TY - JOUR
T1 - The role of natural gas in setting electricity prices in Europe
AU - Zakeri, Behnam
AU - Staffell, Iain
AU - Dodds, Paul E.
AU - Grubb, Michael
AU - Ekins, Paul
AU - Jääskeläinen, Jaakko
AU - Cross, Samuel
AU - Helin, Kristo
AU - Castagneto Gissey, Giorgio
N1 - Funding Information:
B.Z. acknowledges the support from the International Institute for Applied Systems Analysis (IIASA) , and the RE-INVEST project, Aalborg University, Denmark for its contribution. G.C.G. acknowledges the financial support from Ofgem for the ACE project ( Con-Spec-2018-006 ). I.S. acknowledges support from the Engineering and Physical Sciences Research Council for the IDLES programme ( EP/R045518/1 ). P.E.D. acknowledges research support from the EPSRC and InnovateUK via the project ‘The value of interconnection in a changing EU electricity system’ ( EP/R021333/1 ), which is part of the ‘Prospering from the Energy Revolution’ Industrial Strategy Challenge Fund.
Publisher Copyright:
© 2023 The Author(s)
PY - 2023/11
Y1 - 2023/11
N2 - 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.
AB - 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.
KW - Cross-border power transmission
KW - Day-ahead power market analysis
KW - Energy market coupling
KW - Energy system models
KW - International energy trade
KW - Liquified natural gas (LNG)
KW - Solar photovoltaic (PV) and wind energy
KW - Variable renewable energy
UR - http://www.scopus.com/inward/record.url?scp=85172226551&partnerID=8YFLogxK
U2 - 10.1016/j.egyr.2023.09.069
DO - 10.1016/j.egyr.2023.09.069
M3 - Article
AN - SCOPUS:85172226551
SN - 2352-4847
VL - 10
SP - 2778
EP - 2792
JO - Energy Reports
JF - Energy Reports
ER -
