The role of natural gas in setting electricity prices in Europe

Behnam Zakeri; Iain Staffell; Paul E. Dodds; Michael Grubb; Paul Ekins; Jaakko Jääskeläinen; Samuel Cross; Kristo Helin; Giorgio Castagneto Gissey

doi:10.1016/j.egyr.2023.09.069

The role of natural gas in setting electricity prices in Europe

Behnam Zakeri^*
, Iain Staffell
, Paul E. Dodds
, Michael Grubb
, Paul Ekins
, Jaakko Jääskeläinen
, Samuel Cross
, Kristo Helin
, Giorgio Castagneto Gissey

^*Corresponding author for this work

Research output: Contribution to journal › Article › Scientific › peer-review

49 Citations (Scopus)

241 Downloads (Pure)

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.

Original language	English
Pages (from-to)	2778-2792
Number of pages	15
Journal	Energy Reports
Volume	10
DOIs	https://doi.org/10.1016/j.egyr.2023.09.069
Publication status	Published - Nov 2023
MoE publication type	A1 Journal article-refereed

Funding

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.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 7 Affordable and Clean Energy
SDG 13 Climate Action

Keywords

Cross-border power transmission
Day-ahead power market analysis
Energy market coupling
Energy system models
International energy trade
Liquified natural gas (LNG)
Solar photovoltaic (PV) and wind energy
Variable renewable energy

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10.1016/j.egyr.2023.09.069Licence: CC BY

1-s2.0-S2352484723013057-mainFinal published version, 3.15 MBLicence: CC BY

Cite this

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title = "The role of natural gas in setting electricity prices in Europe",

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.",

keywords = "Cross-border power transmission, Day-ahead power market analysis, Energy market coupling, Energy system models, International energy trade, Liquified natural gas (LNG), Solar photovoltaic (PV) and wind energy, Variable renewable energy",

author = "Behnam Zakeri and Iain Staffell and Dodds, \{Paul E.\} and Michael Grubb and Paul Ekins and Jaakko J{\"a}{\"a}skel{\"a}inen and Samuel Cross and Kristo Helin and \{Castagneto Gissey\}, Giorgio",

note = "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 {\textquoteleft}The value of interconnection in a changing EU electricity system{\textquoteright} ( EP/R021333/1 ), which is part of the {\textquoteleft}Prospering from the Energy Revolution{\textquoteright} Industrial Strategy Challenge Fund. Publisher Copyright: {\textcopyright} 2023 The Author(s)",

year = "2023",

month = nov,

doi = "10.1016/j.egyr.2023.09.069",

language = "English",

volume = "10",

pages = "2778--2792",

journal = "Energy Reports",

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publisher = "Elsevier",

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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

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DO - 10.1016/j.egyr.2023.09.069

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SN - 2352-4847

VL - 10

SP - 2778

EP - 2792

JO - Energy Reports

JF - Energy Reports

ER -

The role of natural gas in setting electricity prices in Europe

Abstract

Funding

UN SDGs

Keywords

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