Even though gas consumption in the European Union has been dropping, the fossil fuel continues to heavily determine electricity prices in Europe as coal-fired power plants are being phased out, EU watchdog ACER has found.
Last year, the EU consumed 24 TWh less natural gas than in 2023. But even though the share of power produced by burning gas dropped to 14%, down from 18% back in 2020, natural gas prices continue to set power prices 40% of the time, as per ACER’s annual monitoring report.
In practice, just 20% of gas capacity is used on a yearly basis, but during peak hours, that figure jumps to 52% because only gas is able to meet high demand – and gas’ grip on peak generation is only growing firmer. In 2023, gas fired power plants operated at just 42% of their capacity during peak hours.
Two trends are to blame, according to ACER: Europe’s “growing renewable capacity and the retirement of coal power plants”.
While overall demand for fossil fuels is down because of all the new solar panels and wind turbines, “coal plant retirements have reduced competition among conventional power sources, limiting the ability to switch between coal and gas”.
As a result, markets are “increasingly exposed to gas market fluctuations during periods when fossil-fired generation is required”, meaning in the evenings where demand is high and renewables produce little power.
ACER says, “the gap between midday solar oversupply and evening demand is growing”.
Gas is capitalising on that gap. And it shows on the balance sheets of gas-fired power plants.
In 2019, electricity from gas turbines sold for €49 per MWh on average. Last year, it sold for €104 per MWh.
The gas chokehold on prices is also visible on month-ahead markets, where the correlation between gas and electricity prices went from 0.82 to 0.86 within one year, while short-term correlation is falling.