In this paper we address the question whether fiscal incentives and regulation are the most appropriate tools to increase productivity in energy sector. Doubts exist about whether these are the most effective tools for improving productivity since changes in productivity are usually related to changes in technological progress. We use a vector autoregressive model to study this problem. Our purpose is to identify the shocks which induce movements in productivity, and to measure the productivity response to each shock separately. We use economic theory about long run impacts of different shocks to identify the empirical model. The key indentifying restriction is that the level of productivity is determined in the long run by shocks to technology. We find that productivity responds positively to technological shocks, leading to a transition from one equilibrium to another. Yet, non technological shocks play a minor and transitory role in explaining productivity growth. All these evidences cast doubt on the effectiveness of the current European community policy for development and innovation in energy sector based mainly on fiscal incentives and regulations.