Drivers for Household Electricity Prices in the EU: A System-GMM Panel Data Approach

Electricity as well as gas or refined petroleum products exemplify a significant part of the consumer basket of European households and companies. As energy products are important inputs of nearly all final goods and services, any change of energy prices has a direct impact of the general price level. In this context, the main purpose of this study is to assess the main drivers of household electricity prices in the European Union (EU), throughout a period of deep sector transformation. Relying on Eurostat up to date data, not only we analyze the long-term evolution of household electricity prices across the EU, but also we provide the latest empirical evidence on their determinants while confronting the results with the EU energy policy path. For this purpose a new approach is herein developed based on a dynamic model with panel data through GMM proposal method by Blundell and Bond (1998) with the Windermeijer correction (2005). The data analysis provides grounds for a relation between the variable of household electricity prices with variables related to sector liberalization, renewable energy sources which support the EU policy to boost liberalization. This study offers evidence that the sector liberalization, herein assumed via the market share of the largest electricity producer, is accompanied by a decreasing trend in prices, which is consistent with the European Commission’s objectives to liberalize.