Is It Market Failure or Politics? A Systematic Review of Literature on Price Spikes and a Case Study of the Regulatory Responses to Surging Electricity Prices in European Countries

This paper starts with a simple question: How should regulators respond to price spikes? We examine this question with a systematic review of the literature and a case study of the European energy crisis of 2021-22. We discuss the causes of price spikes, outline the recommended measures to deal with them, and compare the recommended measures in the literature with those applied in practice. Our review shows that there is a discrepancy between the arguments presented in the literature and the regulatory narrative in practice. In addition, institutional and political perspectives are overlooked in scholarly analyses of price spikes in electricity markets. Although theoretical arguments assume market efficiency as the fundamental driver of regulatory decisions, the recent European crisis shows that political concerns can shape regulatory measures to a great extent in some countries. Therefore, further research is needed to understand the interactions between the political context and markets to improve the regulatory framework