Brief analysis 28: Does Austria need an energy crisis mechanism?

As part of the energy market reform, the federal government is planning to introduce an 'energy crisis mechanism' that could guarantee households a maximum electricity price of ten cents per kilowatt hour. At the same time, the government bill to amend the Price Act includes the possibility of a nationwide determination of fixed prices for end customers HERE.

This brief analysis by the economic research institute EcoAustria shows that a general price cap promises relief, but at the same time can lead to serious economic, energy industry and legal problems.

Austrian electricity prices: Heterogeneous and declining since 2023

This analysis clearly shows that electricity prices excluding taxes and levies have been falling since mid-2023 and will be below the previous year's level in 2025. The most recent increase in gross prices is mainly due to the expiry of the electricity cost brake, higher grid charges and the renewed increase in the electricity levy. In addition, the price level varies depending on the supplier and region, which makes it difficult to clearly define a 'crisis'.

Price caps weaken competition and jeopardize security of supply

'If suppliers can no longer set their prices based on the market, they will lose the opportunity to differentiate themselves from one another through favorable tariffs. This weakens central price signals that drive efficiency and innovation in the energy market. For pure energy supply companies without their own generation - in particular smaller providers, but also some large suppliers - this creates massive economic pressure. The result would be an energy market with too little competition among suppliers,' says Monika Köppl-Turyna, Director of EcoAustria.

In addition, a price cap dampens the incentives to save energy and exacerbates the shortage due to unchanged consumption. Strategic behavior on the part of energy suppliers - such as early price increases - also occurs in such situations and paradoxically leads to higher end customer prices.

Legal concerns at EU level

The introduction of a price cap is also tricky under European law. Without export restrictions, the effectiveness of a cap is questionable - export restrictions in turn violate the fundamental freedoms of the EU and the Internal Electricity Market Regulation. Due to its dependence on imports, Austria is particularly susceptible to potential countermeasures by neighboring countries, which jeopardizes security of supply.

Danger of political disincentives

The analysis also points to political economy risks: price caps or 'crisis mechanisms' could be extended or prolonged for politically calculated reasons - even if the market conditions do not justify this. This would delay necessary structural reforms and conceal rising costs.

EcoAustria recommends specific alternatives

Instead of a broad-based price cap, EcoAustria advocates measures that provide relief without eliminating market mechanisms:

• Socially targeted subsidies: Direct payments to low-income households create the same relief effect as a cap - but without distorting the price signals and with greater accuracy.

• 'Sozialtarif Plus': A further development of the existing social tariff that integrates families with low purchasing power more strongly.

• Electricity cost brake: less harmful than a general price cap - but with restrictions

The reintroduction of the electricity cost brake may be an option in principle, but its usefulness is limited. Many of the structural problems of a general price cap - such as distorted price signals or high fiscal burdens - also occur here. Nevertheless, the electricity cost brake has a less distorting effect as it only subsidizes a defined basic consumption and therefore has a certain steering effect.

Nevertheless, the instrument remains a compromise: less invasive than a nationwide price cap, but still associated with interventions in market mechanisms. It would be crucial to avoid earlier design errors - for example, by dynamically adjusting the cap to wholesale prices in order to prevent strategic behavior by energy suppliers, or by setting a fixed subsidy instead of capping the end customer price in order to preserve elements of competition.

Summarized

At first glance, a price cap for households sounds like a quick solution - but it actually threatens to weaken security of supply, market stability and competition among energy providers. EcoAustria therefore recommends prioritizing structural improvements in the energy market and relying on targeted, efficient support instruments.