Politics vs markets: how German power prices hit the floor

This article aims to quantify the effects of energy policy on power prices. A fundamental model is used to replicate wholesale market prices and to analyse the impact of a change in single price drivers such as coal prices or subsidies for new renewables. It is shown that approximately 50 per cent of the wholesale power price decrease in Germany of the last few years is due to market effects such as the decrease of coal and gas prices as well as the decrease in electricity demand. Only approximately 30 per cent of the price decrease can be directly associated with the subsidies for new renewable energies such as wind and solar. The first part of this article reviews the three policy objectives which guide energy strategy in Europe. In the second part two theoretic models of energy policy governance, namely the direct and multiple steering approach are introduced. Moreover, the article quantifies the impacts of the policy instruments on wholesale power prices and challenges the current energy policies. The third part briefly discusses the effect of the energy policy impact of Fukushima, before the results of the fundamental model and the market effects are analysed in the fourth chapter. The last chapter quantifies all different drivers of power prices and concludes that market effects such as coal and gas prices are at least as important as all policy effects, such as subsidizing renewables or abandoning nuclear power, combined.