Assessment of the impact of supply and demand shocks on sustained price increases: Evidence from the wholesale electricity market in Portugal

This study examines the persistent effects of external shocks on electricity markets, particularly in response to major global crises such as the COVID-19 pandemic and the Russia-Ukraine war. The Portuguese market's structural dependence on fossil fuels and imports makes it vulnerable to supply chain instability. By analyzing hourly data from January 2015 to September 2024 using a Structural Vector Autoregression (SVAR) with Blanchard–Quah long-run restrictions and Fry–Pagan F-Triangular identification, this study isolates the distinct short- and long-run effects of supply- and demand-side shocks—particularly those associated with the COVID-19 pandemic and the Russia–Ukraine war. Our results provide robust empirical evidence that sustained electricity price increases during 2021–2024 were predominantly driven by supply-side shocks (e.g., natural gas shortages, infrastructure bottlenecks, and intermittent renewable underperformance), which exerted long-lasting upward pressure on prices. In contrast, demand-side shocks—such as those from pandemic lockdowns—induce only temporary deviations, with limited persistence in price levels. The slow adjustment of electricity prices (0.24% per hour) relative to the rapid corrections in generation (34.4% per hour) and demand (14.5% per hour) further underscores the structural inflexibility on the supply side and the dominance of supply constraints in shaping price dynamics.