Do Household Electricity Prices in European Union Countries Depend on the Energy Mix?

Abstract

In recent years, the international situation and requirements regarding carbon dioxide emissions have increased the production costs of electrical energy and, consequently, prices. The solution to the problem, and at the same time a contribution to improving the quality of the natural environment, is the promotion of renewable energy. The aim of the study was to determine the impact of the share of renewable energy in the energy mix and electricity consumption on household electricity prices. The study was based on data for the EU and Norway for the years 2011–2021. The data have been extracted from the Eurostat database. Multilevel modelling and a correlation analysis were used. It turns out that the situation in the countries covered by the study is different. There are significant differences in electricity prices, consumption and the share of renewable energy in the countries of the EU. The common trend observed is an increase in the share of renewable energy in the energy mix, from 18.6% to 26.3% on average over a decade. Moreover, an increase in the share of renewable energy does not mean a decrease in prices, which increased by approximately 20%.

1. Introduction

Energy markets, including electricity, are among the most important and growing markets in modern economies [1]. In general, the GDP of most countries is dominated by manufacturing, industrial processing, trade and services [2], although economies based on intangible information services are increasingly recognised as modern [3]. However, the profitability of all businesses is highly dependent on energy prices. This was vividly demonstrated in 2022, when global energy prices rose sharply and energy companies began to make unprecedented profits, while global economic growth clearly lost momentum. The implication is that the importance of energy companies, and of energy itself, is much greater than the share of energy production in the GDP would suggest. This is because the economy’s dependence on energy is now greater than at any time in history [4,5].

The links between economic growth and the energy market are obvious, there is a bi-directional causality between economic growth and carbon emissions, between energy consumption and economic growth, between economic growth and population growth, between energy consumption and urbanisation and between economic growth and urbanisation, and there is a causality from urbanisation to carbon emissions [6]. The carbonisation of the economy is unprecedented in history, which is why the focus is on developing renewable energy [7]. Furthermore, economies are becoming dependent on them. This relationship grows as the share of renewables in the energy mix increases, but this relationship is seen as positive because it enables the decarbonisation of the economy [8], and, moreover, the development of renewables promotes economic growth [9].

Macroeconomic policies, especially in highly developed countries, try to protect households from high energy price increases. On the one hand, decarbonisation is beneficial for the natural environment and thus for the population, but on the other hand, it requires large financial outlays. It is therefore necessary to find a source to cover these costs. In practice, they are not sought after in households, so they should not be particularly vulnerable to energy price increases.

It should be noted that the energy mix may change over time due to technological advances, changes in public policy and market forces. Consumers and policymakers should take these factors into account when making decisions on energy production, consumption and pricing [10]. A diverse and balanced energy mix can contribute to more stable and affordable energy prices in the long term while reducing environmental impacts.

Given the importance of the changes taking place in today’s energy markets, in particular the promotion of renewable energy and energy efficient technologies, two research questions were posed:

Q1: How does the share of renewable energy affect household electricity prices?

Q2: What is the impact of household energy consumption on the relationship between the share of renewable energy in the energy mix and the unit price of energy?

The research was based on the examples of the European Union countries and Norway.

2. Literature Review

The links between the electricity market and the wider economy are complex and varied. Much attention is currently being paid to the importance of renewable energy [11,12]. The considerations include technological, social, macroeconomic and microeconomic aspects. Studies look at energy prices [13], production volumes [14] or the direction of the relationship between the energy market and the economy, with some studies suggesting that the economy is dependent on energy [15,16] and others showing that there is no relationship [17,18]. The advantage lies in research suggesting that technologically advanced countries use renewable energy more effectively to stimulate economic growth [19] but are also more sensitive to recession [20].

Environmental issues are an important aspect of research and energy policymaking [21]. Although the costs of implementing renewable energy solutions are high, the low variable costs can compensate for the initial investment expenditure [22,23,24]. However, renewable energy seems to be an unstable energy source [25] and cause serious disruption to the operation of transmission networks [26]. It is therefore difficult to become completely independent of conventional energy from coal or oil, which is becoming a fact. The pressure to use renewable energy sources is not only coming from governments and NGOs but also from business, which are deliberately choosing locations with access to cheap renewable energy. This is often determined by economic considerations related to the penalty for using conventional energy and predictions about the future [27].

