EU-approved price cap reduces profits for inframarginal electricity producers

In late-September, EU member states agreed to impose a price cap on so-called inframarginal electricity producers. In a competitive market the market-clearing price is set by the marginal producer (i.e. the producer with the highest marginal production costs), which is needed for supply to fully meet demand. In the European electricity markets these are currently electricity producers using gas, as European natural gas prices have soared in the wake of the Russian invasion of Ukraine. Electricity producers using other technologies such as nuclear, renewables or coal – the inframarginal producers – have benefited from the high market price even though their marginal production costs have either changed little (n.b. in the case of nuclear and renewables) or less dramatically (n.b. in the case of coal) than those of electricity producers using gas.

EU member states agreed that inframarginal producers should not fully benefit from the currently high electricity prices. Starting on 1 December, EU governments will remove any revenue generated as a result of a market price above €180 /MWh from the inframarginal producers. The money can be used to support electricity users such as households and businesses. The policy will initially be in place until 30 June 2023. The price cap is well below the recent record highs – in August EU electricity prices nearly reached €500 /MWh – but significantly higher than the pre-crisis price level. In practice, we do not expect that the price cap will have any material impact on behaviour of the inframarginals, including on their long-term investment intentions.