The Current State of the European Electricity Market
European electricity price composition
The retail electricity price in Europe is composed of three components: energy supply costs, network costs, and taxes. Before the energy crisis, the proportions of these three components were roughly similar. Since 2022, in order to offset the increase in energy supply costs, the proportion of taxes has decreased.
Electricity prices in various countries
The wholesale electricity price trend generally shows a pattern of “higher in the east and lower in the west, and higher in the north and lower in the south”. Due to the impact of the Russia-Ukraine conflict, countries adjacent to Russia such as Finland, Sweden and Denmark have significant pressure on their natural gas supply and higher prices; while countries like France, the Netherlands and Spain have convenient access to LNG and lower prices.
The retail electricity price in Germany is at a relatively high level in Europe. The key factors are the high proportion of renewable energy (56%) and the associated high renewable energy tax. In 2024, it was 410 euros per megawatt-hour, with taxes accounting for as much as 45%. In January 2026, it dropped to 384 euros per megawatt-hour, mainly due to the reduction in network costs resulting from government subsidies.
The retail electricity prices in Italy also rank among the highest in Europe. In the first half of 2025, they even rose to 370 euros per megawatt-hour. Although the proportion of renewable energy generation was 40% (lower than the average level of the European Union), the high dependence on imported natural gas made the impact of international gas price fluctuations on electricity prices more prominent.
The historical electricity prices for retail in France have been relatively low, remaining below 260 euros per megawatt-hour for a long time before 2022. This was mainly due to the high proportion of nuclear power generation (62%) and a moderate tax structure (accounting for 35%). In the past three years, influenced by large-scale maintenance of nuclear power plants, construction delays, and the government’s increase in nuclear power taxes to alleviate fiscal pressure, electricity prices have risen significantly. In 2024, it was 332 euros per megawatt-hour, and in the first half of 2025, it was 301 euros per megawatt-hour, remaining at a high level.
Analysis of Factors Affecting Electricity Prices
Based on historical data, this study constructed a linear regression model for wholesale electricity prices and a deep learning model for retail electricity prices, systematically quantifying the influence mechanism of various factors on electricity prices.
Factor 1: Natural gas price
The price of natural gas is the most significant factor influencing electricity prices in Europe, exerting a notable positive impact.
The price of natural gas dropped from below 20 euros per megawatt-hour in early 2021 to approaching 340 euros per megawatt-hour in August 2022. After 2023, with the expansion of Europe’s LNG import capacity and the factor of a warm winter, the gas price stabilized and slightly declined, but it remained significantly higher than the level before the crisis. Since March 2025, the price of natural gas has remained within the range of 25 to 40 euros per megawatt-hour, and is at a new price plateau.
The European electricity wholesale market adopts marginal cost pricing. During most periods, gas turbines serve as peak-load generating units and are at the marginal position. The fuel cost directly determines the market clearing price. The increase in gas prices is almost entirely passed on to the wholesale electricity price, thereby pushing up the retail electricity price.
The correlation between the wholesale electricity price and the natural gas price exceeds 99%. The contribution of natural gas prices to the changes in the wholesale electricity price was 87.99% during the rising period (2015 – 2022) and 97.93% during the declining period (2022 – 2025). From 2021 to 2025, the contribution to the changes in the retail electricity price for residents was 57.43%, and to the changes in the electricity price for non-residents was 66.39%. The electricity price for non-residents has a higher degree of marketization and a stronger linkage with the wholesale electricity price, and its elasticity coefficient with respect to the natural gas price is significantly higher than that of the electricity price for residents.
Factor 2: Taxes and Fees
The changes in European taxes can be divided into three stages:
From 2007 to 2019: Taxes and fees generally showed an upward trend. The average household tax rose from 55.1 euros per megawatt-hour to 92.8 euros per megawatt-hour, mainly driven by the increase in subsidies for renewable energy.
