The role of renewable energy sources in residential electricity prices: A club convergence analysis across selected European countries

ABSTRACT

This research analyses the convergence of residential electricity prices in 22 European countries between 1995 and 2019. The findings reveal the existence of two sub-convergent clubs of residential electricity prices. Half of the countries studied belong to the club with higher residential electricity prices, while the other half belong to the lower-price club. Household income increases the probability of belonging to the club of lower residential electricity prices. An increase in heating degree days decreases the probability of belonging to the club of lower residential electricity prices. A similar effect is observed for the price of non-renewable energy sources used in electricity production. Further, although a country’s likelihood of belonging to the club of lower residential electricity prices diminishes with a rise in the share of renewable electricity production, the converse pattern is obtained at the residential level, such that residential renewable electricity share has a beneficial effect. Our findings suggest that households have benefitted in paying lower prices for renewable sourced electricity. Therefore, this research indicates that ongoing clean energy initiatives and the availability of affordable substitutes for conventionally generated electricity are being realized to a certain extent, improving electricity markets for the countries we analysed.

KEYWORDS:

• Convergence
• panel data
• Europe
• electricity prices
• eleasticity

JEL CLASSIFICATIONS:

• C33
• Q43
• Q47

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ See https://ec.europa.eu/energy/topics/energy-strategy/clean-energy-all-europeans_en.

² Convergence in energy prices and energy productivity has been explored, from a variety of perspectives, in a number of previous studies (see, for example, Bhattacharya, Inekwe, and Sadorsky 2020; Bhattacharya et al. 2018; Liddle 2009; Parker and Liddle 2017a, 2017b).

³ The only study outside of Europe is by Apergis, Fontini, and Inchauspe (2017), who report the absence of price convergence in Australian states. In reviewing the literature on electricity prices, we focus predominantly on the European electricity market.

⁴ In order to guarantee convergence, the PS approach makes L(t) = log (t).

⁵ See https://www.enerdata.net/expertise/energy-co2-data.html.

⁶ The most recent data on electricity prices list these countries in a similar order; see https://ec.europa.eu/eurostat/statistics-explained/index.php/Electricity_price_statistics.

⁷ See https://ec.europa.eu/energy/topics/energy-efficiency/heating-and-cooling_en.

⁸ According to the statistics from Eurostat, energy consumption for space cooling was 0.4% in 2018. See https://ec.europa.eu/eurostat/statistics-explained/index.php/Energy_consumption_in_households.

⁹ Lazkano, Nøstbakken, and Pelli (2017) state that the competitiveness of renewable energy with respect to conventional electricity generation will determine the extent to which electricity storage can curb carbon emissions.

¹⁰ The odds ratio corresponds to the probability of the event divided by the probability of the non-event.

¹¹ See https://ec.europa.eu/energy/data-analysis/energy-prices-and-costs_en.

¹² https://ec.europa.eu/energy/topics/markets-and-consumers/market-legislation/electricity-market-design_en.