Towards Cheaper Electricity - Moving Europe from Gas to Renewables

The European Union (EU) remains vulnerable to fossil fuel price volatility and its negative implications for energy security, inflation, and competitiveness. In the current context of increased geopolitical volatility, the rapid expansion of renewable energy, particularly wind and solar, has emerged as a structural shift in most European countries. 

A growing literature shows the role that renewable energy plays in displacing high-cost fossil fuel generation out of the electricity mix, and, in that way, exerting downward pressure on wholesale electricity prices. Building on this, we provide new cross-country evidence for a sample of euro area electricity markets using high-frequency data. We estimate that the deployment of wind and solar reduced wholesale electricity prices by an average of 24.2% over the period 2023–2025 across the countries analysed. These effects are nonlinear and increase with renewable penetration, reflecting stronger price impacts at higher levels of deployment.

However, the decoupling of electricity prices from fossil fuel costs remains incomplete in most European electricity markets. Therefore, natural gas continues to act as the marginal price setter during most of the time. As a result, electricity prices remain sensitive to fossil fuel shocks, particularly during periods of low renewable generation.

Two key implications follow from these findings. First, in countries with low renewable energy penetration, accelerating the deployment of wind and solar is a low hanging fruit to reducing wholesale electricity prices and vulnerability to fossil fuel shocks. In countries with already high renewable penetration, scaling up flexibility resources is key to sustain further price reductions and enable further decoupling from fossil fuel shocks. As we show, wind and solar deployment makes the economics of flexibility resources highly  attractive, facilitating the next stage of decoupling.

Ultimately, strengthening the interaction between renewable energy, flexibility, and electrification can generate two mutually reinforcing feedback loops. Greater deployment of wind and solar incentivises the deployment of flexibility resources, which, in turn, enable higher levels of renewable integration, further reinforcing price reductions. Second, this price reduction incentivises electrification across sectors. Rising electricity demand creates more room for renewable deployment at the same time that it decouples the electrifying sectors from fossil fuels.

As these dynamics are key to strengthening Europe’s resilience to fossil fuel shocks, we argue policymakers must prioritise accelerating the deployment of renewable energy, flexibility resources, and electrification.

This Positive Money Europe new report proceeds as follows. Section 2 outlines recent developments in European electricity markets. Section 3 presents the empirical analysis of the impact of wind and solar on wholesale electricity prices. Section 4 discusses policy challenges and the way forward, and the final section concludes.

Read our full analysis below.