Completing the EU Energy Market: Unlocking the Price Benefits of Renewable Electricity

by Giorgia Ravera

ABSTRACT

Europe’s electricity prices continue to rise, undermining industrial competitiveness and exacerbating energy poverty. While renewables have lowered wholesale prices by displacing fossil generation through the merit order mechanism, their full benefits are constrained by technical, structural, and regulatory barriers. This paper identifies key challenges limiting renewables’ impact on electricity prices, including dependence on gas-fired backup capacity, curtailments, and negative price episodes. It also highlights infrastructure and governance issues, such as opposition to interconnectors, investment biases among grid operators, and weak regulatory and financial frameworks for energy storage, alongside low electrification rates and outdated taxation structures. The paper concludes with six policy recommendations to enhance system efficiency and deliver lower electricity prices: improving clean energies and flexibility solutions’ participation in capacity markets, developing new consumers’ tariff structures, reforming energy taxation, revising CEF-E funding, establishing a European Independent System Operator, and strengthening the financial and regulatory framework to scale up energy storage deployment.

INTRODUCTION

Europe’s electricity prices are higher than in other regions and remain on the rise. In the first half of 2025, retail electricity prices averaged 29.3 € cents/kWh for households and 21.6 € cents/kWh for non-household consumers (Eurostat, 2025). This is about 62% (Figure 1) and 203% (Figure 2) higher compared to the same period in 2019, and 20% higher than in the US (Electric Choice, 2025).

High electricity prices hamper EU competitiveness and drive energy poverty across the EU. The European Central Bank estimates that a permanent rise of 10% in electricity prices could reduce employment in energy-intensive sectors by up to 2% (Bijnens et al., 2025). The Draghi report on EU competitiveness stressed the need to reform the energy sector to accelerate electrification and reduce electricity costs for industrial actors (Draghi, 2024). For European citizens, lower electricity prices would improve access to essential energy services and reduce energy poverty, which currently affects 50 million Europeans (Keliauskaitė et al., 2024).

Renewable energy sources, like solar, wind, and hydro, have the potential of lowering electricity costs through exerting downward pressure on wholesale electricity prices. Unlike natural gas and other fossil fuel sources, renewables have variable production costs close to zero, so when they operate, they are dispatched first on the wholesale market before other energy sources are considered, following the merit order mechanism. In markets where most of the demand is met by renewable energy, higher cost fossil fuel-based generation is displaced in the merit order, and the cost of electricity supply is minimised. For example, a recent report by EMBER revealed that Spain’s wind and solar growth has reduced the influence of expensive fossil generators on the electricity price by 75% since 2019 (Rosslowe & Petrovich, 2025). As a result, electricity prices in the first half of 2025 averaged 62 €/MWh, lower than the costs of generating electricity with gas (111 €/MWh on average) (2025).

While integrated renewable expansion can make electricity prices more competitive in the EU, there are several factors preventing these benefits from fully materialising, which this paper addresses. The first section highlights the market challenges stemming from the variability of renewable sources. The second section considers some of the main structural and policy issues further limiting the potential of wind and solar to lower costs. The final section provides policy recommendations addressed to EU and national authorities to tackle these challenges and fully unlock the benefits of renewables’ generation on European electricity prices.

FACTORS LIMITING RENEWABLES’ BENEFITS ON ELECTRICITY PRICES

MARKET CHALLENGES STEMMING FROM RENEWABLES’ VARIABILITY

The variability of renewable energies supply brings about numerous challenges to their integration into the European electricity system. Because the generation profile of renewables like solar and wind depends on local weather conditions, it is hard to modulate their porduction to supply needs. On average, solar PV electricity generation is at the highest during the central hours of the day and during the spring and summer months, while wind power produces more electricity in autumn and winter (Copernicus, 2023). However, as the graph below illustrates, load factor fluctuations are high, driving supply unpredictability (see Figure 3).

