Watch: Here’s how the price of electricity is set in the EU

Electricity prices have shot up in the European Union in recent months, which has led to calls to reform the way they are set.

Currently, the EU’s wholesale market is a system of marginal pricing. That means that all electricity generators get the same price for the power they are selling at a given moment.

But the price of electricity varies widely depending on the energy source used to generate it: the cheapest being renewable energy sources while fossil fuels are much more expensive.

National electricity producers make their bids on the market and the bidding goes from the cheapest to the most expensive energy source with everybody obtaining the price of the last producer from which electricity was bought, according to the European Commission.

Proponents say this model is the fairest and is cheaper for consumers in the long run.

But as fossil fuels (from petroleum products to coal and natural gas) accounted for nearly 70% of the EU’s energy mix in 2020 and with most of it imported from third countries, it means the bloc is highly vulnerable to price fluctuations.

The reopening of the global economy from COVID-19 lockdowns, which led to a surge in energy demand worldwide, and Russia’s war in Ukraine, which prompted Moscow to curb gas flows to Europe in retaliation for sanctions, have led to a dramatic rise in fossil fuels price.

Rising inflation and electricity bills have led to protests across Europe, with some leaders now advocating for the price of electricity to be decoupled from gas in order to ease the burden on households and businesses.