One of the arguments for the superiority of renewable energy is related to criticisms of conventional energy. It is commonly argued that disturbances in conventional energy markets affect the course of the economic cycle, including changes in gross domestic product and inflation, through the volatility of prices for conventional commodities such as coal and oil [28,29], but countries are becoming rich from renewable energy production [30]. Meanwhile, the variable costs and prices of renewable energy appear to be more stable, although renewable energy production itself is less stable [31]. In general, the situation varies from country to country, and it is difficult to generalise, as each country has different access to raw materials, is at a different stage of development and has different natural conditions. The factors shaping the energy market and the linkages with the economy can be on the demand or supply side [32]. Therefore, the impact of changes in commodity prices on the economy may vary [33,34,35,36].

Another way of looking at the link between the energy market and the economy is the impact of the economy’s needs on the energy market. There is no doubt that as society’s standard of living improves, the demand for energy increases [37], and this has been the case for decades [38]. However, recent studies suggest that households may be reducing their demand for electricity [39] by up to 50% without a significant loss of quality of life [40], but at the same time, they need to improve their energy resistance [41]. Similarly, industry is using more and more energy [42]. However, it should be noted that the situation may differ between developing and developed countries. Typically, developing countries require more energy as industry grows, while developed countries can grow industry with little or no increase in energy demand if they invest more in energy-efficient solutions [43,44,45,46]. However, notwithstanding the recognition of the importance of changes in economic activity for electricity demand, economic activity is one of the most important determinants of electricity consumption projections. On the other hand, there are differences regarding the horizon of analyses [47]. In the short term, it is difficult to transform the economy to cleaner energy sources and more energy efficient technologies, but in the long term, many countries are already making efforts and commitments to reduce energy consumption, and the most energy intensive sectors are in the process of implementing energy-saving solutions [48,49].

When looking at household behaviour in relation to the electricity market and electricity prices, it is important to bear in mind the importance of electricity to modern society. Recent decades have seen fundamental changes in the way people live, work and interact [50]; unfortunately, there are still significant disparities in access to energy around the world [51]. Households in the modern world, especially in developed countries, value comfort and convenience; appliances powered by electricity (refrigerators, heaters, lighting and others) improve the quality of life and have become an integral part of everyday life [52]. Electricity is used to power computers, smart phones and the internet; much of the working life of societies is linked to internet communication [53]. Electricity powers entertainment devices such as televisions, games consoles and audio systems, providing relaxation and leisure for individuals and families [54]. Many medical devices such as life-support systems, nebulisers and other machines use electricity, allowing some medical treatment to be provided at home [55]. There are many more examples of household uses of electrical energy. In summary, electricity is the backbone of the modern household and affects almost every aspect of daily life. Its importance lies in the comfort, convenience and opportunities it provides to households in today’s world. Sometimes, an overly rigid approach to energy transformation, without taking into account regional specificities, can lead to energy poverty [56].

Household electricity prices can vary considerably depending on a number of economic, political and natural factors. However, households generally have limited influence on the price of electricity due to a tightly regulated market in many countries [57]. Prices can vary from country to country due to the availability of specific energy sources, market structures, supply and demand, transmission costs, government policies and regulations and other factors beyond the control of households [58], although energy market liberalisation is leading to greater price integration in some countries. This is particularly visible on day-ahead electricity exchanges, where prices between countries are interdependent [59]. However, in addition to the prices themselves, it is the behaviour of households with regard to electricity consumption that is important. Electricity is an important part of a household’s total expenditure, so behaviours that encourage energy savings are encouraged [60,61]. Household energy consumption habits and the use of energy-efficient appliances and technologies can have an impact on electricity bills. More-energy-efficient households tend to have lower electricity bills [62,63]. However, there can sometimes be significant barriers to implementing energy-efficient solutions [64].

