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Journal of Economics and Finance

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08-06-2023

Chasing the sun and catching the wind: Energy transition and electricity prices in Europe

Authors: Serhan Cevik, Keitaro Ninomiya

Published in: Journal of Economics and Finance | Issue 4/2023

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Abstract

European power markets are in the midst of unprecedented changes, with a record-breaking surge in energy prices. This paper investigates the impact of the green transition on the level and volatility of wholesale electricity prices at a granular level, using monthly observations for a panel of 24 European countries over the period 2014–2021 and alternative estimation methods including a panel quantile regression approach. We find that renewable energy is associated with a significant reduction in wholesale electricity prices in Europe, with an average impact of 0.6 percent for each 1 percentage points increase in renewable share. We also find evidence for a nonlinear effect—that is, higher the share of renewables, the greater its effect on electricity prices. On the other hand, while quantile estimation results are mixed with regards to the impact of renewables on the volatility of electricity prices, we obtain evidence that renewable energy has a negative effect on volatility at the highest quantiles. Overall, our analysis indicates that policy reforms can help accelerate the green transition while minimizing the volatility in electricity prices.

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Energy production is responsible for nearly three-quarters of global greenhouse gas emissions, with about half of these emissions coming from electricity generation alone.

Higher wholesale electricity prices have put upward pressure on retail prices paid by households and commercial entities. The European Union has agreed on a package of energy emergency measures amounting to €376 billion to compensate consumers for the increase in electricity prices.

The countries included in our sample are Austria, Belgium, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Germany, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, the Netherlands, Norway, Poland, Portugal, Romania, Serbia, Slovenia, the Slovak Republic, Spain, Sweden, Switzerland and the United Kingdom.

As alternative, we include total electricity generating capacity (instead of total electricity load) and obtain similar results.

The choice of control variables is dictated by data availability for a balanced panel at monthly frequency.

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Title: Chasing the sun and catching the wind: Energy transition and electricity prices in Europe
Authors: Serhan Cevik
Keitaro Ninomiya
Publication date: 08-06-2023
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 4/2023
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-023-09626-x

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