On one hand, high variability of renewable sources increases the need for thermal backup capacity during demand peaks. Dispatchable backup power is defined as “any device that provides instantaneous, uninterruptible power when the main power sources are not available or unable to meet demand” (Erdinc & Uzunoglu, 2010). Because the electricity system must maintain a constant balance between supply and demand, adequate backup capacity is essential to ensure grid stability and prevent blackouts, especially during episodes of Dunkelflaute (literally, “dark doldrum”; a term describing the simultaneous occurrence of darkness and lull in wind activity). In Europe, gas-fired generation still acts as the main source of backup capacity for the electricity system. In the six European capacity markets, which are power market elements in which asset owners are paid to make capacity available for a given period in the future, reliance on large fossil assets is particularly accentuated (AURORA, 2025). While clean technologies like renewables and batteries are not forbidden to access capacity markets, their participation is limited by strict availability requirements and restrictive de-rating factors, impeding their competitiveness compared to fossil assets (AURORA, 2025; European Commission, 2025b). So far, fossil technologies have received more than two-thirds of the €87 billion in capacity payments, with gas-fired assets accounting for about half of the funding (Bishop et al., 2025). Over the last decade, European countries have contracted around 30 GW of gas under the capacity mechanism, with contracts that extend beyond the target timeline for climate neutrality (Kyllmann, 2025b). With an average market price of 32.29 €/MWh under the Dutch TTF, maintaining fossil backup capacity is costly and exposes the system to market volatility (Trading Economics, 2025). Because capacity mechanisms are financed through levies and taxes on electricity consumers, this reliance ultimately weighs on households and businesses (Kyllmann, 2025a). Finding ways to replace gas and other fossil backup sources with low-carbon alternatives is therefore imperative.

On the other hand, oversupply of electricity in periods of low demand triggers the need for curtailments. Curtailing refers to the forced reduction of renewable power generation below its potential output to retain the balance between supply and demand (Beyond Fossil Fuels, 2025). In Europe, over 27 TWh of renewable electricity were curtailed between 2023 and 2024, with losses exceeding €7.2 billion across just seven countries (2025). As the Eurostat data projects EU curtailments to reach 310 TWh in 2040, finding solutions to minimize this trend is key to support the expansion of renewables. 

Misalignments in supply and demand also expose renewable energy producers in some markets to the phenomenon of negative prices. Negative prices occur when there’s a high renewable energy generation in moments of low and inflexible electricity demand. This creates a situation where generators must pay to feed their electricity into the system (Gruber & García, 2024). Although this may appear beneficial for consumers’ electricity bills, if demand remains inelastic to price variations, periods of negative prices place additional strain on system and grid management and complicate load balancing. The share of negative price hours is increasing across Europe, reaching 8-9% in some countries in the first half of 2025, up from 4-5% in 2024 (see Figure 4) (IEA, 2025b). While on the supply side the new Clean Industrial Deal State Aid Framework abolished feed-in tariffs that contribute to negative price formation and prohibited the granting of State aid during hours of negative prices, measures to enhance demand-side flexibility and align consumption with available supply remain essential to further reduce the effect of negative price episodes (European Commission, 2025c).

INFRASTRUCTURAL AND POLICY CHALLENGES 

On the demand side, the challenges faced by renewables are further aggravated by a stagnating rate of electrification. The Clean Industrial Deal set an electrification rate target of 32% by 2030. Yet, electrification has been plateauing at around 23% for the past two decades and electricity demand has seen modest increases after the 7.5% drop in 2021-2023 (Eurelectric, 2025b; IEA, 2025a). One of the key reasons for these trends is the fact that electricity across the EU is still taxed 1.4 times higher than gas (Eurelectric, 2025a). The 2003 Energy Taxation Directive, which established equal minimum excise duty on electricity and fossil fuels, has not been reformed yet, mainly due to political impasse. The absence of Directive reforms continues to send a negative incentive to MS to tax energy products in line with the needs of a decarbonized economy. 

Across Europe, interconnecting projects are being built to allow electricity demand to be traded at the cross-country level, yet they continue to attract opposition by Member States. In theory, grid interconnections bring numerous benefits to the system, including reducing overall system costs, avoiding curtailments, increasing security of supply, bringing wholesale prices closer together and, ultimately, lowering electricity prices for Europeans (Kyllmann, 2025b). Consequently, in its Regulation on the Governance of the Energy Union (2018/1999), the EU set an interconnection target of at least 15% by 2030 (European Commission, 2025a). Nonetheless, cross-border electricity trading might also increase network costs and weigh disproportionately on electricity bills in exporting countries, making the distribution of costs and benefits unequal among participants (Kyllmann, 2025a). It is on this ground that European governments have been vetoing the construction of some of the planned interconnectors. For instance, in 2024 the Swedish government rejected an application for a new interconnection project with Germany for fear of consumer prices spikes (Reuters, 2024). 

Furthermore, most of grid infrastructure projects today are designed to maximize capital gains over system efficiency. System operators in Europe are for the most part privately-owned for-profit entities, where remuneration for system operation and planning represents less than 10% of the holding company’s total revenue, and companies receive a regulated rate of return on capital expenditures (Batlle et al., 2025). As a result, under this ownership model there is a built-in incentive to favor CAPEX over OPEX-based solutions to grid congestion problems, which drives electricity prices up without maximizing existing capacity. Separating grid network planning from asset ownership would drive network efficiency while acting to keep grid investments below the €100 billion annually by 2050 estimated by ACER (2025). 

