The energy policy pricing dilemma: Affordability, volatility, and market signals in electricity tariffs

Abstract

This paper develops an analytical framework to compare policy outcomes in setting the energy cost component of small consumer tariffs, focusing on its volatile, market-driven nature. It analyzes trade-offs between reducing cost volatility, ensuring affordability, encouraging forward trading, and preserving hourly pricing to promote sustainable consumption. Findings indicate that minimizing volatility, enhancing affordability, and incentivizing forward contracts conflict with maintaining market signals through hourly pricing. Simultaneously reducing cost variance and average cost proves impractical. Using Spain’s 2014 and 2023 tariff regulations as a case study, the study underscores inherent regulatory dilemmas, emphasizing the need to prioritize specific objectives in tariff design.