Electricity price convergence and dynamics in Europe: market integration, decarbonisation, electricity mix, and external shocks

Abstract This study investigates the convergence of electricity prices across 26 European countries in the context of two major transitions: market integration and decarbonisation. Using a dynamic panel data approach with the Dynamic Common Correlated Effects (DCCE) estimator, we assess both absolute and conditional β-convergence of electricity prices across all countries and within country groups classified according to their electricity generation structure. The analysis incorporates key determinants of price dynamics, including natural gas and coal prices, EU Emissions Trading System (ETS) allowance prices, carbon intensity, and the role of net electricity imports. Our findings confirm the presence of β-convergence across the entire sample and all groupings of countries, indicating progress toward a more integrated EU electricity market. We also find that the sensitivity of electricity prices to fossil fuel and carbon costs varies significantly with the electricity mix. In particular, electricity systems with higher shares of renewables appear less responsive to fossil fuel price shocks, suggesting enhanced resilience. Cross-border electricity trade emerges as a key factor shaping price dynamics, especially in countries dominated by renewables. These results support the continued pursuit of European energy market integration and decarbonisation as mutually reinforcing goals.