European electricity prices remain structurally linked to gas markets, with TTF price movements continuing to drive power price volatility across key markets such as Germany and Italy. Recent geopolitical tensions, including disruptions to LNG flows, have reinforced how gas still sets marginal electricity prices, embedding global risk directly into European power markets.
Despite significant growth in renewable energy capacity across Europe, electricity pricing mechanisms continue to be shaped by gas-fired generation. Under the current marginal pricing model, the most expensive fuel—often natural gas—sets the wholesale electricity price, even when cheaper renewables dominate the generation mix. This structural linkage has prevented consumers from fully benefiting from low-cost renewable power.
The Institute for Energy Economics and Financial Analysis (IEEFA) highlights that this dependency exposes European electricity markets to external shocks. Volatility in global gas markets—driven by geopolitical tensions, supply disruptions, and LNG competition—translates directly into higher and more unstable electricity prices. The 2022 energy crisis demonstrated how quickly gas price spikes can ripple across power markets, increasing costs for industries and households alike.
Although policymakers have introduced measures to cap prices and expand renewables, these interventions have not fundamentally altered the pricing mechanism. As long as gas continues to set marginal prices, electricity markets will remain vulnerable to geopolitical developments beyond Europe’s control.
To address this structural issue, experts suggest reforms such as decoupling electricity prices from gas, expanding long-term contracts for renewable energy, and enhancing grid flexibility. Without such changes, Europe risks prolonging a system where electricity prices are disproportionately influenced by fossil fuel markets, undermining energy security and the transition to a stable, low-carbon future.
source: IEEFA