The energy mix, the combination of energy sources used to produce electricity, can have a significant impact on energy prices. The composition of the energy mix varies from region to region and can affect the cost, reliability and sustainability of electricity. This is because different energy sources have different costs associated with their extraction, processing and transport. Coal, natural gas and oil are often subject to fluctuations influenced by global markets [65,66]. Renewable energy sources such as wind and solar have lower ongoing fuel costs but may require significant up-front investment in infrastructure [67,68]. Nuclear fuel costs are relatively stable but can be expensive to manage and safely dispose of [69].

3. Materials and Methods

Time series of annual data were examined:

• Electricity prices for households in EU countries (in EUR/kWh): consuming less than 2500 kWh per year and consuming more than 5000 kWh per year.
• Final energy consumption in households per capita (in KGOE).
• Share of renewable energy in the country’s energy mix.

The period covered by the analysis is 2011–2021, with data taken from Eurostat databases.

The analysis consists of three parts:

• Descriptive statistics—annual average electricity prices, household final energy consumption per capita and the share of renewables in the energy mix in the first and last years of the analysis (2011 and 2021) are presented graphically.
• Correlations.
• Multilevel modelling—4 models built:
  • M1 (for consumption < 2500 kWh):

    Prices excluding taxes and levies =            

    Β₀ + β₁ Share of renewable energy + β₂ Energy consumption
  • M2 (for consumption < 2500 kWh):

    Prices including taxes and levies =            

    Β₀ + β₁ Share of renewable energy + β₂ Energy consumption
  • M3 (for consumption > 5000 kWh):

    Prices excluding taxes and levies =            

    Β₀ + β₁ Share of renewable energy + β₂ Energy consumption
  • M4 (for consumption > 5000 kWh):

    Prices including taxes and levies =            

    Β₀ + β₁ Share of renewable energy + β₂ Energy consumption

Multilevel modelling was originally used to analyse the educational process [70,71] but is now being used increasingly. The essence of multilevel modelling is the hierarchical nature of the data (Figure 1). A multilevel analysis makes it possible to assess the behaviour of outcome variables in successive years of the analysis and by country. If we assume that level 1 is the year and level 2 is the country, then in a standard regression model, all countries would have to be included as independent variables. However, in a situation where a multilevel analysis is used, instead of estimating all the intercepts and regression coefficients for each country, only one intercept, one regression coefficient, their variances and the variance between intercepts and regression coefficients are estimated.

Multilevel modelling analyses were performed in MLwiN 3.05.

4. Results

4.1. Basic Statistics on the Energy Market

Over the period 2011–2021, electricity prices have increased quite significantly (Figure 2). The variation between countries has also increased. In 2011, the average electricity prices in the countries studied were EUR 0.1861/kWh for households consuming less than 2500 kWh per year and EUR 0.1614/kWh for households consuming over 5000 kWh per year, whereas in 2021, they were EUR 0.2275/kWh for households consuming less than 2500 kWh per year and EUR 0.1878/kWh for households consuming over 5000 kWh per year. This represents increases of 22.3% and 16.4%, respectively.

The variation in electricity prices (measured by the standard deviation of prices between countries) for households consuming less than 2500 kWh per year increased from 0.0598 kWh to 0.0813 kWh, and for households consuming more than 5000 kWh per year, from 0.0458 kWh to 0.0485 kWh.

In 2011, the lowest electrical energy prices were recorded in Bulgaria, Estonia and Romania. In 2021, the prices remained low in Bulgaria, but increased significantly in Estonia and Romania. In 2021, the lowest prices for households using up to 2500 kWh per year were recorded in the Netherlands, but this was due to energy subsidies.

The highest prices for households using less than 2500 kWh of electricity per year were recorded in Ireland, Germany, Norway and Denmark, with Spain and Belgium joining this group in 2021. In contrast, for households consuming more than 5000 kWh per year, the highest prices were recorded in Cyprus, Germany, Italy and Denmark, with Ireland, Belgium and Spain joining this group in 2021.

