Electricity Prices, Technology, Productivity, And Environmental Degradation: Implications For Financial Stability

The limited availability of fossil fuels and the financial pressure they create for countries that do not have the resources have led countries to search for new energy sources. In particular, renewable energy sources and therefore electrical energy obtained from these sources have been proposed in the literature as an alternative to fossil fuels. Thus, this study investigates the impact of electricity prices on financial stability in European Union countries from 2010 to 2021 using Driscoll Kraay fixed effects estimation. Financial stability is measured using the bank z-score, while productivity-intensive technology, environmental quality, and economic growth are included as control variables. The findings indicate that an increase in electricity prices negatively affects the bank z-score. In contrast, productivity-intensive technology positively impacts the bank z-score. Similarly, environmental quality contributes to an increase in the bank z-score. Additionally, economic growth enhances financial stability. Considering that rising electricity prices negatively affect financial stability, policymakers should encourage companies to produce electricity from renewable sources, such as solar panels or wind turbines. This can be supported through incentives such as tax breaks or low-cost financing for firms investing in on-site renewable energy systems. In this way, electricity price fluctuations will have less impact on companies and, in turn, help protect financial stability.