Europe’s Green Power Revolution Softens Iran Energy Price Shock

The Tricastin Nuclear Power Plant, operated by EDF, in Saint-Paul-Trois-Chateaux, France. Photo by Nathan Laine /Bloomberg

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(Bloomberg) — Europe’s power market is facing its first serious geopolitical stress test since the 2022 energy crisis — and, so far, it’s holding up.

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German and French prices have been much more resilient than natural gas to the turmoil caused by the war in the Middle East, declining last week despite a surge in oil. High energy prices four years ago caused a deep inflationary shock that lasted years, but this time the continued investment in solar panels and wind turbines is helping to blunt any major price shocks. 

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Contracts remain a fraction of the levels seen after Russia cut pipeline flows in the last crisis, when power costs spiraled and forced governments into emergency interventions. This time, the system looks better prepared.

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“The electricity market is significantly more diversified than the oil market and can therefore better withstand a supply constraint of oil or gas,” said Morgane Trieu Cuot, Alpiq Holding AG’s interim trading head.

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Higher oil and gas prices are adding to inflationary pressure, with the EU warning its measure could exceed 3% this year if the war in the Middle East drags on. Electricity prices, however, remain far lower than they were four years ago, a buffer that could help limit the need for further rate hikes.

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At the height of the last energy crisis, cuts to Russian pipeline supplies culminated in the Nord Stream explosions in September 2022 and sent gas prices to record levels just as peak demand was approaching. Now, solar output is beginning its seasonal ramp-up after the winter lull, while a boom in new installations is steadily increasing its share of the grid.

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“What we’re seeing now is the energy transition in motion,” said Jorge Martinez, chief growth officer at renewable energy producer Nadara. “Even as gas prices jump in response to geopolitical tensions, Europe’s growing solar and renewable capacity is helping cushion the blow.” 

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Wind generation is also rebounding after a long period of below-normal output. In addition, France’s nuclear fleet — a key pillar of Europe’s power market — is on a much stronger footing than during the last energy crisis, adding more supply to the grid.

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Renewables not only lower average electricity prices — they also damp price spikes, Rabobank said. Without renewables — and the seasonal drop in demand — European electricity prices would already be about one-third higher, the bank said in a report. 

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Energy costs were already a key worry for policymakers, with power prices in the region far higher than in the US and China. 

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European power contracts were more expensive than current levels as recently as January, when higher carbon prices and the colder-than-normal winter drove up demand. But on the back of the recent gains, EU leaders are meeting on Thursday to discuss the market and how to shield its industry from the overall high prices. European Commission President Ursula von der Leyen is due to outline options to lower power costs in a letter to the heads of government before their gathering.