Gas and power correlation weakens as carbon prices reshape winter dynamics

Gas and power correlation weakened significantly during the 2025/26 heating season, raising questions about whether the shift is structural or temporary.

The correlation between TTF and power prices weakened significantly through this heating season, falling below the 50% threshold. But is this really a structural change or just a temporary hiccup?

TTF and German power prices displayed a strong correlation in recent years, with gas often acting as the marginal, price-setting fuel in the European merit order system.

The correlation between TTF and German power prices averaged at around 70% through the 2024/25 heating season, highlighting the crucial role of gas in European electricity pricing dynamics.

The correlation between the two weakened to just 45% over the 2025/26 winter season.

The key driver behind this seems to be the decorrelation between EU carbon prices and TTF, which is naturally reducing the TTF vs power price correlation.

While TTF prices fell by 30% compared to the previous heating season, EU carbon prices were up by around 12% year-on-year, partly offsetting the decline in power generation costs. Consequently, German power prices remained practically unchanged compared to the previous heating season, averaging at just over €100/MWh.

In fact, gas-based generation costs (TTF + EUA) remain closely correlated with German power prices at around 65%…

The future correlation between TTF and German power prices will partly depend on what happens with TTF vs carbon prices. While the outlook for TTF is definitely bearish over the medium term, carbon prices have been rather bullish so far from a fundamentals perspective.

The key question is whether there could be a policy shift towards carbon pricing, as suggested by recent comments from top politicians.

What is your view? How will the TTF vs German power correlation evolve? And what could happen on the TTF-EUA front? Three-way relationships are usually complicated, even for commodities.

Source: Greg MOLNAR (LinkedIn)