Determinants of Sectoral Energy Efficiency in New EU Member States: Energy Prices, Energy Price Uncertainty, and Regulatory Quality

Improving energy efficiency is a cornerstone of the EU Fit-for-55, competitiveness, and energy-security strategy, yet performance across the new member states remains uneven despite price convergence and common regulatory frameworks. This study examines how energy prices, energy price uncertainty, and regulatory quality jointly shape sectoral energy efficiency in transition economies. We estimate a Shephard energy distance frontier model for seven new EU member states across ten industrial sectors over 1995–2015, modelling energy inefficiency directly as a function of these determinants and discrete reform episodes. Methodologically, we employ a consistent true fixed effects stochastic frontier estimated via the pairwise-difference estimator of Belotti and Ilardi (2018), which resolves the incidental parameters problem and disentangles inefficiency from unobserved heterogeneity. To our knowledge, this is the first joint one-step frontier estimation of price, price uncertainty, and governance as direct drivers of inefficiency, closing a gap between energy-pricing theory and applied frontier econometrics. Average efficiency is relatively high, with scope for roughly 21% energy savings from eliminating existing inefficiencies. Higher real energy prices significantly reduce inefficiency, confirming the price-discipline hypothesis. Energy price uncertainty robustly raises inefficiency, with a markedly stronger effect during the pre-accession adjustment phase and a weaker effect in high energy-intensive sectors. Regulatory quality is, counterintuitively, associated with higher transient inefficiency, plausibly reflecting adjustment costs. Results are robust to a balanced sub-sample and to Brent-based prices extending coverage to 2022 and eight countries. The findings imply that stabilising and credibly anchoring price signals matter more than raising average prices alone.