Revisiting energy pricing dynamics: evidence from European power markets

Europe’s power markets provide insights for decarbonisation pathways, revealing that wholesale power prices are shaped mainly by fuel cost volatility and the firms’ supply mixes under oligopolistic competition. Paradoxically, increasing shares of renewables tend to lower wholesale prices—benefiting consumers but potentially reducing profits for extant suppliers and new entrants. Hence, this highlights a “missing money” issue that may deter needed infrastructure investment. These findings, using data from European markets at advanced stages of decarbonisation, contribute to understanding the deeper strategic and policy implications at two levels: first, how dynamic interactions of industrial policy, competition, and the firms’ rivalries offer fresh insights on why firms and energy markets pursue diverse pathways to decarbonise; and second, how rival firms alter their competitive advantage, and hence, how they appropriate their payoffs and value under transitioning energy markets. This paper provides insights into how firms pursue strategies that drive profitability under diverse decarbonisation approaches. It highlights the need for further research on aligning investments with the evolving grid. This may benefit from reframing the “missing money” issue into “missing markets and regulation” phenomena.