The recent escalation of the Middle East conflict has once again highlighted a structural vulnerability in Europe’s energy system: its high dependence on imports. More than 50% of the energy consumed in Europe comes from abroad, and nearly 90% of its gas is imported—increasingly in the form of liquefied natural gas (LNG), which competes in global markets.
This exposes the region to any international disruption. When global markets tighten, prices are quickly transmitted to Europe, especially in the electricity system.
“Gas still tends to set the marginal price. When gas prices rise, electricity follows,” said Marin Gillot, analyst at Strategic Perspectives.
The mechanism is linked to the functioning of the European wholesale electricity market under the merit order principle. Technologies are dispatched from the lowest to the highest cost, and the last plant required to meet demand sets the price for the entire system.
This design ensures efficiency under normal conditions and sends clear investment signals towards low-cost technologies such as renewable energy. However, when gas enters the equation, its cost is ultimately passed through to the entire electricity system.
The key lies in how often this occurs. In systems where gas plays a structural role, such as Italy, it sets the price in around 89% of hours, creating direct exposure to international volatility.
By contrast, in Spain, the pattern is different: gas sets the price in only about 15% of hours, significantly limiting the impact of external shocks.
“Where gas frequently sets the price, the impact is immediate. Where it does not, it is much more limited,” Gillot explained.
Renewables, electrification and market signals
The difference between the two systems is explained by the share of renewable energy. In recent years, Spain has added more than 40 GW of wind and solar PV capacity, structurally reshaping its power mix.
This growth is reflected in demand coverage: in the first half of 2025, wind and solar accounted for around 46%, compared to 29% in 2019. As a result, the operational space for gas in the system has been reduced.
The shift is also visible in price formation. The share of fossil fuel technologies acting as price setters fell from 75% to 19% over the same period.
“Gas is still present, but it sets the price far less often,” Gillot noted.
This gradual decoupling between gas and electricity not only reduces volatility but also begins to generate competitive advantages. Systems with lower exposure to fossil fuels offer more stable electricity prices, which favours industrial investment in sectors such as green hydrogen, steel and batteries.
In this sense, renewable energy becomes an economic tool as well as an energy solution. Stable electricity costs are increasingly a key factor in attracting new industries.
However, capturing these benefits requires a comprehensive system approach. The expansion of renewables must be accompanied by grid infrastructure, battery storage, demand-side management, and the electrification of end uses such as heating and transport.
Despite these advances, economic signals still move in the opposite direction. In the European Union, electricity is taxed on average at twice the rate of gas. In some countries, this difference is even greater: three times in Germany, six times in Belgium and up to fourteen times in Croatia.
This directly impacts consumption and investment decisions. When electricity is relatively more expensive, the adoption of technologies such as heat pumps or electric vehicles is delayed, and industries have fewer incentives to electrify processes.
“Rebalancing taxes would immediately improve the economics of electrification,” Gillot said.
In this context, fiscal policy emerges as one of the few instruments with immediate impact. Adjusting these signals would help accelerate electrification, reduce gas demand and strengthen the deployment of clean technologies.
Aligning taxation with electrification would not only reduce exposure to international volatility in the short term, but also connect short-term relief with greater long-term energy security.
