Europe built a single market for goods and left its electricity behind - why industrial power prices can differ threefold across a supposedly single market, and what completing the grid would be worth

On the eleventh of June, the Managing Director of the International Monetary Fund, Kristalina Georgieva, addressed Europe’s finance ministers on the subject of energy. Much of what she said was familiar - praise for Europe’s progress on the energy transition, warnings about the fiscal cost of subsidies, the now-routine observation that Europe remains exposed to external supply shocks. But one phrase, delivered almost in passing, captured a problem that Europe has been reluctant to confront directly.

Industrial electricity prices in some EU member states, she noted, are more than three times higher than in others - a startling outcome, in her words, for a supposedly single market.

That sentence is the subject of this week’s analysis. Europe has built one of the most integrated markets in the world for goods. A product made in Portugal moves to Finland without tariffs, customs formalities, or duplicate approvals. But electricity - the input on which the entire modern economy runs - does not move that way. It is trapped, to a substantial degree, behind national borders, in a patchwork of national markets connected by an incomplete grid. The result is that the price of the most fundamental industrial input can vary by a factor of three across a market that calls itself single. Understanding why, and what it costs, is to understand one of the largest pieces of unfinished business in the entire European project.

The single market in goods works because goods can physically move and because the rules governing them have been harmonised or mutually recognised. Electricity is different in a way that turns out to be decisive: it can only move where the wires go, and the wires between European countries are insufficient.

Electricity flows across borders through interconnectors - the high-capacity transmission links that connect national grids. Where interconnector capacity is adequate, electricity can flow from where it is cheap and abundant to where it is expensive and scarce, equalising prices and using generation efficiently. Where interconnector capacity is inadequate - which is the case across much of Europe - electricity cannot flow freely. Cheap power generated in one country cannot reach a neighbour where prices are high, because there is no wire to carry it, or the wire that exists is already full.

The consequence is precisely what Georgieva described. When electricity cannot cross a border, a local shortage produces a local price spike, while cheaper electricity elsewhere in Europe goes to waste for want of a connection. The market fragments not because of tariffs or regulations in the ordinary sense but because of a physical absence - the missing infrastructure that would allow a single market in electricity to function as a single market in goods already does.

This is compounded by the uneven geography of European renewable energy. The wind is in the north; the sun is in the south. A Europe serious about renewable power is a Europe that must move electricity across long distances - from northern wind to southern demand, from southern sun to northern industry. Without the grid to carry it, the renewable transition itself runs into a physical wall: generation in the wrong place relative to demand, with no way to connect the two.

The cost of this fragmentation is not abstract. It shows up in the competitiveness of European industry, and the numbers are substantial.

European industrial users have, in recent years, paid two to three times more for electricity than their competitors in the United States and China. This is a direct competitive disadvantage in every energy-intensive activity - and the category of energy-intensive activity is broader than it first appears. It includes the obvious heavy industries: chemicals, steel, aluminium, cement. But it increasingly includes the computation-intensive technologies that will define the coming economy. The data centres that train and run artificial intelligence are enormous consumers of electricity, and the price of power is becoming a determinant of where the AI economy is built.

The longer-term damage is captured in a single estimate that the IMF is preparing to publish: over the past two decades, the doubling in real terms of European industrial energy prices is estimated to have reduced value added in energy-intensive industries by roughly 18 percent. This is the cumulative cost of expensive, fragmented energy - a steady erosion of the industrial base, sector by sector, as high power prices made European production progressively less competitive than production elsewhere.

And the fragmentation imposes a second cost beyond the high average price: volatility and dispersion. European energy price volatility has risen sharply since 2021, and the threefold dispersion of prices within the Union compounds the problem. Both volatility and dispersion hold back investment, because investment requires predictability, and a market where the price of a fundamental input is both high and unpredictable and varies enormously by location is a market that discourages the long-term commitment of capital.

