The entry of new electricity utility firms has promoted competition, innovation, and the adoption of sustainable energy technologies. Existing studies highlight the different benefits of the specialized (Marshallian agglomeration externalities) or diversified regional economy (Jacobean externalities) in the emergence of new firms. However, there is a limited understanding of the interaction of these externalities and their changing influence with industry dynamics. This study investigates the factors responsible for the spatial emergence of electricity utilities and the changing relevance of agglomeration externalities within a rapidly transforming electricity industry. Using a spatial-temporal fixed effects regression model, we examine the emergence of electricity utilities across 942 NUTS-3 regions in 12 European countries. The analysis is conducted from 2000 to 2020, capturing two phases of radical transformation in the electricity industry– liberalization in the early 2000s and sustainability transition in the late 2010s. The study finds that the presence of both Marshallian and Jacobean externalities in a region during periods of radical transformation greatly increases the probability of the entry of new electricity utilities. In the context of smart specialization and sustainability transition, the finding highlights the need to go beyond the arbitrary distinction between specialized and diversified regions and a static understanding of agglomeration externalities.