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1. Who should be charged? Principles for fair allocation of electricity system costs

Author:
Conall Heussaff, Eva Jüngling, Simone Tagliapietra, and Georg Zachmann
Publication Date:
04-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The high costs in the European Union of supplying electricity can only be structurally reduced through decarbonisation and deeper European electricity system integration. In the short-term, policymakers have few choices. They can redistribute system costs by shifting components from one consumer to another. Another immediate distributional option would be to reduce energy taxation, implicitly shifting costs to the taxpayer. Meanwhile, decision-making processes that translates electricity system costs into final consumer prices are fragmented. Rules on the short-term production, transmission and consumption of electricity are determined at EU level. National regulators and governments determine how the fixed costs of the system are recovered from consumers, while national policymakers also set energy taxes. This Policy Brief sets out options for shifting the fixed costs of the electricity system between consumers, for changing energy taxation to reduce prices and for evaluating systemic trade-offs between system cost and other characteristics, such as sustainability and reliability. We also estimate the quantitative effects of shifting costs between consumers and reducing taxes on electricity. We set out four principles for pricing electricity fairly. Policy interventions in the electricity system should not seek to achieve broader economic objectives at the expense of energy-policy goals. Consumer prices should incentivise efficient system operation. Carbon emissions should be priced in. The fixed costs of the electricity system should be primarily recovered from inelastic consumption. European policymakers should develop transparent analytical tools to assess the distributional effects of electricity-policy interventions. Lessons should be learned from the energy crisis, during which EU and national policies attempted to shield consumers from price impacts, and these lessons should form the basis of ongoing efforts to reduce prices. EU guidelines for electricity cost recovery should be established, following fundamental economic principles, and could form a policy toolbox for national governments to reduce energy prices. Finally, the long-term strategic goal of deeper physical and institutional integration of the European electricity should be pursued to structurally reduce electricity prices.
Topic:
Climate Change, European Union, Electricity, and Energy
Political Geography:
Europe

2. Decarbonising for competitiveness: four ways to reduce European energy prices

Author:
Conall Heussaff
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Energy prices are higher in the European Union than in most other industrialised economies, presenting a fundamental competitiveness challenge. The price disparity stems from the EU’s reliance on imported fossil fuels, contrasting with the United States, which is a net exporter of energy. In 2024, EU gas wholesale prices were on average nearly five times those in the US. Average EU industrial electricity prices were roughly two and a half times higher than in the US. The transition to clean, domestically generated energy is therefore essential to reduce European energy costs. Despite rapid decarbonisation of the power sector, fossil fuels remain vital for electricity generation and continue to significantly influence final consumer costs. Additional factors influencing final prices include the fixed costs of supporting renewables and maintaining and expanding the energy networks, and consumption taxes and levies. However, the ongoing energy transition is reshaping cost dynamics. Renewables, with fixed capital costs and no fuel requirements, are increasingly transforming the electricity sector. The electrification of heating, transport and other energy services further reduces fossil-fuel demand, shifting overall energy costs from variable fuel expenses to fixed capital investments. As the energy transition progresses, EU energy costs can be expected to fall, but how far they fall and how they are shared will depend on policy choices in four main areas. In the short term, policymakers must allocate system costs fairly across energy consumers. Medium-term policies should encourage demand flexibility in electricity to improve system efficiency. In the long-term, coordinated investment at EU level and deeper cross-border interconnection will drive down final costs for all consumers.
Topic:
Climate Change, European Union, Economy, Industrialization, Decarbonization, Energy, and Competition
Political Geography:
Europe

3. Phased European Union electricity market reform

Author:
Georg Zachmann and Conall Heussaff
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In an environment of record-breaking electricity prices driven by a gas supply shock and below-average electricity generation, reforming the design of the European electricity market is seen as a means to delink consumer costs from volatility in short-term power markets. Electricity markets should meet three objectives: fairness, optimal investment and optimal operation. The current market design has achieved these objectives to varying degrees. Faced with the unprecedented shock, the electricity system has operated well, but electricity markets have struggled to achieve fair outcomes and investments have not been driven by market-based cashflows. Further complicating market reform, the power system is being changed radically by decarbonisation. The electricity system is becoming more decentralised and digitalised, with an active demand side. These transformations will have consequences for the optimal electricity market design in the later stages of the energy transition. Reform proposals have focused on increasing the share of long-term contracts in the remuneration of generation technologies. Different long-term contracting regimes have structural implications for the functioning of electricity markets, especially in relation to the roles of the state and the market, and the responsibilities of national governments and European Union institutions. A phased approach should be taken to EU electricity market design reform. In the near-term, reform should seek to protect consumers and drive investment. An assessment should also be made of what market design will best meet the fairness, investment and operational objectives in a decarbonised system, and what the conceptual role of electricity markets should be during the transition. This process should start as soon as possible so well thought-through proposals are available when the next European Commission takes office.
Topic:
Markets, Reform, European Union, Electricity, and Green Economy
Political Geography:
Europe

4. An assessment of Europe’s options for addressing the crisis in energy markets

Author:
Conall Heussaff, Simone Tagliapietra, Georg Zachmann, and Jeromin Zettelmeyer
Publication Date:
09-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Since Russia’s invasion of Ukraine, wholesale prices for electricity and gas in the European Union have risen five to fifteen-fold, with severe impacts for households and businesses. The crisis is also creating liquidity problems for energy companies, with contagion risks for the financial sector. In response, European governments have taken a range of actions. Some have introduced measures at retail level, while others have introduced windfall-profit taxes on energy companies. Some countries have provided emergency liquidity to energy companies facing soaring collateral costs. Some energy companies have even been nationalised. Emergency-intervention proposals should be evaluated against three principles. First, energy supply must meet demand at prices that do not cause major damage to the European economy. Second, the most vulnerable consumers must be protected. Third, measures should be consistent with the case for investment in a sustainable energy system, in order to safeguard Europe’s ability to decouple structurally from fossil-fuel imports. Gas price caps have been proposed as an emergency measure in different forms: a cap on Russian gas only, a cap on gas used in electricity generation, a cap on all wholesale gas. All entail significant risks. The first might lead to a full stop of Russian gas into the EU. The second might increase gas demand from the electricity sector. The third might raise gas demand and also undermine Europe’s ability to attract much-needed gas supplies. Instead of capping gas prices, the EU should engage collectively with external gas suppliers and negotiate new long-term contracts with provisions to limit price volatility. A September 2022 European Commission proposal involving electricity demand reduction, a revenue cap on inframarginal generation, solidarity payments from fossil-fuel companies and consumer support measures, is broadly positive, notably because it emphasises demand reduction. However, it is not sufficient. A more comprehensive plan needs to ensure that all countries bring forward every available supply-side flexibility, make real efforts to reduce gas and electricity demand, keep their energy markets open and pool demand to get a better deal from external gas suppliers. In the longer term, measures to split the markets for energy generated from renewables and fossil fuels should be examined.
Topic:
Markets, European Union, Energy Sector, and Green Economy
Political Geography:
Europe