What Caused the Drop in European Electricity Prices?
13 Pages Posted: 25 Nov 2016
Date Written: November 23, 2016
European wholesale electricity prices have dropped by nearly two thirds since their all-time high around 2008. Different factors have been blamed, or praised, for causing the price slump: the expansion of renewable energy; the near-collapse of the European emission trading scheme; over-optimistic power plant investments; a decline in final electricity consumption; and cheap coal and natural gas. This paper is an ex-post study of European spot markets in electricity from 2008 to 2015. We use a fundamental electricity market model to quantify the impact of these and other factors on day-ahead prices using a ceteris paribus approach. In the two countries we study in detail, Germany and Sweden, different factors were important drivers of the price drop: fuel and CO2 prices in Germany, electricity demand in Sweden. In both countries, however, the single largest factor contributing to the fall in wholesale prices was the expansion of renewable energy.
Keywords: electricity price; ex-post analysis; utility crisis
JEL Classification: Q42, C61
Suggested Citation: Suggested Citation