Navigating the electric storm: assessing policy responses to Europe's energy shock

We take an off-the-shelf model of the day-ahead electricity market, adapted from Reguant (2019), and use it to study how different emergency policy interventions proposed in response to the 2021–2022 European energy crisis would feed into short-run wholesale electricity price and consumption dynamics. Calibrating the model to Italian data, our analysis predicts that an EU-wide cap on natural gas prices significantly lowers electricity prices, while consumed quantities increase only marginally. A mandated reduction in electricity demand during peak hours leads to modest price declines, while a national cap on gas prices for electricity generation triggers a sharper increase in consumption. These findings suggest that emergency interventions can mitigate the short-term impact of price shocks, though they may also lead to increases in energy consumption and market distortions.