2020 – 2022: During the energy crisis, Germany, France, Italy and other countries temporarily reduced taxes to mitigate the impact on residents. The average tax per megawatt-hour for residents decreased from 89.2 euros to 41.4 euros, but the tax adjustments for industrial and commercial sectors were limited.
2023 – 2025: Temporary tax cuts will gradually be phased out. To support the REPowerEU plan and make up for the loss of fuel tax revenue, electricity taxes will be structurally raised again, especially on the non-residential side, in order to strengthen the “polluter pays” principle and raise funds for the Carbon Border Adjustment Mechanism (CBAM), but they will still be lower than the levels before the crisis.
Taxes often play a buffering role in stabilizing the electricity prices for residents, and thus have a greater elasticity coefficient for non-resident electricity prices. From 2021 to 2025, the tax reduction policy for residents offset 10.16% of the electricity price increase, playing an important role in price stabilization.
Factor 3: Grid Investment
Grid investment has a significant positive impact on electricity prices, which is achieved through the network cost transmission mechanism. Grid investment covers multiple aspects such as expansion of transmission grids, upgrading of distribution grids, and digital transformation. These investments are incorporated into transmission and distribution prices through depreciation and financing costs.
European grid investment has increased from around 25 billion euros in 2007 to approximately 70 billion euros in 2025, representing an increase of 180%. As the scale of grid investment expands, the proportion of network costs in the final electricity price continues to rise.
The growth in power grid investment has a more significant impact on residential electricity prices. From 2007 to 2025, the contribution of power grid investment to the changes in residential electricity prices was around 29%, while the contribution to non-residential electricity price changes was less than 12%. Residential electricity prices are determined by the government and require a higher proportion of long-term network costs, thus having a higher elasticity coefficient with respect to power grid investment.
In June 2025, the European Union released the “Forward-looking Guidelines for Grid Investment”, aiming to achieve a grid investment target of 1.4 trillion euros by 2040 (477 billion euros for the transmission grid and 730 billion euros for the distribution grid), with an annual investment of nearly 100 billion euros. In the long term, the growth of grid investment will continue to raise retail electricity prices.
Factor 4: Proportion of Wind Power Generation
The installed capacity of wind power in the European Union has increased from 53.4 gigawatts in 2007 to 241 gigawatts in 2025, representing an increase of over 350%. The proportion of electricity generation has risen from 3.39% in 2007 to 16.94% in 2025.
The increase in the proportion of wind power-generated electricity has a “double-edged sword” effect on electricity prices. On one hand, wind power has the advantage of zero marginal generation cost, and an increase in its proportion can lower the wholesale electricity price. On the other hand, the volatility and non-dispatchability of wind power bring additional network costs, including balancing costs, reserve capacity costs, and grid upgrade costs, etc. Overall, the increase in the proportion of wind power-generated electricity has pushed up the retail electricity price level.
The proportion of wind power generation in total electricity output has a more significant impact on non-residential electricity prices. This is mainly because the additional costs are mainly borne by non-residential electricity prices, and this differentiation phenomenon has become increasingly obvious in recent years. The elasticity coefficient of non-residential electricity prices for wind power generation is twice that of residential electricity prices.
Factor 5: Carbon Price
In 2005, the European Union officially launched the EU ETS (Carbon Emission Trading System), adopting a “total quantity control and market allocation” mechanism, covering industries such as electricity, industry, and aviation, accounting for approximately 45% of the EU’s greenhouse gas emissions.
The ETS carbon price experienced significant fluctuations: it once exceeded 20 euros per ton of carbon dioxide from 2007 to 2008, then dropped to less than 5 euros per ton of carbon dioxide due to the economic crisis and oversupply of quotas; from 2013 to 2017, it remained at a low level of 5 to 10 euros per ton of carbon dioxide; after 2018, with the implementation of the MSR mechanism and the tightening of emission reduction targets, the carbon price began to rise, reaching over 50 euros per ton of carbon dioxide in 2021, and exceeding 80 euros per ton of carbon dioxide in 2022, and remaining at around 75 euros per ton of carbon dioxide in 2025.
