In Europe’s current energy architecture, natural gas occupies a paradoxical position. It is indispensable to system stability, yet it is also one of the system’s greatest sources of fragility. Gas is expected to provide flexibility, absorb renewable variability, and stabilise electricity markets during stress. At the same time, its supply is increasingly exposed to global competition, logistical constraints, and geopolitical risk. This dual role makes gas the backbone of the energy system and, simultaneously, a transmission channel for instability.
The transition toward renewables has elevated gas from a conventional generation fuel to a system-level balancing instrument. Gas-fired power plants no longer run primarily to meet baseload demand. Instead, they respond to fluctuations in wind and solar output, ramping up when renewable generation falls short and stepping back when it surges. This operational flexibility is essential, particularly in regions where storage and demand-side response remain underdeveloped. Gas has become the fuel that turns intermittency into reliability.
Yet this very function exposes the system to gas-market dynamics in unprecedented ways. When gas sets the marginal price of electricity, power markets inherit gas volatility directly. A modest increase in gas prices can translate into a disproportionate rise in power prices during periods of low renewable output. Conversely, a temporary gas supply concern can destabilise electricity markets even if total energy availability appears sufficient on paper.
The structural vulnerability lies in the fact that Europe’s gas flexibility increasingly depends on LNG rather than pipeline flows. LNG markets are global, highly competitive, and sensitive to price signals. Cargoes move toward the highest netback, which can change rapidly due to weather, shipping costs, or geopolitical developments. This means that European gas availability is no longer determined solely by regional fundamentals, but by events and decisions occurring far beyond the continent.
For power markets, this introduces a layer of uncertainty that did not exist when gas supply was largely contract-based and predictable. Gas-fired generators must now operate within a fuel market that can tighten abruptly, with limited warning. When LNG flows shift, gas prices react quickly, and electricity markets follow. The system’s flexibility, intended to provide stability, becomes a conduit for external shocks.
South-East Europe illustrates this tension vividly. The region relies heavily on gas for balancing, yet it lacks the depth of storage and diversity of supply found in larger markets. Countries such as Serbia, Hungary, Romania, Bulgaria, Croatia, Greece, and Italy are connected through pipelines and interconnectors, but their exposure to gas-market shifts varies significantly. A supply disruption or price spike may affect each country differently, yet the resulting power-market impact is transmitted across borders through electricity flows.
This creates a situation in which local gas conditions can have regional consequences. A tightening of gas supply in one part of the network can raise electricity prices elsewhere, even where gas availability remains adequate. Power flows respond to price signals, exporting scarcity and importing volatility. Gas, in its role as a flexible backbone, thus amplifies rather than dampens system-wide stress.
Operational constraints further complicate the picture. Gas-fired power plants are designed for flexibility, but their performance depends on stable fuel logistics and predictable pricing. Frequent starts and stops increase maintenance costs and reduce availability over time. When gas markets are volatile, generators face higher operational risk, which they price into electricity markets. The cost of flexibility rises, and with it the baseline level of power-market volatility.
Regulatory assumptions often fail to reflect these realities. Electricity market design frequently assumes that gas will be available at reasonable cost whenever needed. Gas policy, in turn, assumes that power-sector demand will remain manageable and predictable. Neither assumption holds in a system dominated by variable renewables and globalised fuel markets. The gap between regulatory design and operational reality becomes a source of instability in its own right.
Financial markets reinforce this dynamic. Gas and power are increasingly traded as a combined exposure, particularly in regions where gas sets the marginal power price. When uncertainty rises in one market, it quickly affects the other. Spark spreads widen or compress rapidly, and hedging becomes more complex. What appears to be flexibility at the physical level translates into heightened sensitivity at the financial level.
The paradox of gas is therefore unavoidable. It is essential for managing variability and ensuring reliability, yet its own market dynamics introduce volatility that the system must absorb. As renewable penetration increases, this paradox intensifies. Without sufficient alternatives for flexibility, such as storage or demand response, reliance on gas deepens, increasing exposure to its risks.
For South-East Europe, managing this paradox is a central challenge. The region’s energy transition depends on gas to stabilise power systems, but its exposure to gas-market volatility is structural rather than temporary. Recognising gas as both a solution and a problem is the first step toward addressing this challenge.
Elevated by clarion.energy
