Economic analysis of energy procurement under price cap policy

Yi Ye, Jiajia Nie and Qiang Guo

Energy Economics, 2025, vol. 148, issue C

Abstract: The existing literature has extensively researched price constraints. However, price cap policies aimed at limiting wholesale prices in energy-exporting countries have not been thoroughly explored. To clarify the implications of price cap policies for stakeholders in the energy supply chain, we develop a three-stage supply chain framework. On the supply side, Russia and the alternative energy-exporting country with capacity limitations and cost disadvantages are considered. On the demand side, there are Europe and the other energy-importing country, which then distribute the energy through the market and resell it to end market customers. After analysing the optimal equilibrium solution, we obtain several noteworthy results. First, a price cap policy may diminish Europe's willingness to consider alternative energy-exporting countries and augment its tendency to procure energy from Russia. This counterintuitive finding suggests that a price cap policy may inadvertently reinforce Europe's reliance on Russian energy. Second, while implementing a price cap policy on Russia can lower the wholesale prices of Russian energy, it may paradoxically increase Europe's willingness to import energy from Russia, thereby enhancing Russia's export volume of energy. Consequently, in certain circumstances, Russia may realise higher profits than it would have without such policies. Third, a price cap policy may prove detrimental to both alternative energy-exporting countries and other energy-importing countries, as it could disrupt the market balance and affect their economic interests. For alternative energy-exporting countries, a price cap policy makes Europe more likely to procure Russian energy, thereby reducing energy orders from them. For other energy-importing countries, the policy allows Europe to gain wholesale price advantages, whereas they need to procure energy at normal wholesale prices, weakening their energy price competitiveness in the market. These findings contribute to theories related to energy capacity and price constraints and provide valuable insights for decision-makers.

Keywords: Russia–Ukraine conflict; Energy procurement; Price cap policy; Limited capacity (search for similar items in EconPapers)
JEL-codes: C70 Q42 Q48 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988325004360
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:148:y:2025:i:c:s0140988325004360

DOI: 10.1016/j.eneco.2025.108609

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().