Limits to Liberalization: The Puzzling Pattern of EU Electricity Price Regulation

The electricity sector has undergone significant price volatility issues. As a result, the gradual but increasingly comprehensive harmonization of the electricity market is challenged. Price controls in the EU are currently and traditionally one of the most prominent instruments to address volatility and as necessary mitigation of the effects of increasing liberalization. However, their potential to distort the internal market makes it to a particular controversial instrument. This conflict has led to high-profile clashes between some Member States and the Commission, with the latter twice failing to harmonise price control rules at EU level. The largely failed harmonisation is puzzling in contrast to the Commission's success in gradually liberalising other pillars of the electricity sector. On the other hand, there has been a lot of momentum at national level in introducing and removing price controls. However, price controls have been largely ignored in the political science literature. The influence of the Commission's monitoring regime on national policies is also discussed. The quantitative analysis uses a newly constructed dataset of electricity price controls across Member States between 2008 and 2020, while clustered OLS regression is used to explain the reasons for the extent of price controls. The paper argues that distinct political reasons, such as the interests of renewable energy producers and state capacity, are key to explaining this least likely case of liberalisation and harmonisation. This contrasts with dominant functional explanations that emphasise high prices and market failure or the social nature of the instrument to explain the emergence of price controls.