The fundamental drivers of European wholesale electricity prices

The 2021-2023 energy crisis resulted in increased average prices and price volatility in short-term power markets across Europe. 

Following this, the EU adopted reforms in 2024 that aimed at better protecting customers from power price volatility. However, in part exacerbated by recent geopolitical events, the EU's electricity market design is again under the spotlight.

Considering these developments, Europex has commissioned Frontier Economics to:

• analyse the fundamental drivers of wholesale electricity prices, and in particular price volatility, based on empirical evidence across different timeframes and geographies;
• outline the economic significance of well-functioning electricity markets;
• assess how wholesale price movements affect end-consumer prices; and
• identify policy priorities to maximise the benefits of integrated wholesale power markets while advancing consumer welfare, decarbonisation and security of supply.

We have carried out an econometric analysis of hourly spot wholesale price data from 39 bidding zones in the coupled European power market over the period from October 2018 to December 2024. While the specifics vary across bidding zones, we find the elevated prices and volatility observed during the 2021-2023 energy crisis can largely be explained by temporary factors, including higher and more volatile gas prices and weather-related periods of system tightness impacting the availability of various production assets. 

While wholesale spot prices can sometimes be volatile, eliminating this volatility is neither feasible nor efficient. Spot price signals help to maximise social welfare by indicating the value of incremental energy production or system flexibility in each zone. Short-term wholesale markets therefore play a crucial role in guiding operational decisions, supporting decarbonisation and maintaining security of supply at least cost.

Our report highlights the possible negative consequences of interventions that distort spot market functioning, such as price caps or changes that weaken the current marginal pricing approach to setting spot prices. Instead, it argues that policymakers should focus on:

• supporting the efficient deployment of flexibility, including demand-side response and storage, as well as interconnection capacity, which can help to reduce underlying price volatility
• facilitating liquid forward and futures markets that help participants hedge their exposure to short-term volatility
• ensuring that wider policy and regulatory frameworks support efficient investment, hedging and cross-border integration.

Click here to read the full report: The fundamental drivers of European wholesale electricity prices