Electricity Tariff Deficit: Temporary or Permanent problem in the EU?

In the recent years electricity tariff deficits emerged in Spain, Portugal, Greece and in some other Member States. Tariff deficits are shortfalls of revenues in the electricity system, which arise when the tariffs for the regulated components of the retail electricity price are set below the corresponding costs borne by the energy companies. The objective of this paper is to define and identify the different cases of electricity tariff deficits in Member States. The analysis starts with a description of the functioning of the electricity market in Europe, including price formation and different forms of government intervention, such as support to renewable energy and retail price regulation. Then the paper determines the existence of tariff deficits in the various Member States on the basis of common criteria and describes their common features, as well as particular characteristics of tariff deficits in the countries concerned. An econometric analysis is carried out to identify the drivers of the emergence of a tariff deficit. The final section discusses the impact on the individual firms and on public finances and provides the conclusions.