Finally, regulatory uncertainty and financial barriers continues to impede the development of energy storage systems like batteries. Building battery storage capacity to absorb excess electricity when the grid is saturated and release it during periods of undersupply is essential to address the variability challenges faced by renewables and reduce reliance on fossil-fuel generation. Yet, recent data from SolarPower Europe (2025) indicate a stagnation in battery energy storage market growth in 2024, along with a high concentration of installations in a limited number of Member States. A key obstacle to market expansion is the absence of clear energy storage targets beyond 2030and clear policies to deliver these targets. As of June 2025, no Member State had completed an assessment of its national flexibility needs, largely due to the delayed publication of a harmonised EU methodology (Energy Storage Europe, 2025). Addressing this gap is essential to send a positive investment signal to companies developing battery storage solutions in Europe. Equally important is to create a favorable financial environment for the upscaling of flexibility businesses. Nowadays investors and offtakers often impose strict collateral and credit requirements, such as multi-year cash reserves or performance guarantees, to mitigate perceived project and counterparty risks. These provisions tie up substantial capital that cannot be redeployed for construction or operations. As a result, project developers face higher financing costs and lower returns, which limits the bankability of storage projects and slows market growth. Overall, risk perceptions and financing norms have not yet evolved in line with the sector’s strategic importance, creating a mismatch between policy ambition and investment readiness.

POLICY RECOMMENDATIONS

STIMULATE CLEAN FLEXIBILITY OPTIONS UNDER THE CAPACITY MECHANISM 

To reduce reliance on fossil plants as backup capacity under the capacity mechanism, countries need to create favorable conditions for the full participation of clean technologies, like renewables and batteries, in these markets. Member States participating in capacity markets should lift the stringent requirements concerning minimum plant availability, minimum eligible capacities, long sustained delivery, and minimum bid sizes. One way of limiting the risk of administrative overload could be to enable participation of smaller producers through asset aggregation. Additionally, national authorities should revisit their de-rating approaches by allowing, for instance, the self-declaration of de-ratings for non-fossil assets, as in the current Belgian capacity market. Finally, Member States operating capacity markets should stimulate participation of clean generating assets at a cross-border scale. 

MOBILIZE DEMAND-SIDE FLEXIBILITY THROUGH TIME-VARYING ELECTRICITY PRICES 

Tariff schemes that expose consumers to real-time prices can encourage efficient demand-side behavior, incentivizing consumers to use and store electricity in times of abundance, and to reduce consumption during periods of constraint supply. Further mobilizing these schemes represents an effective solution to mitigate the impact of negative price hours in the European markets. National authorities and electricity retailers should develop supply contracts with dynamic price formulas like real-time pricing or time-of-use pricing, while still maintaining fixed retail price options for vulnerable consumers. As suggested by Heussaff (2024), time-of-use pricing is preferrable, as it balances ease of implementation, consumer risk aversion and flexibility incentives by shifting consumer prices between 2 or 3 pre-defined price levels only depending on the hour of the day. 

ENCOURAGE ELECTRIFICATION THROUGH REFORMING ENERGY TAXATION 

Revising energy tax structures is vital to accelerate end-use electrification and achieve the EU’s climate-neutrality objectives. The European Union should prioritise the publication of the long-delayed reform of the Energy Taxation Directive. The recast version should introduce energy-content and carbon-based minimum tax rates, granting reduced or zero rates for electricity from renewable and low-carbon sources, while progressively increasing taxes on fossil fuels according to their carbon intensity. It should also ensure consistent taxation across sectors to avoid distortions between electrified and fossil-based energy uses. Such a reform would strengthen investment signals for clean electricity, enhance industrial competitiveness, and steer consumption towards a fully decarbonised energy system.

SUPPORT INTERCONNECTION PROJECTS THROUGH ESTABLISHING A SOCIAL WELFARE FUNDING QUOTA UNDER THE CEF-E

While interconnection projects maximise overall welfare benefits in the European electricity markets, the share of costs and benefits is not always equally distributed among participating countries, driving resistance. To address unequal welfare allocations and support interconnection projects, the European Commission could reform the Connecting Europe Facility – Energy (CEF-E) to close the gap between the projects’ costs and the realistic level of cost recovery from network users. A Social Welfare Funding Quota under CEF-E should be introduced to partially compensate the losers from specific projects for their higher costs or negative effects on consumer prices, by covering a percentage of the welfare loss delta. This solution would lower the social cost of participating in the cross-border electricity trade, favouring Member States’ cooperation.

