Electricity Prices in the European Union Region: The Role of Renewable Energy Sources, Key Economic Factors and Market Liberalization

Abstract

Electricity is by far the most valuable energy commodity for households; hence, it is of the utmost importance for national regulatory authorities and the European Commission (EC) to guarantee affordable and unimpeded access for European citizens to this vital social good. The existing academic literature mainly focuses on the effect of specific renewable energy resources (RES), such as solar, wind, etc., on electricity prices, thus neglecting the crucial impact of the electricity market structure. In an effort to fill this gap, the present paper attempts to clarify whether the real effect of the share of total renewable energy production in the generation scheme and certain electricity market liberalization indices constitute key determinants of household electricity prices. The study is further innovative on the grounds that the empirical analysis utilizes both static and dynamic panel methodologies for a dataset including several variables introduced for the first time in academia. The dataset consists of yearly observations regarding 26 EU countries for a time horizon from 2003 until 2019. The econometric outcomes revealed the complex relationship between RES deployment and generation concentration with the level of household electricity prices. In contrast, the deregulation of the retail market and especially the presence of many retailers with a market share exceeding 5% can benefit European consumers by reducing electricity prices. Additionally, the relative costs concerning the outward-orientation of the economy and the power system’s upgrade were found to be transferred to the final electricity price. The opposite applies to environmental taxes, allowing European governments to accumulate considerable funds for ecological and environmental protection actions. Lastly, due to the estimated slow adjustment rate of electricity prices, policymakers are advised to develop long-term strategic energy planning.