Energy Transitions in Europe – Role of Natural Gas in Electricity Prices

The post-pandemic surge in energy prices in Europe, exacerbated by the consequences of the Russia-Ukraine war, has intensified a critical debate over EU energy and climate policy: to what extent are variable renewable energy, namely wind power and solar PV, versus fossil fuels impacting electricity markets and prices? Using econometric analysis and European open power system data between 2015-2019, we quantify the role of fossil-fuelled vs. low-carbon electricity generation in shaping wholesale electricity prices in Europe. We find that, despite a declining share in electricity generation, fossil fuels are still the main power plants “at the margin” and set power prices in Europe about 66% of the time whilst generating only 37% of electricity per year. Energy transitions in Europe have shifted dependency away from coal toward natural gas as the main electricity price setter, making European electricity prices dependent on natural gas prices more than ever. As natural gas is mostly imported to Europe, this exposes electricity prices to the geopolitical risks of gas supply, as well as the economic risks of currency exchange and natural gas price volatility. We discuss potential solutions to these issues