It is interesting to note the loose relationship between prices in the group of households using less than 2500 kWh and those using more than 5000 kWh of electricity per year. In Norway, prices for the former group are significantly higher than for the latter. In general, prices for households consuming less than 2500 kWh of electricity per year are higher per unit (per 1 kWh) than for households consuming over 5000 kWh. This was the case in 23 out of 28 countries in 2011 and in 24 countries in 2021. The situation in Greece and the Netherlands is interesting; there are two countries where, in both 2011 and 2021, the prices per unit (per 1 kWh) were lower for households consuming less than 2500 kWh of electricity per year than for households consuming more than 5000 kWh. In addition, this was also the case for Bulgaria, Italy and Latvia in 2011 and Estonia and Malta in 2021. In all other countries, the prices per unit (per 1 kWh) are higher for households consuming less than 2500 kWh than for households consuming more than 5000 kWh.

The household final energy consumption per capita is a value that varies between the countries of the European Union and Norway (Figure 3). This range was from 165 KGOE for Malta to 945 KGOE for Finland in 2011 and from 229 KGOE for Malta to 1085 KGOE for Finland in 2021. Energy consumption has decreased in some countries and increased in others. There are no clear trends. The largest decrease in energy consumption was in Luxembourg, with 171 KGOE. Luxembourg is one of the countries with a high energy consumption. The largest increase in energy consumption was in Finland with 140 KGOE. Overall, 11 countries had a lower energy consumption in 2021 than in 2011, and 17 countries had a higher energy consumption. On average, there was a slight increase in electricity consumption over the period considered (from 598.4 KGOE to 605.3 KGOE). However, this may be due to the specificity of a given year (a cold, rainy year or a warm, sunny year).

The EU countries and Norway vary considerably in terms of the share of renewable energy in the energy mix (Figure 4). In 2011, the variability ranged from 1.9% for Malta to 64.6% for Norway, and in 2021, from 11.7% for Luxembourg to 74.1% for Norway. The arithmetic mean of the share of renewable electricity in the energy mix was 18.6% in 2011, with a standard deviation of 13.8 p.p., and up to 26.3% in 2021, with a standard deviation of 15.0 p.p. The share of renewables in the energy mix increased in all countries. The smallest was in Hungary (0.1 p.p.), and the largest in Sweden (14.9 p.p.).

4.2. Correlations

The electricity prices for households appear to have a weak correlation with energy consumption, although it is positive in all situations (Figure 5). In 2011 and 2021, the correlation coefficient between electricity prices and energy consumption was 0.3229 for households consuming less than 2500 kWh and 0.0512 and 0.0727, respectively, for households consuming over 5000 kWh.

The electricity prices for households appear to have a very weak correlation with the share of renewables in the energy mix (Figure 6). In 2011, the correlation coefficient between electricity prices for households consuming less than 2500 kWh and the share of renewables in the energy mix was 0.1698 and 0.2491 in 2021, while for households consuming over 5000 kWh, it was −0.2101 and −0.0158, respectively.

4.3. Multilevel Analysis Model

Examining the impact of the share of renewable energy in the energy mix and energy consumption on household electricity prices gives inconclusive results (Figure 7). As designed, the outcome variables are electricity prices excluding taxes and levies (net) and including taxes and levies (gross). Prices in EUR per 1 MWh have been used to better integrate the results.

The results obtained are inconclusive and depend on the group of households by electricity consumption (less than 2500 kWh and above 5000 kWh) and on net/gross prices.

The first two models, (a) and (b), apply to a group of households with low electricity consumption (<2500 kWh):

• For this group, the regression coefficient B1, which measures the impact of the share of renewable energy in the energy mix on the price level, is positive: 1.048 (0.600) for net prices and 0.147 (0.273) for gross prices. These results imply that, with energy consumption unchanged, a one percentage point increase in the share of renewable energy in the energy mix contributes to a price increase of 1.048 EUR/1 MWh and 0.147 EUR/1 MWh, respectively. However, as the regression coefficient is less than two times the standard error, this phenomenon cannot be considered statistically significant.
• The coefficient B2, which represents the impact of energy consumption on the price level, is positive: 0.036 (0.025) for net prices and 0.104 (0.021) for gross prices. Thus, with the share of renewable energy unchanged, an increase in energy consumption leads to an increase in prices. For gross prices, the relationship is significant, and each 1 KGOE leads to an average gross price increase of 0.104 EUR/1 MWh.

