The debate over how best to shield households and firms from high and volatile energy prices shows no sign of ending — it is now driven as much by geopolitical turmoil as by climate-related supply shocks. Should governments cap retail prices, cut taxes, hand out transfers, or intervene upstream at the wholesale level? As the experience of the 2021-2023 energy crisis in Europe makes clear, the choice of instrument ultimately determines who shoulders the costs and who reaps the benefits.
Recent work has mapped the macroeconomic fallout of the 2021-2023 energy crisis — output losses, inflation spikes, and tighter monetary conditions (e.g. Bachmann et al. 2024, Krebs and Weber 2024). What has received far less attention is the distributional consequences that lie behind these aggregates: the windfalls accruing to some energy producers, the burdens falling on households and taxpayers, and the uneven effectiveness of policy shields across income groups and regions. In recent work (Fabra et al. 2025), we have quantified the distributional impacts of the energy crisis in Spain, where the energy shock was severe and the policy response — shared with Portugal — was unlike anything seen elsewhere in the EU.
Figure 1 Gas and electricity prices in European exchanges
Panel A) Gas
Panel B) Electricity
From a macro shock to micro burdens
Almost a year before the war in Ukraine, the energy crisis began with an extraordinary surge in European gas prices as Russian pipeline deliveries slowed and markets priced in growing risks of supply disruptions (Figure 1). In wholesale electricity markets — where gas-fired plants often set the marginal price — the pass-through to higher electricity prices was immediate (Fabra 2023). As illustrated in Figure 2, the outcome was costly power for consumers and a surge in inframarginal rents for generators whose costs remained largely unchanged (nuclear, hydro, and renewables). As the European Commission President put it at the time, low-carbon generators were earning revenues “they never dreamt of” and that did not reflect their costs (von der Leyen 2022).
Figure 2 Pass-through of gas prices to electricity prices and inframarginal rents
Most countries responded downstream, implementing retail caps, tax cuts, and transfers to cushion energy bills. While these measures created large fiscal outlays (Ferdinandusse and Delgado-Téllez 2024, Sgaravatti et al. 2023), ultimately borne by taxpayers, they left wholesale market pricing intact and did little to touch inframarginal windfalls. Spain and Portugal chose an upstream alternative, known as the ‘Iberian solution’: a temporary cap on the gas costs of fossil-fuel generators, financed through a surcharge on consumers exposed to wholesale prices. As illustrated in Figure 3, the aim was to delink electricity prices from gas by inducing lower bids from the price-setting units, thereby compressing inframarginal rents without writing a large fiscal cheque.
Figure 3 The Iberian solution
Unpacking the distributional effects
In Fabra et al. (2025), we study the distributional consequences of the crisis and the Spain-Portugal intervention for both electricity producers and consumers in Spain. At the wholesale level, we simulate counterfactual electricity market outcomes under five scenarios; results are shown in Figure 4. Taking differences across these scenarios allows us to separate the effects of (i) the crisis itself, (ii) the price intervention, and (iii) contemporaneous energy-saving measures. To build these scenarios, we construct counterfactual input prices (fossil fuels, carbon, the price of French imports) and estimate electricity demand absent the crisis using machine-learning techniques. At the retail level, we combine simulated hourly wholesale prices with rich data on household electricity consumption at the ZIP-code level to compute bill changes for Spanish households. We also analyse how those changes vary across consumer groups, clustered based on income, weather variables, and consumption profiles.
Figure 4 Simulated wholesale electricity prices in Spain 2020-2023
Our approach addresses two blind spots in the debate. First, the surplus reallocation between electricity producers and consumers has been discussed mostly in qualitative terms. We carefully quantify these transfers. Second, household distributional effects have been inferred from average bills or representative households. We draw on hourly consumption data from 8,390 ZIP codes to identify which households were hit hardest by the crisis and which gained the most from the wholesale intervention.
Our findings
- Producers made large windfalls; the intervention clawed some of them back. Because gas plants often set the price, wholesale earnings for Spanish power plants surged significantly. As reported in Table 1, we estimate that between July 2021 and June 2023, plant earnings increased by roughly €50 billion (about +250%) relative to a no-crisis counterfactual. In turn, profits increased by €27 billion (+224%). The Iberian intervention reduced inframarginal rents by pushing down the market price.
Table 1 Policy intervention and crisis effects on earnings, costs, and profits (million €, July 2021-July 2023)
Notes: This table reports the changes in earnings by power generators located in Spain, their production costs, and their profits due to the policy interventions and the energy crisis. Payments and Costs include the gas compensation in the Factual and Price-Intervention-Only scenarios.
