Europe’s electricity market reforms aim to stabilise spot and forward pricing markets

Europe’s energy markets are undergoing a seismic shift linked to the increased volatility of prices due to the energy transition and rising geopolitical tensions. 

The Russian invasion of Ukraine caused a structural shock to European energy prices and security by threatening gas supplies, adding urgency to the continent’s ambitions to electrify and shift to renewables. But energy from wind, solar and wave power creates an entirely different trading environment for energy prices and futures hedges. 

One of the major hurdles for renewable energy projects has been that they produce intermittent supplies, making it difficult for investors to put a price on costs and profits from a given project.  

On energy markets, the price volatility from the intermittent nature of renewables is causing a shift towards spot market trading. Energy is now frequently bought and sold for immediate delivery. But traditionally, the forward markets allowed energy traders to hedge against future price risks. This shift means that the relationship between forward and spot markets is changing, with future price risks now linked to the unpredictable fluctuations of spot prices.  Volatility and negative prices 

Europe has significant ambitions for electrification, and renewable energy is building its share of the energy market. According to the EU Commission, 46.9% of net electricity generated in the EU in 2024 came from renewable energy sources. Denmark had the highest share of renewables in its net electricity generation with 88.4%, coming mostly from wind, followed by Portugal (87.5%, mostly wind and hydro) and Croatia (73.7%, mostly hydro).¹ 

Wind and hydro power accounted for more than two-thirds of the total electricity generated from renewable sources (39.1% and 29.9% respectively). The remaining one-third of electricity came from solar (22.4%), combustible fuels (8.1%) and only around 0.5% from geothermal energy.² 

Despite this progress, encouraging continued investment in the large scale infrastructure projects necessary to keep boosting electrification is difficult – especially in a world where negative electricity prices exist. 

When there is a surplus supply of electricity on a grid and demand is low, power prices on the electricity exchange fall below zero, resulting in suppliers paying wholesale customers to buy electricity. This occurs when producers put forward a spot price for power for the next day and buyers agree what they will be willing to pay. The point on these curves where the numbers meet is the market clearing price.  

But on days of windy sunshine, this can be set below zero as power producers offer electricity for negative prices, because the volume of power being produced exceeds storage capacity. The grid has to balance, the electricity feeding into the system and the demand have to equalise if there isn’t enough storage for excess power. 

Over 2024, day-ahead electricity prices showed increased volatility in Europe. The average daily standard deviation in Europe amounted to around €28/MWh, slightly above the previous year’s average (€26/MWh). Compared to 2023, price volatility increased in Hungary, Poland, Serbia and Romania in particular. The highest price volatility in 2024 was recorded in Romania and Hungary at over €50/MWh. Price volatility was also comparatively high in the Baltic states, Serbia and Greece.³ 

Hours with negative day-ahead prices also occurred for the first time in Spain and Portugal in 2024. A particularly high number of hours with negative prices on the day-ahead market occurred in Finland (725), Sweden (652), and the Netherlands (458). Germany ranked third in the country comparison with 459 negative prices. ⁴  Electricity market reform 

Increasing energy storage is a key intervention for Europe, particularly as at other times, Europe is facing very high energy costs when it relies on expensive gas supplies. But Europe is also implementing market reforms that acknowledge the changing financial landscape. 

In July 2024, the European Union implemented regulations aiming to stabilise markets and long-term prices by promoting power purchase agreements (PPAs) and two-way contracts for difference (CfDs). The EU is hoping that these two mechanisms will allow market participants to more effectively develop forward hedging products. 

PPAs are bilateral purchase agreements that provide predictable pricing for both a buyer and seller in the long term, allowing investors more certainty in long-term trends. CfDs are contracts between producers and public entities that offer a floor and a ceiling on prices. The producer sells their electricity on the market, but the difference is paid by the public entity at a pre-agreed price. 

The reforms acknowledge the interplay of spot prices and forward markets and aim to bring more stability to the market by enhancing the predictability of energy prices. 

A recent IMF paper on Europe’s electricity prices has also suggested that the EU consider greater integration of its electricity markets.⁵ 

“The empirical analysis presented in this paper indicate that infrastructure modernization and regulatory reforms can help minimize the volatility in wholesale electricity prices, especially during the transition to renewables… moving from the current zonal system with cost-based redispatch to a nodal pricing system would improve the efficient distribution of electricity and dampen excessive price fluctuations, considering the growing share of renewable energy sources with greater intermittency and close to zero marginal costs of generation,” the report said.⁶ 

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