How renewables can cut Europe’s energy bills and inflation

While the heatwave that recently swept across Europe is fading, energy bills in the EU keep getting hotter. As we saw in the first blog of this series, the US war on Iran and the closure of the Strait of Hormuz have once again exposed an undeniable reality: fossil fuel dependency is a threat to the EU - to its economy as much as to its climate.

Fossilflation is happening in front of our eyes, with higher global oil and gas prices pushing inflation towards 3% as of July 2026. But Europe’s energy affordability crisis is not simply the result of temporary geopolitical shocks. It is the result of a structural dependence on volatile fossil fuels.

And yet, the solution has been in front of us all along, too often presented as “just” a climate policy. An energy system built on renewables can deliver lower and more stable prices by design. It can make life more affordable, help European industries compete, decarbonise the energy system, and protect our health and the planet at the same time.

What makes renewables prices more stable than fossil fuels?

Unlike fossil fuels, renewable energy relies on resources, sun and wind, that are available more or less everywhere in the EU, even if with different levels of intensity. Oil and gas, by contrast, are concentrated in a few regions of the world and controlled by a limited number of producers and countries. That makes them vulnerable to both accidental and deliberate supply disruptions.

But the biggest difference is not only where the energy comes from. It is how its costs are structured. Fossil fuel power plants have to keep buying fuel for as long as they operate. This means their costs remain tied to global oil and gas markets, where prices can change minute by minute, moving with wars, pandemics, shipping disruptions, and even the words of world leaders. As long as Europe relies on fossil fuels, it remains exposed to that volatility.

Solar and wind work differently. Once built, they have very low and predictable operating costs. Low, because the fuel is free. Predictable, because their output can often be forecast through weather models and supported by long-term production contracts. In other words, renewables shift the main cost of energy away from volatile fuel markets and towards upfront investment.

It is true that renewables also come with dependencies, especially on imported technologies and components, including from China. But the inflation risk is very different. A disruption in imports of solar panels and relevant raw materials could raise the cost of new projects. It would not raise the cost of generating electricity from wind and solar farms that are already operating.

This is why solar and wind are now the cheapest sources of new electricity available. The average cost of generating a unit of electricity over a plant’s lifetime - known as the levelised cost of electricity, or LCOE - is much lower for renewables and has been falling rapidly. Between 2010 and 2024, the LCOE fell by 90% for solar PV and 70% for onshore wind, thanks to innovation, investment, and larger-scale deployment.

In the EU today, the LCOE for solar ranges between €24 and €62/MWh, depending on the member state. For wind, it ranges between €36 and €51/MWh for onshore and €61 and €95/MWh for offshore. Gas, by contrast, stands at around €109–181/MWh. The numbers are clear: producing electricity from the sun and wind is much cheaper than producing it from gas.

And this is already changing Europe’s electricity system. After a steep rise since 2022, renewables generated 47.2% of electricity in the EU in 2025, with solar and wind alone accounting for 30%. Fossil fuels, by contrast, accounted for just over 29.6%. This reflects not only the EU’s decarbonisation targets, but also a simple economic fact: investing in these technologies has become increasingly profitable.

How wind and solar lower electricity prices

This growing deployment of renewables is already pushing electricity prices down. In a recent report, Positive Money Europe estimated that between 2023 and 2025, after EU energy prices had risen sharply following Russia’s war on Ukraine, solar and wind reduced wholesale electricity prices by an average of 24.2%.

To understand why renewables lower prices, we need to look at how the EU electricity market works. Under EU rules, the electricity market follows a merit-order system. In simple terms, the cheapest sources of electricity are used first, while the most expensive power plant needed to meet demand sets the final market price.

Renewables have very low operating costs and so they enter the market first. They are followed by other sources, including nuclear, gas, and coal, which are usually more expensive.

This means renewable energy lowers prices in two complementary ways. First, when more renewable electricity enters the system, it pushes more expensive gas and coal plants out of the market. Even when gas still sets the final price, renewable generation can push the most expensive gas plants out, so that a cheaper gas plant sets the price instead. The result is lower wholesale electricity prices.