The direct impact of carbon prices on retail electricity prices is much lower than the cost of natural gas fuel itself. From 2021 to 2025, the contribution of carbon prices to changes in residential electricity prices was approximately 10.74%, which was significantly lower than that of natural gas. The reason is that carbon costs are an additional item in the total cost of gas-fired power generation. Assuming a carbon price of approximately 90 euros per ton and a carbon emission intensity of natural gas power generation of about 0.34 tons of carbon dioxide per megawatt-hour, under an ideal condition with a 100% transmission rate, the carbon cost is only about 30 euros per megawatt-hour. In contrast, the cost of natural gas fuel is significantly affected by efficiency conversion and market fluctuations. Calculated based on an electricity price of approximately 35 euros per megawatt-hour and a power generation efficiency of 50%, the fuel cost alone is approximately 70 euros per megawatt-hour. This cost structure determines that carbon prices account for about 30% of the total power generation cost, but fluctuations in the gas price can easily cover the impact of changes in carbon prices.
The increase in carbon prices is one of the factors contributing to the long-term rise in electricity costs in Europe. However, at the present stage, its impact is overshadowed by the dominant cost of natural gas. In the future, it is expected to become the main driver of the increase in retail electricity prices.
Factor 6: Proportion of Nuclear Power Generation
The scale of nuclear power in European countries has been declining year by year. It dropped from 121.85 gigawatts in 2007 to 98 gigawatts in 2025, and the proportion of nuclear power generation decreased from 29.6% to 23.4%. The main influencing factor is the policy of decommissioning nuclear power plants.
Germany is the most committed country to nuclear abolition. It shut down its last three nuclear power plants in April 2023, and the proportion of nuclear power generation has already dropped to zero ahead of schedule. France has historically implemented a nuclear abolition policy. The Macron government has changed its stance and proposed a nuclear power revival plan, aiming to build 6 new EPR2 reactors and extend the lifespan of existing nuclear power plants. By 2025, the proportion of nuclear power generation has slightly increased.
From 2007 to 2020, the contribution of the proportion of nuclear power generation to the change in residential electricity prices was 6.96%. From 2021 to 2025, this contribution was less than 5%.
The share of nuclear power generation in the EU has remained within the range of 22% to 26% over the past five years, with short-term fluctuations (for instance, in 2022, due to the large-scale shutdown of nuclear power plants in France, the share dropped to 21.9%). In the long term, it shows a slow downward trend. This overall stability in the share indicates that nuclear power, as a base-load power source, does not cause a significant supply shock to the electricity market, and thus has a relatively minor impact on the overall electricity price.
Factor 7: Proportion of Photovoltaic Power Generation
The development of photovoltaic power in Europe is accelerating. The proportion of photovoltaic power generation in the EU has increased from 0.13% in 2007 to 13.2% in 2025, and the installed capacity has grown from 4.97 gigawatts to 402 gigawatts, with an increase of over 80 times.
The increase in the proportion of photovoltaic power generation has a “double-edged sword” effect on electricity prices. On one hand, photovoltaic power generation is concentrated during the midday, which lowers the spot market price during the day. The “duck curve” effect of new photovoltaic installations directly reduces the end-user’s terminal electricity purchase cost. On the other hand, photovoltaic power generation intensifies the rapid upward demand from the midday low point to the evening peak, increasing the auxiliary service costs of the system.
The net impact of photovoltaics on electricity prices is a trade-off between reducing energy supply costs and increasing network costs. Under the current proportion of photovoltaic power generation in Europe, the effects of the two are roughly equivalent. Model analysis shows that the elasticity coefficient of electricity prices to the proportion of photovoltaic power generation is relatively small. From 2021 to 2025, the elasticity coefficient of retail electricity prices was below 0.005. Overall, the growth of the current proportion of photovoltaic power generation has a limited impact on electricity prices.