The energy crisis after the invasion in Ukraine has shown the extent to which Europe is vulnerable to the price fluctuations of fossil fuels and in particular, gas. Researchers from the University of Barcelona, the Universitat Oberta de Catalunya (UOC), the University of Concepción (Chile) and Queen's University Belfast (United Kingdom) have published a paper that examines the vulnerability of electricity prices in Europe to changes in natural gas prices. One of the main conclusions is that this vulnerability is higher in times of large changes in energy prices, such as, for instance, during the energy crisis that triggered the beginning of the invasion in Ukraine. This shows the need for a greater market vigilance during such episodes, associated with an increased market turmoil and volatility. In contrast, in times of stability and regularity, there is even a certain disconnection between electricity prices in Europe and natural gas prices.
"In the study, we refer to a vulnerable market when an abrupt change in the price of natural gas generates an abrupt change in the price of electricity in the local market. In other words, a market is vulnerable, according to this study, when these shocks from fossil fuels are transmitted and amplified in the local electricity market", say the co-authors of the article, Helena Chulià, professor at the UB's Faculty of Economics and Business, and Jorge M. Uribe, professor of Economics and Business Studies at the UOC and researcher with the UOC's FM2 group. To conduct this analysis, the researchers used a very flexible econometric model, which has allowed them to measure the relationship between natural gas and electricity prices dynamically.
Most vulnerable countries
The article ranks European countries according to the vulnerability of their energy markets in the period analysed, which runs from 1 January 2015 to 30 December 2022. Italy and the Netherlands appear as the most vulnerable markets, closely followed by the United Kingdom and Hungary. At the other end of the table, the Czech Republic and Germany emerge as the markets least vulnerable to natural gas price volatility, followed by Spain, Portugal and Belgium.
"Spain would be one of the least vulnerable markets, partly due to measures taken to limit the price of gas in the local market, but also thanks to its relatively diversified electricity generation matrix, which allows it to better assimilate market shocks, and thanks to the advantages provided by its geographical position when importing natural gas," the researchers explain. "On the other hand, the most vulnerable countries are vulnerable because of a mix of high dependence on fossil fuels for power generation and relatively low market integration," they say.
Tackling energy poverty
The research study argues that unexpected energy price shocks, which disproportionately affect the energy expenditures of vulnerable households, should be integrated into strategies to address energy poverty. Despite progress in the energy transition, a complete shift away from natural gas for electricity generation may not be feasible in the short term, and the study recommends considering subsidies and price caps for gas in wholesale markets, while carefully assessing their effects on the wider electricity market.
"Our results emphasize the importance of greater physical and economic integration of electricity markets, the need for a highly diversified generation matrix that includes greater contributions from renewables, and strategic planning to exploit the natural advantages of electricity generation in Southern Europe with renewable energies to reduce energy dependence on non-EU actors," the researchers conclude.