Europe’s Energy Fragmentation - Key Numbers

EU industrial electricity prices: 2-3 times higher than US and Chinese competitors
Price dispersion within the EU: industrial prices more than 3 times higher in some member states than others
Estimated damage: roughly 18% reduction in energy-intensive value added over two decades
Energy import dependence: still over 50% of needs, broadly unchanged since 1990
Energy intensity of output: cut by more than 40% over 30 years
Potential gain from completing planned interconnectors: more than 10% lower average EU electricity prices

The constructive part of the diagnosis is that the problem has a known solution and a measurable payoff. The solution is to build the missing grid - to expand the interconnectors that allow electricity to flow across borders - and to pair that expansion with continued growth in solar, wind, and nuclear generation.

The IMF’s analysis suggests that completing the interconnectors already planned, combined with further expansion of clean generation, could lower average EU electricity prices by more than 10 percent. The gains are largest precisely where the missing infrastructure currently binds most tightly - where interconnector capacity constraints are forcing prices apart that an integrated market would bring together.

There is a political obstacle that has slowed this for years, and it is worth naming because it explains the delay. Countries that would export electricity through new interconnectors sometimes fear that selling power to a neighbour will raise prices for their own consumers and provoke domestic political backlash. This fear is understandable, but the evidence undercuts it: in many cases, prices have fallen in both the exporting and the importing country after an interconnector is built, because deeper, better-connected markets match supply and demand more efficiently across time and location. Where genuine distributional concerns remain, they can be addressed by redistributing part of the export revenue to the public - a far smaller problem than the one created by leaving the grid fragmented.

The reason this matters beyond the energy sector is that energy integration is not a self-contained question. It is, as Georgieva framed it, a key support for a better single market - and the gains from completing the single market as a whole are among the largest available to Europe. The IMF’s estimate of what deep single-market reforms could deliver runs to an uplift in per capita income of 35 percent or more.

Energy is the input beneath everything else. A fragmented energy market does not only raise the cost of energy; it raises the cost of everything that uses energy, which is to say everything. The threefold dispersion in electricity prices is a tax on European industry, levied not by any government but by the absence of the infrastructure that would let a single market function as one. Completing the energy union is, in this sense, not a sectoral energy policy but a piece of the larger project of making the single market real - the same project that remains unfinished in services, and for the same underlying reason: the difficult, politically sensitive integration that the early decades postponed.

The first misunderstanding is to read European energy difficulties purely through the lens of the 2022 Russian gas shock - to see Europe’s energy problem as a geopolitical story about dependence on Russian supply, now substantially resolved. The dependence on Russia has indeed been broken, which is a genuine achievement. But the deeper, structural problem - the fragmentation of the internal energy market and the persistent gap in interconnection - long predates the war with Russia and remains largely unaddressed. The geopolitical crisis was acute and is passing; the structural fragmentation is chronic and endures.

The second misunderstanding is to assume that because Europe leads the world in climate policy and renewable deployment, its energy market must be correspondingly advanced as a market. The opposite is closer to the truth. Europe has been ambitious on generation - building enormous quantities of renewable capacity - while remaining timid on integration, leaving that renewable power stranded behind an incomplete grid. The result is the paradox of a continent that generates more clean electricity than ever and still pays among the highest and most dispersed industrial power prices in the developed world.

For American companies and investors, the practical implication is that European energy costs are a structural feature to be reckoned with, not a temporary disruption to be waited out - and that the location decisions which turn on energy prices should account for the possibility that European integration, if it finally proceeds, could narrow the gap. The fragmented grid is the problem. Whether Europe builds its way out of it is one of the more consequential questions for the continent’s industrial future.

Europe built a single market in which goods move freely and left electricity - the input beneath everything else - trapped behind an incomplete grid, so that the price of power can differ threefold across a market that calls itself single, at a cost measured in two decades of eroded industrial competitiveness.

Friday’s EuroTasteDaily Review brings the fragmented grid down to the level where it is actually felt - in the cost calculations of the energy-intensive businesses that pay the price of Europe’s missing interconnectors. Friday examines what a threefold price gap means for a company that competes across borders, why the Emissions Trading System is a quiet fiscal instrument as much as a climate one, and whether a crisis is, once again, the only thing that can move Europe to finish what it started.