Europe’s electricity prices remain structurally linked to gas, leaving markets exposed to geopolitical risks and price volatility.
A new analysis highlights how recent tensions, including the 2026 Iran war, have driven gas price spikes that quickly fed into power markets.
Rising gas prices have pushed electricity costs higher, particularly in Italy and Germany where gas often sets the marginal price.
Even without supply disruptions, market uncertainty has increased price volatility across Europe.
The universal pricing mechanism – which today the UK has decided to change – reflects how electricity markets operate, with the most expensive generation source meeting demand setting the overall price.
Gas-fired plants, despite generating only around 18-20% of EU electricity, still play a decisive role in price formation.
This influence is most visible during peak demand or low renewable output, when gas plants are called upon more frequently.
These periods often coincide with the highest electricity prices, amplifying the impact of gas costs on annual averages.
The relationship between gas and electricity prices varies across Europe depending on energy mix.
Countries like France and Spain, with strong nuclear and renewable capacity, see weaker links and more stable pricing.
In contrast, Italy relies heavily on gas for generation, while Germany uses gas and coal to balance intermittent renewables. This results in stronger price correlations and higher volatility in these markets.
Despite reduced dependence on Russian gas, Europe remains exposed to global LNG markets. LNG now accounts for around 48% of EU gas imports, tying prices to international demand and supply risks.
Expanding renewables alone will not fully address the issue due to grid constraints and curtailment challenges. Investment in grid infrastructure, storage and flexibility will be essential to reduce reliance on gas.
Until these structural changes are made, gas will continue to shape electricity prices, embedding geopolitical risk at the core of Europe’s energy system.
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