Economic analysis of energy procurement under price cap policy

The existing literature has extensively researched price constraints. However, price cap policies aimed at limiting wholesale prices in energy-exporting countries have not been thoroughly explored. To clarify the implications of price cap policies for stakeholders in the energy supply chain, we develop a three-stage supply chain framework. On the supply side, Russia and the alternative energy-exporting country with capacity limitations and cost disadvantages are considered. On the demand side, there are Europe and the other energy-importing country, which then distribute the energy through the market and resell it to end market customers. After analysing the optimal equilibrium solution, we obtain several noteworthy results. First, a price cap policy may diminish Europe's willingness to consider alternative energy-exporting countries and augment its tendency to procure energy from Russia. This counterintuitive finding suggests that a price cap policy may inadvertently reinforce Europe's reliance on Russian energy. Second, while implementing a price cap policy on Russia can lower the wholesale prices of Russian energy, it may paradoxically increase Europe's willingness to import energy from Russia, thereby enhancing Russia's export volume of energy. Consequently, in certain circumstances, Russia may realise higher profits than it would have without such policies. Third, a price cap policy may prove detrimental to both alternative energy-exporting countries and other energy-importing countries, as it could disrupt the market balance and affect their economic interests. For alternative energy-exporting countries, a price cap policy makes Europe more likely to procure Russian energy, thereby reducing energy orders from them. For other energy-importing countries, the policy allows Europe to gain wholesale price advantages, whereas they need to procure energy at normal wholesale prices, weakening their energy price competitiveness in the market. These findings contribute to theories related to energy capacity and price constraints and provide valuable insights for decision-makers.