Navigating the electric storm: Assessing policy responses to Europe’s energy shock

Abstract

We take an off-the-shelf model of the day-ahead electricity market, in the spirit of (Reguant, 2019) and use it to study how different emergency policy interventions proposed in response to the 2021–2022 European energy crisis would feed into short run wholesale electricity price and quantity dynamics. Calibrating the model to Italian data, our analysis predicts that an EU-wide cap on natural gas prices significantly reduces electricity prices, while consumed quantities increase only marginally. A mandated reduction in electricity demand during peak hours leads to modest price declines, while a national cap on gas prices for electricity generation triggers a sharper increase in consumption due to cross-border trade incentives. These findings suggest that emergency interventions can mitigate the short-term impact of price shocks, though they may also introduce inefficiencies in terms of energy consumption and market distortions.