- The wholesale intervention and energy-saving measures meaningfully reduced household bills. On average, the crisis increased household electricity bills by €338 per year (≈1% of disposable income). Without policy measures, that increase would have been €487. The average relief of €149 corresponds to roughly 30% of the crisis-induced burden. The Iberian price intervention accounts for almost 59% of the avoided increase, with the remainder attributed to energy-saving measures.
- The retail burden was regressive — but the Iberian solution was relatively progressive. As shown in Figure 5, higher-income households saw larger absolute increases in their bills. This is expected, as those households tend to use more electricity. Yet, relative to income, the shock was regressive: for poorer households, the rise in bills represented a significantly larger share of their disposable income. Importantly, the Iberian solution mitigated that regressivity: while the absolute savings were higher for wealthier households, the policy provided greater relief to poorer households relative to their income.
Figure 5 Crisis and policy intervention effects by household income quintile
- Geography and technology shaped exposure. Clustering ZIP codes by weather, demographics, and load profiles reveals clear patterns. Areas with colder winters or hotter summers and higher prevalence of electric heating/cooling experienced both larger crisis burdens and larger policy-driven relief. Put differently, where the price spikes would have hurt most, the upstream intervention delivered the largest marginal benefit.
- Demand fell, but not mainly because of price responses. Contrary to a widespread narrative that the ‘price alone did the work’, our machine-learning demand counterfactuals (Figure 6) indicate that non-price conservation policies (nudges, targets, and public campaigns) explain a sizeable share of the demand reduction, in line with recent evidence for Germany (Behr et al. 2025). This is a crucial design insight: retail caps and broad transfers can dull incentives to conserve; upstream wholesale interventions combined with conservation targets can preserve (and even strengthen) those incentives while still lowering average prices.
Figure 6 Actual versus predicted aggregate electricity demand
Why upstream matters
The Iberian solution contrasts with retail-side caps used in the UK and the block tariffs/guaranteed-baseline schemes in Germany and the Netherlands. Retail caps protected households quickly (Levell et al. 2025), but at a fiscal cost and with complex knock-on effects on retail competition (Haan and Schinkel 2023). Baseline-style shields preserved some marginal incentives to save but again required large taxpayer support and risked entrenching higher retail mark-ups (Dertwinkel-Kalt and Wey 2025). By intervening upstream, Spain and Portugal acted where the rents arose — in the wholesale market — compressing the spread between marginal and inframarginal technologies and shifting surplus toward consumers.
This design choice also shaped cross-border dynamics and environmental trade-offs. Lower wholesale prices in Iberia increased electricity exports to France, raising concerns that Iberian consumers would effectively subsidise foreign relief and that gas-fired generation (and associated emissions) could rise. Our estimates confirm these concerns: Spain’s exports rose by 120% as a result of the price intervention. To meet this additional demand, thermal generation expanded, driving higher emissions — although accompanying savings measures partially mitigated the impact. Overall, the combined effect of both policies was an 18% increase in power-sector carbon emissions.
It is important to note, however, that this rise in Spanish emissions may have been partly offset by reductions in France, to the extent that Spanish electricity displaced French gas-fired generation. Since carbon is a global pollutant, what ultimately matters is the net cross-border effect. Moreover, these distortions would have likely been avoided under a European-wide implementation of the Iberian solution.
Lessons
The experience of the 2021-2023 energy crisis shows that the surge in gas prices minted significant inframarginal rents for electricity producers. Yet, results from the Iberian solution revealed that policy instruments acting directly at the wholesale margin can claw back part of those rents without drawing on general fiscal resources. The wholesale price intervention substantially reduced household bills. Higher-income households captured larger savings in absolute euro terms, but the relief was proportionally greater to lower-income families. The crisis also underscored that conservation policies matter at least as much as price adjustments in driving down demand, highlighting the value of pairing upstream relief with ambitious savings targets. More broadly, the lesson is that distributional outcomes can be designed in advance. As climate variability and geopolitical tensions increase the likelihood of future shocks, building such distributional considerations into policy design will be essential.
References
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Dertwinkel-Kalt, M and C Wey (2025), “Why Energy Price Brakes Encourage Moral Hazard, Raise Energy Prices, and Reinforce Energy Savings”, RAND Journal of Economics 56(2):129–144.
Fabra, N (2023), “Reforming European electricity markets: Lessons from the energy crisis”, Energy Economics 126(C).
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von der Leyen, U (2022), “Statement by President von der Leyen on energy”, European Commission, 7 September.