The role of natural gas in setting electricity prices in Europe
Author(s)
Type
Journal Article
Abstract
The EU energy and climate policy revolves around enhancing energy security and affordability, while reducing the environmental impacts of energy use. The European energy transition has been at the centre of debate following the post-pandemic surge in power prices in 2021 and the energy crisis following the 2022 Russia-Ukraine war. Understanding the extent to which electricity prices depend on fossil fuel prices (specifically natural gas) is key to guiding the future of energy policy in Europe. To this end, we quantify the role of fossil-fuelled vs. low-carbon electricity generation in setting wholesale electricity prices in each EU-27 country plus Great Britain (GB) and Norway during 2015-2021. We apply econometric analysis and use sub/hourly power system data to estimate the marginal share of each electricity generation type. The results show that fossil fuel-based power plants set electricity prices in Europe at approximately 58% of the time (natural gas 39%) while generating only 34% of electricity (natural gas 18%) a year. The energy transition has made natural gas the main electricity price setter in Europe, with gas determining electricity prices for more than 80% of the hours in 2021 in several countries such as Belgium, GB, Greece, Italy, and the Netherlands. Hence, Europe’s electricity markets are highly exposed to the geopolitical risk of gas supply and natural gas price volatility, and the economic risk of currency exchange.
Date Issued
2023-11-01
Date Acceptance
2023-09-09
Citation
Energy Reports, 2023, 10, pp.2778-2792
ISSN
2352-4847
Publisher
Elsevier
Start Page
2778
End Page
2792
Journal / Book Title
Energy Reports
Volume
10
Copyright Statement
© 2023 The Author(s). Published by Elsevier Ltd. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
License URL
Subjects
BENEFITS
BRIDGE FUEL
CLIMATE
Cross-border power transmission
Day-ahead power market analysis
Energy & Fuels
Energy market coupling
Energy system models
IMPACT
International energy trade
Liquified natural gas (LNG)
NORDIC POWER MARKET
RENEWABLE ENERGY
Science & Technology
SECURITY
Solar photovoltaic (PV) and wind energy
Technology
Variable renewable energy
Publication Status
Published
Date Publish Online
2023-09-25