Executive summary

The document analyzes the five-decade structural link between fossil fuel markets and European electricity prices. Despite changes in generation mix and market design—from regulated monopolies to liberalized markets—electricity prices remain dictated by the fuel cost of the "marginal" unit in the dispatch stack. It concludes that while renewables lower average prices, they do not automatically eliminate price volatility as long as gas remains the primary provider of flexibility.

Key points:

1. Five shocks, five decades: A brief anatomy

Identifies five major electricity price crises since 1973 (Arab oil embargo), 1979 (Iranian Revolution), 2005-08 (commodity boom), 2021 (post-Covid gas tightening), and 2022 (Russia-Ukraine war). Each shock originated outside the power sector but was transmitted through the fuel costs of specific power plant categories.

2. The structural link between fuel markets and electricity prices

Explains marginal cost pricing: electricity prices are set by the most expensive unit required to meet demand. Since thermal variable costs are dominated by fuel prices, electricity prices are "anchored" to the upstream fuel markets of whichever technology is marginal at the time.

3. How market design changed the speed, visibility, and distribution of shocks

Compares two regimes: Regulated monopolies transmitted prices slowly through administrative tariff adjustments. Liberalized markets transmit prices immediately and automatically. Liberalization did not resolve the structural dependency but shifted risks from utility balance sheets to consumers.

4. Renewable energy and price volatility

Highlights a paradox: 2022 saw the highest renewable penetration and record-high prices. While renewables lower average prices (merit-order effect), they concentrate gas-fired generation as the marginal provider in fewer but more extreme hours, increasing price sensitivity to gas shocks.

5. A pattern of shifting vulnerabilities

Transition policies often shift dependency from one fuel to another (e.g., moving away from oil increased gas dependency). Each policy response to a crisis contains the seeds for the next vulnerability if marginal flexibility sources are not diversified.

6. Conclusion

Decarbonization changes the structure of price volatility rather than eliminating it. Achieving long-term price stability requires parallel investment in low-carbon flexibility (storage, nuclear, demand response) to displace gas from the marginal position.

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