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What Caused the Drop in European Electricity Prices? A Factor Decomposition Analysis

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  • Lion Hirth

Abstract

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 having caused the price slump: the expansion of renewable energy; the near-collapse of the European emissions trading scheme; over-optimistic power plant investments; a decline in final electricity consumption; and cheap coal and natural gas. This ex-post study of European electricity markets from 2008 to 2015 uses a fundamental power market model to quantify their individual contributions on day-ahead prices. The two countries we study in detail, Germany and Sweden, differ significantly: fuel and CO2 prices were important price drivers in Germany, but in Sweden it was electricity demand. This difference is explained by the nature of the hydro-dominate Nordic electricity system. In both countries, however, the single largest factor depressing prices was the expansion of renewable energy. At the same time, Germany's nuclear phase-out had an upward effect on prices. If one defines the Energiewende as the combination of these two policies, its net effect on power prices was negligible.

Suggested Citation

  • Lion Hirth, 2018. "What Caused the Drop in European Electricity Prices? A Factor Decomposition Analysis," The Energy Journal, , vol. 39(1), pages 143-158, January.
    • Handle: RePEc:sae:enejou:v:39:y:2018:i:1:p:143-158
    DOI: 10.5547/01956574.39.1.lhir
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    References listed on IDEAS

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    1. Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
    2. Hirth, Lion, 2013. "The market value of variable renewables," Energy Economics, Elsevier, vol. 38(C), pages 218-236.
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