Europe’s energy transition is usually described through a relatively simple set of numbers: how many solar panels have been installed, how much wind capacity has been added, how quickly emissions are falling, and how much fossil-fuel consumption has been displaced. These indicators matter. But they do not tell us whether the transition is economically well designed.

The more difficult questions are often less visible. What does it cost to integrate intermittent electricity into the grid? Who pays for backup capacity, networks and storage? How much of the final electricity bill comes from generation itself, and how much comes from taxes, charges and regulation? Are subsidies creating genuinely competitive technologies, or are they sometimes keeping investments alive that would not survive under normal market conditions?

These were some of the questions raised during a recent interview about European energy policy. They also lie at the heart of my recent research on electricity markets in Spain and the European Union.

The central issue is not whether Europe should reduce emissions. The more interesting economic question is how to do it without unnecessarily increasing costs, weakening price signals or making European consumers and firms less competitive.

Cheap solar power does not necessarily mean cheap electricity

Spain provides a particularly useful example.

It has excellent conditions for solar generation, and during some hours electricity produced from solar installations can be extremely cheap. This creates an apparently obvious question: if solar power is so cheap, why do Spanish households not always enjoy equally cheap electricity?

Because three different concepts are frequently confused.

There is the cost of producing electricity.

There is the wholesale market price.

And there is the final price paid by the consumer.

They are not the same thing.

A solar installation may have a very low marginal cost at midday. But consumers do not only use electricity when the sun is shining. The system has to continue supplying homes, hospitals, factories and transport networks in the evening, during cloudy periods and when demand suddenly rises.

Networks have to be maintained. Supply and demand have to be balanced. Backup and flexible generation may still be needed. Storage and interconnection require investment. Taxes and regulatory charges are then added before electricity reaches the final consumer.

This is why I think one distinction should become central to the European energy debate:

Cheap electricity generation is not necessarily the same as a cheap electricity system, and a cheap electricity system is not automatically the same as a cheap electricity bill.

Spain’s average wholesale electricity price fell to approximately €63 per MWh in 2024, down from the extraordinary levels seen during the European energy crisis. Yet regulatory and fiscal components continued to form an important part of what consumers ultimately paid.

Simply pointing to falling solar generation costs, therefore, tells us much less about affordability than is sometimes assumed.

Someone always pays

Another uncomfortable question is who actually pays for the transition.

The answer is not always immediately visible because the cost can appear in several places.

If governments finance subsidies through taxation, taxpayers pay.

If the cost is included in electricity tariffs, consumers pay.

If companies face higher electricity costs, part of the burden may appear through higher prices, lower profits or reduced investment.

If governments finance expenditure through debt, part of the cost may eventually fall on future taxpayers.

There is no institutional arrangement capable of making economic costs disappear. Policy can redistribute them, delay them or make them less visible, but somebody ultimately bears them.

One of my ongoing empirical analyses uses data covering 26 EU countries between 2010 and 2024. One of the clearest findings concerns taxes and regulatory charges. For households, a one-percentage-point increase in the tax-and-levy share is associated with approximately €0.0015 per kWh more in electricity prices in our preferred specification.

That number sounds small until it is put into context.

Moving from roughly the 25th to the 75th percentile of the tax burden in our sample—from around 18% to 34%—is associated with approximately €0.024 per kWh more in the household electricity price. That is around 10% of the sample median.

These are statistical associations rather than proof that every euro of taxation mechanically produces the same increase in every country. But they show why taxation and regulation cannot be treated as secondary details when discussing affordability.

Renewable capacity is only part of the story

It is sometimes asked whether a country can have “too much” renewable energy.

I do not think there is a meaningful universal percentage at which renewable energy suddenly becomes excessive.

The better question is whether the electricity system has enough capacity to integrate variable generation.

Solar and wind are different from conventional dispatchable generation because their output depends partly on weather conditions. As their share increases, other parts of the electricity system become increasingly important: storage, interconnection, stronger networks, flexible consumption, backup generation and the services needed to maintain system stability.

In other words, the economic challenge changes as the transition advances.

At an early stage, the question may be:

How can we produce renewable electricity more cheaply?

Later, another question becomes equally important:

How can we integrate very large amounts of variable electricity without making the overall system unnecessarily expensive or unreliable?

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How to Cite this Article (APA 7th edition)

Wang, H. H. (2026, September 6). The Hidden Costs of Europe’s Energy Transition: Cheap Generation Is Not the Same as Cheap Electricity. https://williamhongsongwang.com/2026/09/06/the-hidden-costs-of-europes-energy-transition-cheap-generation-is-not-the-same-as-cheap-electricity/