CREATE AN INDEPENDENT SYSTEM OPERATOR TO PLAN AND OPERATE ELECTRICITY NETWORKS

Today’s grid investments need to pivot away from the largely incremental, reactive, and CAPEX-based practices to fully reflect the speed and scale of the energy transition. To ensure that the electricity system planning is fully technology-neutral and grounded in robust analytical and modelling processes, the European Union should institute a European Independent System Operator (ISO), similar to the one envisioned by Heussaf and Zachmann (2025). Under an ISO regime, the national TSOs would maintain ownership over their electricity network infrastructure, but the responsibility for operating the interconnected European electricity transmission network would pass under centralised European control. To complement industry-led planning, the EU ISO would carry out pan-European needs assessments of network capacity and associated investments, based on a standardised, transparent and technology-neutral methodology. This would help to reduce regulatory bias towards capital-intensive investments and the predominance of national interests over European benefits. 

ESTABLISH A FINANCIAL AND REGULATORY FRAMEWORK TO SCALE UP ENERGY STORAGE

Batteries represent an essential tool to meet the system’s flexibility needs, support the grids system, and reduce renewables’ curtailment. It is thus paramount that Member States act quickly to apply ACER’s flexibility assessment needs methodology in their National Energy and Climate Plans, and provide clear energy storage targets beyond 2030. 

To drive a financial environment that supports the large-scale deployment of energy storage systems, the EU should reduce perceived investment risk and improve access to affordable capital. This requires targeted public instruments, such as guarantee schemes, performance insurance, and concessional financing through the European Investment Bank, to replace costly collateral requirements and unlock private investment. Standardised long-term contracts for flexibility and clear, multi-year revenue frameworks would enhance bankability and enable project securitisation. By aligning financial regulation, state-aid rules, and taxonomy criteria with the strategic value of storage, the EU can lower the cost of capital, shorten time-to-investment, and accelerate the scale-up of storage capacity needed for a resilient, decarbonised power system.

