The energy crisis of 2021 and 2022 exposed a vulnerability in Europe's economy that few had fully appreciated. When natural gas prices spiked, electricity prices followed, driving inflation across the continent and straining households and businesses. For some policymakers, the solution seemed obvious: deploy renewable energy as fast as possible and sever the link between fossil fuel prices and the cost of electricity.

But exactly how much stabilization can renewables actually provide? And at what point do economics make further deployment unfeasible? New research offers surprisingly specific answers to these questions, revealing both the promise and the limits of renewable energy as a hedge against energy market shocks.

The findings suggest that Europe's current renewable deployment targets will reduce the economy's sensitivity to natural gas price spikes by roughly 30 percent. But reaching true independence from fossil fuel price volatility would require far more aggressive buildout than governments have planned. More troublingly, that level of deployment could make renewable energy economically unviable under current market structures—a paradox that exposes a fundamental tension in the energy transition.

Measuring the Price Connection

To understand how renewables affect electricity prices, researchers modeled European power markets for 2030, accounting for projected capacity changes from each country's National Energy and Climate Plans, plus historical variability in weather, electricity demand, and fuel prices. They ran 300 simulations, each representing a different year with different conditions.

The key innovation was a metric called β sensitivity, defined as the projected increase in annual electricity prices when the price of natural gas rises by one euro. Think of it as a measure of how tightly electricity prices are tethered to fossil fuel costs.

In today's market, the connection is strong. A one euro increase in natural gas prices translates to roughly a 1.4 euro increase in annual electricity prices across Europe. This happens because natural gas plants often set the marginal price in electricity markets. When gas gets expensive, the cost of the electricity produced by these plants increases, and that cost ripples through the grid.

By 2030, under planned capacity expansions, this sensitivity would fall to one euro. That's meaningful. It means renewables, along with the retirements of coal and nuclear plants, would reduce how much electricity prices respond to gas shocks. Power prices would become more stable, and Europe's vulnerability to supply disruptions in natural gas would diminish.

The Case for Deeper Deployment

But the current plans do not go far enough. To push sensitivity below 0.5 euros—meaning a one euro gas price increase would raise electricity prices by less than half—Europe would need to deploy roughly 30 percent more wind and solar than the national targets specify. To achieve a sensitivity of just 0.25 euros, deployment would need to be 50 to 60 percent higher.

These numbers sound abstract until you consider what they mean economically. Research on macroeconomic volatility shows that price stability produces measurable welfare gains. When consumption becomes less volatile, society benefits. This benefit is especially pronounced when volatility stems from energy shocks that ripple through the entire economy.

The researchers call this the "insurance value" of renewables. Just as insurance protects against financial catastrophe, renewable energy can insulate an economy from the devastating effects of energy price spikes. Environmental benefits and health gains from cleaner air are often cited as reasons to support renewables. But the insurance value is rarely part of policy calculations, even though it could be substantial.

The Paradox of Success

Here is where the analysis becomes troubling. Higher renewable deployment does lower electricity prices during sunny and windy hours. But when many solar and wind farms flood the market simultaneously, prices can collapse to near zero during peak generation periods. This phenomenon, called cannibalization, depresses the revenue that renewable generators can capture from selling electricity directly into the market.

The research shows a clear relationship: as sensitivity to gas prices falls, the average price captured by wind farms drops sharply. At sensitivity levels around 0.5 euros or lower, renewable generators would struggle to recover their capital costs from day ahead market sales alone. Achieving the deepest price stability would require renewable deployment so aggressive that the business case for financing those projects without government support becomes extremely difficult.

This creates a policy trap. To stabilize electricity prices in the face of future gas shocks, Europe needs more renewables than current targets. But if those targets are exceeded by 30 to 60 percent through private investment alone, the market will destroy the revenue streams that make such investment possible. The paradox is mathematical and stubborn.