The next two models, (c) and (d), are for a group of households with a significant electricity consumption (>5000 kWh). Here, the situation presented by the model is different from models (a) and (b). Thus, in models (c) and (d), we have:

• The regression coefficient B1, which represents the impact of the share of renewable energy in the energy mix on the price level, is negative: for net prices, −0.974 (0.444) and for gross prices, −0.813 (0.203). These results indicate the significance of the relationship. Thus, a 1 p.p. increase in the share of renewable energy, at a constant energy consumption, leads to a decrease in the net price of 0.974 EUR/MWh and a decrease in the gross price of 0.813 EUR/MWh.
• The coefficient B2, which represents the impact of energy consumption on the price level, is negative for net prices, −0.041 (0.014), and positive for gross prices, 0.033 (0.015). Thus, for a constant share of renewable energy, an increase in consumption of 1 KGOE leads to a decrease in net prices of 0.041 EUR/MWh and a simultaneous increase in gross prices of 0.033 EUR/MWh.

The relationships examined from the multilevel analysis models (a)–(d) are shown in Figure 8 in the two-variable system:

• Share of renewable energy—electricity prices.
• Energy consumption—electricity prices.

The left column of Figure 8 shows the effect of the share of renewable energy in the energy mix on electricity prices. The graphs show the following:

• There is no relationship for the net price model (Figure 8a—consumption < 2500 kWh);
• An overall positive relationship for the gross price model (Figure 8b—consumption < 2500 kWh);
• An overall negative relationship for the net price model (Figure 8c—consumption > 5000 kWh);
• An overall negative relationship for the gross price model (Figure 8d—consumption > 5000 kWh).

Models (c) and (d) deserve special attention as, despite the overall negative relationship, a positive relationship can be observed more often for individual countries. This is illustrated in the graph. This may suggest that the conclusion of a decrease in electricity prices as a result of an increase in the share of renewable energy in the energy mix—the models of multilevel analyses (c) and (d)—is inaccurate.

The right-hand column of Figure 8 shows the impact of energy consumption on the price of electricity. The graphs show the following:

• An overall positive relationship for the net price (Figure 8a—consumption < 2500 kWh), gross price (Figure 8b—consumption < 2500 kWh) and net price (Figure 8d—consumption > 5000 kWh) models;
• An overall weak negative relationship for the net price model (Figure 8c—consumption > 5000 kWh).

These results are consistent with the findings of the multilevel analysis models.

5. Discussion

The modelling carried out and the presentation of the data in the graphs show that the relationship between electricity prices and the share of renewables in the energy mix and energy consumption is not simple. First of all, the situation varies from country to country. This is obvious given the differences between countries in terms of access to energy sources, geographical location and, therefore, the length of daylight and temperature. Such natural factors turn out to be important determinants of energy prices, energy consumption and the share of renewable energy in the energy mix [72]. It is not surprising, therefore, that it is difficult to identify general strong regularities. Sometimes, it is pointed out that market regulations influence the increase in energy prices, and sometimes the increase in the share of renewable energy reduces the demand for conventional energy sources and lowers their prices [73]. The difficulty in interpreting this market is illustrated by studies showing that price shocks for non-renewable energy do not affect the consumption of renewable energy [74], while an increase in demand for such energy could be expected. It is sometimes shown that developed countries are better off in this respect than developing countries, but these conclusions are not conclusive [75].

Although there has been a lot of talk in recent years about saving energy, including saving energy in households [76,77], energy consumption is still very high in some countries. Studies show significant differences between the countries with the lowest and highest energy consumptions. However, if we look at the geographical location of the countries with the lowest energy consumption, we see that these are the countries in the southern part of Europe, and the countries with the highest energy consumption are the countries in the northern part of Europe. Another important issue related to electricity consumption is habit and the expectation of a more comfortable life [78]. This may explain why, despite the promotion of energy savings, electricity consumption has increased in most countries. The electricity consumption throughout the year can also be specific. During a cold winter, the electricity consumption is bound to be higher, even if energy savings are encouraged, and during a mild winter, the energy consumption will be lower. The same applies to summer periods, when air conditioning is used more often in hot weather. Although it is noticeable that societies are increasingly choosing energy-saving products, the functional value of the product is equally important, demonstrating consumers’ rational approach to purchasing [79]. However, the demand for a comfortable life means that the elasticity of energy demand to price is very low, and societies are willing to pay more but do not want to compromise on comfort [80].

