High Electricity Prices Despite Cheap Renewables?

The European wholesale electricity market creates a structural conflict of objectives: although renewable energies incur virtually no running costs, the costs of CO2 allowances for fossil fuel power stations are driving up the uniform wholesale price. The resulting additional revenues for non-fossil fuel generators increase wholesale costs for consumers, weaken incentives for electrification and undermine industrial competitiveness. WIFO Working Paper 725/2026 ("A Market Design Proposal for Decoupling Carbon and Electricity Prices") proposes a change to the settlement mechanism in the wholesale electricity market: if the day-ahead price exceeds a threshold, non-fossil power plants receive the market price minus a CO2 proxy deduction. The mechanism redistributes part of the inframarginal rents to the consumer side without altering the CO2 price itself or the dispatch order of power plants. Static calculations based on hourly data for 2025 yield savings of around 8.5 percent in Austria and 4.7 percent in Germany (measured against average procurement costs on the day-ahead market; grid charges and levies are not taken into account). The greater reduction in Austria stems from the fact that a disproportionately large amount of hydropower is available during high-price hours. A variant designed for gas price crises would have reduced average wholesale costs by around 30 percent (Austria) and 25 percent (Germany) in the second half of 2022.