The indicator External costs of electricity production is used for the assessment of costs; with regard to the level of environmental and energy taxes, it is assessed to what amount the final prices of energy reflect the environmental costs. External costs are generated in production processes as negative effects influencing economic, social and environmental systems. In practice, there are several methods and methodologies of calculating external costs of electricity production. They differ in their manner of assessment, definition and selection of environmental and other influences, assessments of specific cost impact, etc. In literature, external costs are also referred to as externalities or social marginal costs.

Electricity production has a huge impact on the environment and human health; however, the impact is different with regard to the method and location of electricity production. Prices of electricity production mainly do not include the damage caused by electricity production; therefore, external costs of electricity are generated.

The calculations of external costs of electricity production clearly indicate that external costs of electricity production in the period 1990–2007 decreased significantly, despite the increase in electricity production. It is estimated that in Slovenia in 2007 external costs of electricity production amounted from 2.6 to 7.1 €cent/kWh, which is more than what these costs represented on average in the EU-25 in 2004 (1.8 – 6.0 €cent/kWh). External costs in Slovenia are higher due to a high share of electricity production from coal.

The level of external costs of electricity production in Slovenia is largely determined by SO₂, NO_x and VOC emissions that influence human health and ecosystems, which indirectly also have an influence on higher expenses in health care and agriculture that are supported by the entire society. The damage caused by GHG emissions also plays a significant role in Slovenia. However, caution is necessary in the assessment of the impact of GHG emissions, since due to the uncertainty of climate change, the probability of their impact as well as the assessment of such an impact from an ethical and economic point of view is highly questionable in this assessment.

Total external costs of electricity production in Slovenia are dependent upon several factors: the structure of sources of electricity production, efficiency of electricity production and location of production units. In Slovenia, one third of electricity is produced from coal, while the efficiency of electricity production in thermal power plants is lower in comparison with such units in the EU; furthermore, the production units are located in the direct vicinity of urban settlements.

According to individual energy resources, electricity production from coal and liquid fuels has the highest external costs. It is estimated that in 2007 the external costs of electricity production from coal amounted from 4.6 to 16.2 €cent/kWh, and the external costs of electricity production from liquid fuels (heating oil, residual fuel oil, liquefied petroleum gas) from 3.9 to 13.4 €cent/kWh. In electricity production from natural gas, the external costs were estimated to be from 2.9 to 10.4 €cent/kWh, for nuclear energy 2.2 €cent/kWh, and for renewable energy sources up to 0.1 €cent/kWh. With regard to 1990, the external costs of electricity production decreased in all technologies. The biggest progress was made in the area of coal, primarily due to the desulphurizing of flue gases in Šoštanj thermal power plant and Trbovlje thermal power plant; the exchange between fuels did not have a significant impact on the reduction of external costs.

In Slovenia, the internalisation of external costs is not implemented completely due to numerous opposite interests, uncertainties and implementing problems. In Slovenia, the funds collected by excise duties or environmental taxes are still not intended for the prevention or recovery of external impacts. However, the opposite incentive price policy is being implemented, with smaller fiscal internalisation (taxation) or even with subsidies of some forms of energy (see EN22 Subsidies in the energy sector).

The internalisation of external costs is considered as a market mechanism, which can limit the environmental and spatial impact. For internalisation, it is necessary to financially evaluate the external influences and include them in the accounts in an appropriate manner. The principles 'the pollutant pays' and 'internalisation of external costs' are not always feasible, especially when in cases of contradiction between the economy and environmental impact the strategic reliability of supply and social-political aspects are in question (for instance, the abandonment of domestic coal in Trbovlje-Hrastnik mine, priority dispatching, etc.). Therefore, in these cases the second best approach within the meaning of economy theory was selected in Slovenia – financial incentives for renewable energy sources and technologies that reduce negative environmental impacts.

Until recently, electricity was not a subject for special taxation; the only tax burden for households was the value-added tax. In 2007, the excise duty on electricity was introduced in the amount of 1 €/MWh for households and 0.5 €/MWh for commercial use. On the basis of data on electricity prices for households, the tax burden from the value-added tax in 2007 amounted to 1.4 €cent/kWh, and including the excise duty to 1.5 €cent/kWh. With such a level of taxes, only partial internalisation of external costs of electricity was provided, which amounted from 2.6 to 7.1 €cent/kWh in 2007. The introduction of an excise duty on electricity contributed the first step to better internalisation; however, the level of excise duty remains too small so that the prices of electricity would better reflect the external costs of electricity production.