Market failure or politics? Understanding the motives behind regulatory actions to address surging electricity prices

This paper aims to explore the underlying motivations that drive regulatory measures to address surging electricity prices. We discuss this question with a systematic review of the literature on price spikes in electricity markets and compare the recommended measures in the literature with political and regulatory actions taken during the 2021-22 European energy crisis. Our review shows a discrepancy between the arguments presented in the literature and the regulatory narrative in practice. Although theoretical arguments assume a general regulatory framework driven primarily by market efficiency, recent regulatory decisions show that political concerns can shape regulatory measures to a great extent, and the political economy of regulation should be incorporated into market analyses.