Gas will play a crucial role in European electricity prices until 2060

Natural gas will continue to be a key determinant of the marginal price of electricity in Europe until 2060. This is one of the key messages emerging from the report “Langsiktig markedsanalyse 2026–60” published by Statnett (the Norwegian electricity grid operator) in recent days. Admittedly, Norway may have a potential conflict of interest on this issue, given that it is Europe’s main gas supplier following the shutdown of Russian gas pipelines, but it is nonetheless a study that merits analysis.

In particular, according to the paper, combined-cycle power stations will continue to cover periods of low renewable energy output until 2060. The forecast is that European power generation will become virtually carbon-neutral within a few years thanks to the rapid development of wind and solar power, which will replace a large part of the current gas- and coal-fired capacity. However, partly due to the high costs of hydrogen and other alternative sources, gas will continue to dictate the marginal price during many hours: in 2035 it will account for only 5–10 per cent of generation, but will determine the market price of electricity in around 40 per cent of cases, and this will remain the case in the years to come.

The most significant finding to emerge from Statnett’s simulations (in the base case scenario) therefore concerns the role of gas-fired generation in the coming decades. Due to the massive uptake of solar and wind power, the share of gas in Europe’s total annual electricity generation will fall to between 5 per cent and 10 per cent from 2035 onwards. In the long term (towards 2060), the share of annual electricity generation from gas could fall further, even reaching 5 per cent. Despite this largely marginal presence, gas will be the marginal technology (the one that sets the market price for all other sources) in around 40 per cent of all hours of the year between now and 2060.

This phenomenon – it is explained – occurs because, in European electricity markets based on marginal pricing, the hourly price is determined by the last power station required to meet demand. Consequently, when the wind is not blowing and the sun is not shining (so-called ‘Dunkelflaute’ events), gas-fired power stations remain the only flexible resource capable of ensuring system security, thereby passing on their production costs to the entire market.

Statnett also points out that the economic equilibrium of the European electricity system will reach a natural limit beyond which it will no longer be economically rational to install further renewable capacity in order to phase out gas entirely. There are three key factors behind this phenomenon. Firstly, the scaling back of green hydrogen and seasonal storage. In the past, Statnett believed that the former (produced by flexible electrolysis during periods of renewable surplus) could act as seasonal storage, replacing gas in winter. The 2026 report, however, drastically revises this assumption, acknowledging the error – namely, the underestimation of the costs of electrolysis plants and hydrogen storage. Secondly, it cites the technical limitations of batteries. Although the report notes a sharper-than-expected fall in the cost of commercial batteries, Statnett clarifies that whilst these are useful for shifting energy within the same day, they are structurally insufficient and incapable of providing seasonal storage. Finally, the third factor that will halt the trend towards phasing out gas – again according to the report – will be the inflexibility of nuclear power, which will retain its capacity, protected or supported by state subsidies (as in France), but suffers from high fixed costs and a lack of flexibility. Increasing nuclear capacity to cover winter peaks would result in a massive destruction of value (waste of energy) during the summer months, when solar power drives prices down to zero, concludes the Norwegian TSO.