Second, when renewable sources are enough to cover total demand, they can effectively set the marginal price themselves. Their variable costs are close to zero and so this can bring prices down significantly.

But this also shows why Europe’s electricity system remains vulnerable. Gas is no longer the EU’s main source of electricity generation, but it still sets the price during many hours of the day, especially when renewable generation is not enough to meet demand. And because, as we saw in the first blog, gas prices are highly volatile, this volatility is transmitted to the whole electricity market. In technical terms, electricity prices have not yet fully decoupled from gas prices.

This is the key point: renewables do not just add cheaper electricity to the system. At sufficient scale, they reduce the number of hours in which gas sets the price. The more often this happens, the more Europe can weaken the link between fossil fuel volatility and electricity prices.

That is why the price-lowering effect of renewables depends heavily on how much wind and solar are already in a country’s electricity mix. The contrast between EU member states makes this clear. In Spain, where solar and wind power almost doubled between 2016 and 2025, wind and solar reduced wholesale electricity prices by 35.6%. 

The effect is also non-linear: as renewable generation increases, prices fall faster. In France, increasing renewable penetration from 10% to 20% reduces prices by roughly 16 percentage points, while an increase from 25% to 35% leads to a much larger reduction of about 45 percentage points. In Italy, by contrast, where gas still covers around 50% of electricity generation, prices have fallen by only 11.2%.

But more renewables alone is not enough. Another key factor is storage and flexibility: the technologies and systems that allow electricity to be consumed at a different time from when it is produced.

This matters because solar and wind are weather-dependent. They depend on the weather and, in the case of solar, the time of day. At night, when no solar power is feeding the grid, electricity prices can rise sharply and gas can come back in as the price-setter. But if batteries store excess electricity generated during the day, that power can be used later, reducing price spikes and making the system more stable.

So the policy lesson is clear: Europe needs more renewables, but also the grids, storage, interconnectors, and demand flexibility that allow renewables to replace gas more often. That is how Europe can move from temporarily lowering electricity prices to structurally stabilising them.

The investment gap Europe still needs to close

It all comes down to this: the more solar and wind the EU deploys, the more electricity prices can fall and stabilise. Renewable energy is not just a decarbonisation strategy. It has a multiplier effect for the public interest: less volatility, less public money spent on emergency fixes, more energy sovereignty, stronger industrial competitiveness, and more affordable lives for Europeans.

But this transition will not happen fast enough on its own. If Europe wants renewables to lower bills and reduce fossil fuel dependence, it needs to deploy them at speed and at scale. That requires public investment, targeted policy, and a financial system that supports the build-out of clean energy.

At the moment, Europe is still far from that point. The EU Clean Energy Investment Strategy, launched by the European Commission in March 2026, estimates that annual energy-system spending must rise to about €660 billion annually by 2030, and €695 billion between 2031 and 2040

Finance is already a major obstacle. According to a European Investment Bank survey, access to finance is the main barrier to investment for cleantech firms, with 30% reporting it as a major obstacle — more than twice the share observed among firms more broadly.

This matters because renewables are cheap to run, but expensive to build. Most of their costs come upfront: planning, permits, equipment, installation, grid connection, and storage. Once built, the fuel is free. But before that point, someone has to finance the investment.

That makes the cost of capital decisive. Higher interest rates hit renewable projects harder than fossil fuel projects because clean technologies are more capital-intensive. Raising interest rates from 2% to 6% increases the LCOE of solar-plus-storage by 33% and wind by around 24%, but only 3.7% for gas.

In other words, expensive money makes cheap energy harder to build. It risks slowing down the very investments that would protect Europe from future fossil fuel price shocks.

Conclusion

If Europe wants lower bills, stronger industry, and protection from future fossil fuel price shocks, it cannot treat renewable investment as optional or purely environmental. It must treat it as critical price-stability infrastructure. That means using all available tools, including monetary policy and public finance, to accelerate the shift away from fossil fuels.

In the next blogs, we will look at how this can be done, and what central banks, especially the ECB can do to support the green transition while protecting the EU economy from price volatility.