentive- based regulation within the next years. In such a regime either prices or revenues are capped and grow with the inflation rate minus a factor, which accounts for productivity differences between the sector and the rest of the economy. This paper derives such an X-factor for the German electricity industry using a new productivity database and Growth Accounting methodology. Considering that several underlying assumptions are violated due to market imperfections, the calculated X-factor rises from 0.48 to a modified value of 2.15.

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