Recently, the European electricity market has experienced dramatic fluctuations in prices, a situation that has stemmed from a combination of extreme weather, regional conflicts, and the ongoing transition of energy structuresThis volatile scenario not only illuminates fundamental issues lurking within Europe's energy framework but also poses significant challenges to existing energy policies and market mechanisms.

In December, the harsh weather conditions in Europe led to soaring electricity pricesOn December 11, Germany witnessed a spike in electricity costs, reaching a staggering €936.28 per megawatt-hour due to a drastic reduction in wind power generation forecastsThis spike marked an 18-year high for the countrySimilarly, other European nations observed unprecedented price increases; in Southern Norway, prices surged by 20 times while Denmark, typically rich in energy resources, saw rates surpassing €11 per kilowatt-hour

The German Energy Industry Association has pointed out that with the frequency of extreme weather events on the rise and electricity demand escalating, fluctuations in electricity prices might become even more common in the future.

The significant pressure on the European electricity market can be attributed to an imbalance between supply and demandEnergy analysts suggest that this winter's unique climatic conditions have been pivotal in igniting the electricity price crisisWith predictions of a particularly cold winter, production from solar and wind sources is anticipated to plummet due to insufficient sunlight and wind, falling short of the increasing electricity demandsConsequently, electricity production has become increasingly reliant on high-cost natural gas to fill the gapCompounding the issue, contracts for Russian gas supplies to Europe are set to expire, which may lead to a substantial reduction in gas imports, further driving up prices.

This volatility exposes the inherent instability of renewable energy sources within Europe

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In 2023, renewable energy sources accounted for a remarkable 44.7% of the EU's electricity generation, overtaking fossil fuels in prominenceAs the energy transition moves away from coal and nuclear sources towards renewables such as wind and solar, the influence of renewables on market pricing continues to growHowever, this same instability complicates the ability of these sources to independently ensure stable electricity supplyUnfavorable weather conditions can result in sharp fluctuations in generation levels, thus presenting challenges to electricity provision.

The structural deficiencies within the European energy system have been laid bare by the current crisisIssues such as insufficient electricity reserves, a lack of storage facilities, and inadequate grid flexibility have rendered the energy framework incapable of responding effectively to sudden spikes in electricity demand

Moreover, the gradual phasing out of traditional energy sources has, to some extent, weakened the stability of this framework, making it more vulnerable to shocksIn addition, the EU’s carbon trading system has placed a heavy cost burden on power companies, with rising carbon prices inadvertently raising electricity production costs.

The surge in electricity prices has resulted in escalating energy costs, leading some energy-intensive industries to slow down or halt production, thereby diminishing the competitiveness of European industriesEnergy costs have become a key focus for European policymakers in recent monthsVarious industry associations have proposed initiatives to support energy-intensive sectors, advocating for increased energy subsidies or reductions in taxes on electricity prices to safeguard the competitiveness of Europe’s electricity market.

Analysts believe that addressing the severe challenges facing the electricity market is imperative

On one hand, there is an urgent need to build cross-border energy infrastructureThe European Commission has projected that by 2030, electricity consumption will rise by approximately 60%. However, concerningly, 40% of the distribution networks are over 40 years old, ill-equipped to handle the increase in demand and the integration of more renewablesAdditionally, the uneven development of electricity prices across European nations, coupled with the uneven distribution of renewable resources, hinders interconnectivity and coordination within the European electricity marketEstablishing cross-border energy infrastructure could not only balance the development levels of renewable sources across different countries but also enhance the circulation of energy and resource sharing within the EU, unlocking the potential of the European electricity market and aiding in achieving the goals outlined in the Green Deal.

On the other hand, enhancing energy efficiency and diversifying energy structures represent effective pathways to stabilizing electricity prices