The debate over electricity prices has reignited. European Commission’s President Ursula von der Leyen’s claim to “bring different options and findings on whether it is time to move forward on the market design” sparked concern amongst experts. Another round of debate on market design, when there was no consensus on alternative designs during the recent review of the electricity market reform (EMD), is not going to solve the issue but would rather create more uncertainty.
However, ways to lower electricity prices without breaking market fundamentals already exist.
While we wait for the next European Council on 19-20 March, in this week’s #FridayFeature we shed light on consumer bills, how to lower electricity bills in the short term through lowering taxes and levies, and how to improve consumer protection and transparency for consumers when choosing contracts online.
The functioning of electricity spot markets
In Europe, electricity spot market prices are set by demand and supply. Which power plant and energy source is used to satisfy demand depends on each plant’s short-term marginal costs (mainly fuel costs). To determine this, power plants are ranked in ascending order of their marginal costs (cheapest to most expensive).
The sport market is then cleared based on the ‘marginal pricing’ mechanism: the marginal costs of the last (most expensive) power plant needed to satisfy the last MW of demand set the market clearing price. That power plant is called ‘marginal generator’. Depending on the electricity demand for a given timeframe, these can be solar, wind, hydro, nuclear, gas or coal power plants. All other power plants dispatched – i.e. those with lower marginal costs than the marginal generator – will receive that clearing price for their volume of electricity offered in the spot market for a given timeframe.
Put differently, marginal pricing ensures only the cheapest electricity generation units are selected to cover electricity demand (and therefore keep the lights on).
Overall, economically, this is the most cost-efficient system to determine spot market prices. It ensures the cheapest generation sources are used first, makes the system transparent, and pays all selected power plant operators the same market price. The latter aspect entails that operators of renewable power plants can recover their capital expenditure for their generation assets. This is crucial to incentivise a market-driven buildout of renewables and low-carbon energy sources to achieve the EU’s decarbonisation goals.
The principle of marginal pricing is not applied exclusively to electricity, but is a way of pricing commodities and is used in other markets, such as oil, metals and coffee beans.
How to effectively lower bills
However, final prices paid by household and industrial consumers are not just defined by wholesale electricity prices. Our retail markets explainer shows that a typical electricity bill is made up of three layers:
- energy supply costs shaped by wholesale market prices and hedging costs
- network charges to finance electricity grids
- taxes and levies set by national governments
Taxes and levies are a sore point. Despite being the cleanest and most efficient final energy carrier, electricity is disproportionately burdened by taxes and levies compared to natural gas in the EU. Our Power Barometer shows that since the second half of 2022, taxes and levies on household consumers have continued to rise at an average rate of 28%, while retail power prices retain at historically high levels, exceeding 25c€/kWh.
The struggle is real. However, short-term price interventions that distort competition and weaken supplier balance sheets won’t solve the issue. Instead, governments should focus on measures that lower bills while preserving the core market principles of competition, marginal pricing in spot markets and contract choice for consumers.
In a recent paper, Eurelectric set out 3 levers to cut bills through lower taxes and levies without breaking markets: reduce, shift, and exempt:
- Reduce: electricity is taxed around 1.4 times more than gas per unit of energy in the EU. Governments already have room – under existing EU law – to reduce excise duties, lower VAT and remove non-energy-related charges from electricity bills. The Commission now explicitly urges capitals to use that flexibility.
- Shifting, not subsidising: several Member States are already shifting levies away from electricity and onto fossil fuels, correcting distorted price signals without necessarily blowing holes in public budgets. This improves affordability and strengthens the case for electric heating, transport and industry.
- Exempt: certain consumer groups or electricity users should be exempted from taxes and levies
The underlying logic is clear: lasting affordability comes from reducing the hours when gas sets the spot market price and from removing policy costs that penalise electricity relative to fossil fuels.
Consumers need choice – and clarity
Retail markets only work if consumers have access to a wide range of contracts that suit their preferences and can make informed and unbiased decisions.
Price comparison tools (websites or apps) are essential for helping consumers compare electricity contract offers and choose a supplier and tariff that suits their preferences. Consumers want to rely on clear, accurate, and trustworthy information when using these tools.
Eurelectric’s paper on price comparison tools highlights a growing problem: the line between independent comparison tools and commission-based switching platforms is sometimes blurred. Sponsored offers are not always clearly labelled. Ranking criteria are often opaque. Dynamic price offers can be poorly explained.
This matters because retail markets are evolving fast. Consumers can now choose between fixed, variable, time-of-use, dynamic and hybrid contracts – alongside green tariffs, bundled services and flexibility offers.
The recommendation is straightforward: transparency, clear labelling of sponsored and advertised offers, and fair ranking rules – enforced using existing EU digital and consumer legislation – rather than new layers of regulation.
Consumers need choice – and clarity
Retail markets only work if consumers have access to a wide range of contracts that suit their preferences and can make informed and unbiased decisions.
Price comparison tools (websites or apps) are essential for helping consumers compare electricity contract offers and choose a supplier and tariff that suits their preferences. Consumers want to rely on clear, accurate, and trustworthy information when using these tools.
Eurelectric’s paper on price comparison tools highlights a growing problem: the line between independent comparison tools and commission-based switching platforms is sometimes blurred. Sponsored offers are not always clearly labelled. Ranking criteria are often opaque. Dynamic price offers can be poorly explained.
This matters because retail markets are evolving fast. Consumers can now choose between fixed, variable, time-of-use, dynamic and hybrid contracts – alongside green tariffs, bundled services and flexibility offers.
The recommendation is straightforward: transparency, clear labelling of sponsored and advertised offers, and fair ranking rules – enforced using existing EU digital and consumer legislation – rather than new layers of regulation.
Looking ahead
Member States can already implement targeted action on the real drivers of retail bills.
Aligning taxation with decarbonisation goals, accelerating grid and storage deployment, and ensuring consumers can access transparent and competitive retail offers would deliver tangible relief in the short term – without undermining market confidence. At a time when electrification is central to industrial competitiveness, energy security and climate neutrality, stability is essential.
The challenge is therefore not to reinvent the wheel, but to make it work better for consumers and businesses by removing avoidable policy costs and enabling smarter system operation.
This blog post was originally published as part of Eurelectric’s LinkedIn Friday Features. Subscribe here to stay updated and never miss an edition.
Disclaimer: This article is for communication purposes only and may not reflect Eurelectric positions. Any positions taken in this article shall not be attributable to Eurelectric’s official positioning. Official Eurelectric positions are reflected only in position papers published here.