Geographic Variation Matters

The research also reveals important differences across Europe. Countries like Spain, Portugal, and the Nordic nations would achieve low sensitivity to gas prices with 30 percent additional renewable deployment. Italy, Austria, and parts of Eastern Europe would see much smaller improvements, even at 30 percent overkill, because those regions lack the coal plants that current deployments would retire.

This fragmentation complicates any European wide policy response. A coordinated effort to achieve deep price stability would require most countries to exceed their targets significantly. Yet the financial viability of such deployment remains unclear without major market reforms or continued policy support.

What Market Reform Looks Like

The researchers note that several proposed reforms might help. Contracts for Difference (CFDs), which protect renewable generators by guaranteeing a minimum price, have become more common in European support mechanisms. Power Purchase Agreements (PPAs) allow renewable projects to secure long term sales contracts outside the spot market. But these instruments are primarily risk management tools. They do not fundamentally solve the cannibalization problem when sensitivity is very low.

Other proposed changes, like capacity mechanisms that pay generators for simply being available, risk favoring technologies that increase price volatility rather than reduce it. The current European market design, which relies on auction based pricing where the marginal cost of the last generator determines the price for all electricity, may be poorly suited to a system dominated by near zero marginal cost renewables.

The European Union's most recent electricity market reforms acknowledge some of these issues and include support for long term contracts. But none directly consider the price stability contribution of renewables when making deployment or support decisions. It is a gap that the research suggests should be addressed.

The Insurance Argument

The underlying principle behind the insurance value concept is straightforward. Risk averse societies prefer stable income streams to uncertain ones, even if both have the same expected value. This preference has economic weight. Recent research suggests that macroeconomic volatility carries substantial welfare costs, not the negligible ones assumed in earlier models.

If deploying renewables reduces the volatility of electricity prices and thus consumption more broadly, society gains. That gain exists independently of environmental benefits and should be factored into policy decisions about renewable deployment levels and support mechanisms.

Yet calculating the insurance value precisely requires assumptions about societal risk aversion, future energy demand, and how the volatility of electricity prices translates into broader economic impact. The researchers do not fully quantify this value in the study, but the simulations show that large increases in renewables produce very relevant reductions in price volatility. The magnitude suggests the insurance value could be substantial.

Implications for Energy Policy

The findings carry clear implications for how governments should think about renewable energy targets. Current plans focus on reducing emissions and meeting climate goals. Those remain paramount. But the research suggests an additional dimension to energy security that has gained political prominence: insulating economies from fossil fuel price shocks.

Renewables deliver on this promise, but not automatically. The level of deployment matters enormously. Modest increases in wind and solar generation reduce sensitivity modestly. Aggressive deployment drives deeper insulation. But without reforms to electricity markets and mechanisms to support renewable generators when prices collapse, pushing deployment far beyond current targets may require ongoing government support.

The research does not argue for any particular policy choice. Rather, it provides the analytical framework that policymakers need to make those choices explicitly. Right now, many governments speak about renewables as insurance against energy shocks but do not account for this benefit in their planning processes.

Integrating the insurance value into energy planning could justify more aggressive renewable deployment targets. It could also justify different forms of support than those currently in place. What it requires is honesty about the value being sought and the willingness to design markets and mechanisms that capture that value rather than work against it.

The energy transition will happen. The question is whether it will be driven primarily by emissions reduction targets and falling renewable costs, or whether it will also be designed explicitly to create stable, resilient power systems less vulnerable to global energy shocks. The research suggests that achieving the second goal is possible but requires going beyond current plans and rethinking how electricity markets work.

Credit & Disclaimer: This article is a popular science summary written to make peer-reviewed research accessible to a broad audience. All scientific facts, findings, and conclusions presented here are drawn directly and accurately from the original research paper. Readers are strongly encouraged to consult the full research article for complete data, methodologies, and scientific detail. The article can be accessed through https://doi.org/10.1038/s41560-025-01704-0