The war in Iran has sent fuel prices soaring in Europe, which is now confronting its second energy crisis in less than five years. But even as some countries have installed record levels of wind and solar power as a way of insulating themselves against energy shocks, the results have been uneven.
Germany, for example, has created more wind and solar capacity than Spain, but that has not stopped Germany’s wholesale electricity prices from jumping sharply at times, while Spain’s have been relatively stable.
So what explains these differences?
One big factor is the structure of Europe’s energy markets. Because of the way Europe sets wholesale electricity prices, even a small amount of fossil fuel in a country’s energy mix can have an outsize effect, anchoring prices higher and canceling out potential savings from renewables.
Electricity prices have long been set using similar systems, including in the U.S. But some experts say these pricing systems, particularly in Europe, need to be adjusted to accommodate the growth of renewable energy.
First, some background: After Russia cut off natural gas supplies to the European Union in 2022, manufacturers had to partially shut down factories and some households saw heating bills rise tenfold. Policymakers responded by embracing energy produced at home. They committed to investing heavily in wind and solar, with a target of generating more than 40 percent renewable energy by 2030.
How Europe’s energy pricing works
Europe’s energy markets work like a cup that needs to be filled every hour. The cup represents all of a country’s energy demand. First, the cheapest form of energy is poured into the cup, then the next most expensive, and so forth. That generally means solar and wind are added to the mix first, then hydroelectric and nuclear power, then gas and coal.
But here’s the catch: European countries’ wholesale electricity prices are determined by the last, most expensive form of fuel that’s added to the mix. In practice, that means using a relatively small amount of fossil fuel energy, like gas, can raise a country’s wholesale electricity prices, regardless of how much cheaper renewables it uses.
“It’s not just about how much gas a country uses in its power supply,” said Chris Rosslowe, senior energy analyst at Ember, a research firm. “It’s about how influential that gas technology is on power prices.”
(Wholesale prices are what suppliers pay for electricity. They often have a big effect on retail prices, which can also be complicated by transmission costs and other factors.)
The renewable energy threshold
To fully protect electricity markets from fossil fuel price shocks, European Union countries would need to fill virtually all of their demand with sources that are less expensive to operate like wind, solar, hydroelectric and nuclear.
That’s not to say renewable energy in Europe is an all-or-nothing proposition: Electricity from every solar panel that is added to the grid helps avoid some of the greenhouse gas emissions that worsen climate change.
“Any crisis in fossil fuel markets has a direct impact on Europe,” said Frauke Thies, Europe director at Agora Energiewende, a research organization based in Berlin. “Countries that have invested more in renewables are, broadly speaking, better off.”
Spain’s solar push
These pricing dynamics help explain why Spain’s renewables have been so transformative. In 2021, gas prices determined Spanish wholesale electricity prices 52 percent of the time. By 2025, the country had installed so much renewable energy that the number had fallen to 26 percent.
In the first half of 2025, Spain’s wholesale electricity price was about two thirds of the E.U. average, according to data from Ember. Spain now gets more than 40 percent of its electricity from wind and sun, though its grid did suffer a blackout last year that an investigation later found that had been caused by multiple factors.
“Spain is emerging as a good student,” of the Russia-Ukraine energy crisis, said Phuc-Vinh Nguyen, head of energy center at Institut Jacques Delors, a research group based in France.
In Germany, by contrast, gas prices in 2025 set electricity prices slightly more often than they did in 2021, about 35 percent of the time, even though the country has installed more renewable capacity than Spain. This is happening in part because Germany shut down its nuclear power plants and has decommissioned some coal plants, increasing its reliance on natural gas. Italy, which gets most of its electricity from fossil fuels, has seen high wholesale prices in recent weeks, too.
Efforts are underway to reduce the influence of oil and gas on European energy prices. Countries are in the process of better connecting their power systems to make it easier to spread excess energy capacity around. (Back to the analogy: Imagine Spain’s cup overflowing with renewable energy, but better able to pour the extra into France’s cup.) Another change, which is in progress, involves updating the way renewable energy is paid for to stabilize prices.
Better interconnection and system optimization could save nearly $600 billion between 2035 and 2050, according to an analysis by Agora Energiewende.
Claire Brown covers climate change for The Times and writes for the Climate Forward newsletter.
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