References

• ACER. (2025, March 26). Getting the signals right: Electricity network tariff methodologies in Europe ACER report on network tariff practices. ACER- European Union Agency for the Cooperation of Energy Regulators. https://www.acer.europa.eu/sites/default/files/documents/Publications/2025-ACER-Electricity-Network-Tariff-Practices.pdf
• AURORA. (2025). Capacity remuneration mechanisms in Europe. Beyond Fossil Fuels. https://beyondfossilfuels.org/wp-content/uploads/2025/01/202501_BFF_CRM-Report_.pdf
• Batlle, C., Barruso, M., Rodilla, P., & Canoyra, A. (2025, July 31). The (Hopefully) Enlightening Blackout in Spain: Questions and Lessons for the Future -. CEEPR. https://ceepr.mit.edu/workingpaper/the-hopefully-enlightening-blackout-in-spain-questions-and-lessons-for-the-future/
• Beyond Fossil Fuels. (2025, May 12). How Europe’s grid operators are preparing for the energy transition: A snapshot of electricity transmission system operator practices and plans. Beyond Fossil Fuels. https://beyondfossilfuels.org/2025/05/13/how-europes-grid-operators-are-preparing-for-the-energy-transition-a-snapshot-of-electricity-transmission-system-operator-practices-and-plans/
• Bijnens, G., Hutchinson, J., & Arthur, S. G. (2025, May 5). How enduring high energy prices could affect jobs. European Central Bank. https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20250505~86c88d726c.en.html
• Bishop, R., Böhmer, D., & Leicht, N. (2025, January 28). Capacity Remuneration Mechanisms in Europe: Implications For Climate Targets. Aurora. https://auroraer.com/resources/aurora-insights/market-reports/capacity-remuneration-mechanisms-in-europe
• CoopeEoliennes. (2020, July 21). Production éolienne du mois de décembre 2019. CoopEoliennes. http://coopeoliennes.free.fr
• Copernicus. (2023). Renewable energy resources. Copernicus.eu. https://climate.copernicus.eu/esotc/2023/renewable-energy-resources
• Draghi, M. (2024, September). The Draghi report on EU competitiveness. European Commission. https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en
• Electric Choice. (2025, October 24). Electricity Prices (kWh) by State. Electric Choice. https://www.electricchoice.com/electricity-prices-by-state/
• Energy Storage Europe. (2025, June). National Energy & Climate Plans: Overview of Energy Storage and Flexibility Targets. Energy Storage Europe. https://energystorageeurope.eu/publication/national-energy-climate-plans-overview-of-energy-storage-and-flexibility-targets/
• Erdinc, O., & Uzunoglu, M. (2010). Recent trends in PEM fuel cell-powered hybrid systems: Investigation of application areas, design architectures and energy management approaches. Renewable and Sustainable Energy Reviews, 14(9), 2874–2884. https://doi.org/10.1016/j.rser.2010.07.060
• Eurelectric. (2025a). ACER overestimates network costs for consumers towards 2050. Eurelectric - Powering People. https://www.eurelectric.org/news/acer-2050-prediction-of-higher-network-costs-for-consumers-is-flawed-says-eurelectric/
• Eurelectric. (2025b). Power Barometer 2025. Eurelectric. https://powerbarometer.eurelectric.org
• European Commission. (2025a). Electricity interconnection targets. European Commission. https://energy.ec.europa.eu/topics/infrastructure/electricity-interconnection-targets_en
• European Commission. (2025b, March 3). REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the assessment of possibilities of streamlining and simplifying the process of applying a capacity mechanism under Chapter IV of Regulation (EU) 2019/943, in accordance with Article 69(3) of Regulation (EU) 2019/943. EUR-Lex. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52025DC0065&qid=1741261561534
• European Commission. (2025c, April 7). Framework for State Aid measures to support the Clean Industrial Deal (Clean Industrial Deal State Aid Framework) C/2025/3602. Official Journal of the European Union. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:C_202503602
• Eurostat. (2025, April). Electricity price statistics. Ec.europa.eu. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Electricity_price_statistics
• Gruber, C., & García, A. (2024). Understanding ultra- low and negative power prices: causes, impacts and improvements . In Eurelectric. https://www.eurelectric.org/wp-content/uploads/2024/11/Eurelectric-explainer-on-negative-prices.pdf
• Heussaff, C. (2024, September 26). Decarbonising for competitiveness: four ways to reduce European energy prices. Bruegel | the Brussels-Based Economic Think Tank. https://www.bruegel.org/policy-brief/decarbonising-competitiveness-four-ways-reduce-european-energy-prices
• Heussaff, C., & Zachmann, G. (2025, February 12). Upgrading Europe’s electricity grid is about more than just money. Bruegel | the Brussels-Based Economic Think Tank. https://www.bruegel.org/policy-brief/upgrading-europes-electricity-grid-about-more-just-money
• IEA. (2025a). Electricity Mid-Year Update 2025. IEA. https://www.iea.org/reports/electricity-mid-year-update-2025/executive-summary
• IEA. (2025b). Prices: Trends in wholesale markets differ across regions – Electricity Mid-Year Update 2025. IEA. https://www.iea.org/reports/electricity-mid-year-update-2025/prices-trends-in-wholesale-markets-differ-across-regions
• Keliauskaitė, U., McWilliams, B., Sgaravatti, G., & Tagliapietra, S. (2024, October 23). How to finance the European Union’s building decarbonisation plan. Bruegel | the Brussels-Based Economic Think Tank. https://www.bruegel.org/policy-brief/how-finance-european-unions-building-decarbonisation-plan
• Kyllmann, C. (2025a, April 9). Crucial EU electricity market integration collides with member states’ worries of uneven benefits. Clean Energy Wire. https://www.cleanenergywire.org/factsheets/eu-electricity-market-integration-collides-member-states-uneven-benefits
• Kyllmann, C. (2025b, July 23). Q&A: Capacity mechanisms in Europe’s fossil-free electricity system. Clean Energy Wire. https://www.cleanenergywire.org/factsheets/qa-capacity-mechanisms-europe-electricity
• Reuters. (2024, June 14). Swedish government says no to new power cable to Germany. Reuters. https://www.reuters.com/business/energy/swedish-government-says-no-new-power-cable-germany-2024-06-14/
• Rosslowe, C., & Petrovich, B. (2025). Decoupled: how Spain cut the link between gas and power prices using renewables. In EMBER. https://ember-energy.org/app/uploads/2025/10/Decoupled-how-Spain-cut-the-link-between-gas-and-power-prices-using-renewables-PDF.pdf
• SolarPower Europe. (2025, May 7). European Market Outlook for Battery Storage 2025-2029 . SolarPower Europe. https://www.solarpowereurope.org/insights/outlooks/european-market-outlook-for-battery-storage-2025-2029/detail
• Trading Economics. (2025). EU Natural Gas TTF. Trading Economics. https://tradingeconomics.com/commodity/eu-natural-gas