Electricity price: analysis of the European market and sustainable solutions

The price of electricity is one of the most discussed topics across Europe. It not only concerns families and businesses, but also directly affects the competitiveness of countries and the speed of the ecological transition. Behind every bill, there is a precise mechanism: that of the marginal price, adopted in the electricity markets of almost all EU member states.

Understanding how this model works and what limitations it currently shows is essential for interpreting the price fluctuations that in recent years have heavily impacted the European economy.

What is the price of electricity

The price of electricity in Europe does not correspond to the simple cost of production, but is formed in the wholesale markets, where supply and demand meet every day. Each country has its own electricity exchange, but the markets are interconnected, which means that the dynamics of one state also influence others.

The principle is common: a single price is set for each hour of the day, reflecting the cost of the most expensive source needed to meet the demand. This is where the marginal price comes into play.

How the marginal price system works

The marginal model establishes that the final price is determined by the last power plant activated to meet the demand at a given moment.

Let’s take an example: if in Central Europe the demand is 1000 MWh and the coverage comes partly from solar, wind, and hydro (low-cost) and partly from natural gas (more expensive), the final price will not be the weighted average, but will be set by the gas power plant. If it produces at 120 €/MWh, that will become the price for all energy sold during that hour, even if a good part was produced almost for free by renewables.

The role of natural gas in Europe

Gas plays a significant role in the energy mix of many European countries, although with differences:

• In nations like Italy and Germany, gas still represents an important share of electricity production.

• In other countries, such as France and Sweden, nuclear and hydroelectric reduce dependence on gas.

• In Northern Europe, offshore wind is rapidly expanding and starting to reshape the market.

However, if at a certain moment a gas plant needs to be turned on in a country, it conditions the price across the entire interconnected region. This is why the gas crisis of 2022 caused electricity prices to rise across the European Union, regardless of each country’s national mix.

Limits of the marginal system

The marginal model, born when fossil fuels dominated the market, today shows various limitations:

• Punishes renewables: even if they produce at very low cost, they are paid at the price of gas.

• Transmits instability: the volatility of natural gas immediately reflects on the price of electricity.

• Does not value transition: even in countries with high renewable production, the price remains tied to fossil sources.

These aspects have pushed several European states to call for a reform of the electricity market.

Towards a new European model

The European Union is discussing a revision of the system to make energy prices more stable and less dependent on fossil raw materials. Among the proposed solutions are:

• Greater integration of renewables with widespread storage systems.

• Long-term contracts (Power Purchase Agreements and Contracts for Difference) to stabilize the prices of renewables.

• Smart grid and digitalization to better manage energy flows in real time.

• Dynamic demand management to shift consumption during hours of greater availability of clean energy.

The benefits of a more modern system

If Europe can overcome the link between electricity and gas, the advantages will be significant:

• Economic: more predictable and competitive prices for families and businesses.

• Environmental: reduction of CO₂ emissions and acceleration of decarbonization.

• Strategic: reduced dependence on fossil fuel imports, especially from geopolitically unstable areas.

Conclusions on the price of electricity

The marginal pricing system has so far ensured the security of electricity supply in Europe, but today it is no longer enough. The experience of recent years has shown that the link to gas makes electricity too expensive and unstable.

Europe has a great opportunity ahead: to rethink the electricity market in a modern way, valorizing renewables and fully leveraging storage and intelligent management technologies. Only then will it be possible to offer citizens a fairer, more stable, and sustainable energy price, while strengthening the economic competitiveness and energy security of the continent.