Determinants of Energy Prices in the European Union for the Period 2017–2025—An Econometric Analysis

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Original abstract

Currently, a major challenge for European economies is the volatility of electricity prices, which affects costs borne by households and firms, as well as inflation, economic competitiveness, and energy security. Although the literature has analysed various determinants of electricity prices, there is still limited evidence on the comparative short- and long-term effects of fiscal factors, the natural gas market, and the transition to renewable energy within the Member States of the European Union. This paper analyses the relationship between household electricity prices and a set of economic, climate, and fiscal determinants in EU countries over the period 2017–2025, using panel data econometric methods. The methodology includes pooled OLS models, fixed and random effects estimators, unit root tests, cross-sectional dependence (Pesaran CD) tests, cointegration analysis, and a Panel ARDL-PMG framework, complemented by robustness checks using FMOLS and DOLS-type estimators. The results indicate the existence of a stable long-run equilibrium relationship between the analysed variables, as well as significant cross-sectional dependence among countries, reflecting common shocks and interconnected dynamics in EU energy markets. Fixed effects models are used as the baseline specification, while PMG-ARDL and other dynamic estimators are employed for robustness analysis. The results are consistent across different econometric specifications. The conclusions highlight the dominant role of Household Gas Prices as the main determinant of electricity prices, while energy productivity shows a positive association with electricity price levels. Climate variables exhibit weak and unstable effects, and environmental taxes do not show statistically significant impacts within the sample period. Overall, the findings underline the importance of energy market dynamics, structural factors, and the ongoing energy transition in shaping electricity price developments in the European Union.

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