In recent years, much attention has been paid to energy neutrality [81,82,83], and it has been pointed out that such energy neutrality can be achieved by increasing the share of renewable energy. At the same time, such energy has lower variable costs. The share of renewable energy has increased in all the countries studied. Although the rate of increase varied, it is important to note that this was the case in all countries. It is interesting to note that the largest absolute increases in the share of renewables occurred in the countries with the lowest and highest shares of renewables in the energy mix. Therefore, on the one hand, the leading countries need to see tangible benefits from renewable energy, and on the other hand, some countries need to catch up with others. It is interesting to note that the middle countries are not developing renewables as strongly.

The regulation policy for household electricity is aimed at security of supply, environmental protection and price stability [84]. It is precisely the issue of price stability that has been examined in this paper. It turns out that the countries of the European Union are quite different with regard to the level of household electricity prices. When other products are taken into account, such as food, fuel or telecommunication services, there are not such large differences between EU countries. However, it should be noted that electricity is one of the most heavily regulated markets. Moreover, despite attempts to reduce the role of the state, reforms and the introduction of competition between energy companies, it is still one of the most regulated sectors [85,86]. Moreover, deregulation does not lead to the expected price competition due to the high concentration on the seller side [87].

6. Conclusions

The regulation of the electricity sector is manifested, among other things, in the non-market nature of price setting [88,89,90]. This is quite a problem for modelling dependencies in the energy market, as the results obtained may be unexpected. On the other hand, such attempts are worthwhile, as possible deviations from behaviour in line with economic laws or social expectations can be the basis for the design of government regulatory and fiscal policies.

The first and most important problem in this study was to determine the impact of the share of renewable energy in the energy mix on the level of electricity prices. For this purpose, two categories of households were examined (those with a standard consumption of less than 2500 kWh per year and those with a high consumption of more than 5000 kWh per year). It turns out that there are no simple correlations here. The correlations are so weak that it cannot be said that a higher or lower share of renewable energy influences prices.

The use of multilevel modelling offered better opportunities than the correlation assessment. For households with a standard electricity consumption of up to 2500 kWh, a positive but statistically insignificant effect of the share of renewable energy on prices was found. In contrast, for households consuming more than 5000 kWh of electricity, there was a negative, statistically significant effect, i.e., an increase in the share of renewable energy led to a decrease in prices for this group of consumers. This relationship is complicated by the internal situation of individual countries, where the relationship is sometimes positive. This is where the question of consumption comes in. If renewable energy is not used, it will increase prices, as entrepreneurs will try to compensate for energy losses through price, but if it is used, it can stabilise prices. The answer to the first research question How does the share of renewable energy affect household electricity prices? is ambiguous. However, most evidence suggests that it has a stabilising effect, especially when energy consumption is high. The answer to the second research question What is the impact of household energy consumption on the relationship between the share of renewable energy in the energy mix and the unit price of energy? is also ambiguous because without a change in the share of renewable energy in the energy mix, the effect is generally positive, i.e., as consumption increases, prices increase, but this is not so obvious for individual countries.

The situation is very different from country to country. This is reflected in all aspects: price levels, the share of renewables in the energy mix and the level of energy consumption. Obviously, the current situation can be described as a transition, or in other words, an energy transition. Looking at the data from 2011 to 2021 and the rather strong price increases observed in some countries, price increases can be expected in other countries. Although the market is regulated, the law of one price is also strong, and the drive for convergence is always strong. The promotion of renewable energy is arguably good for air quality, but these investments are costly and companies expect a quick return on their investment, so price reductions are not to be expected. There is an interesting problem here: the extent to which possible savings in energy consumption, and therefore lower demand, will be a problem for energy producers who expect higher sales and profits.