Partner London
"The sharp rise in European gas prices has drawn renewed attention to the structure of electricity markets, particularly the use of marginal pricing, where gas‑fired generation sets the wholesale electricity price."
The sharp rise in European gas prices has drawn renewed attention to the structure of electricity markets, particularly the use of marginal pricing, where gas‑fired generation sets the wholesale electricity price. With gas prices elevated, pressure is mounting to revisit and, in some cases, overhaul existing market arrangements.
The recent extensive damage to the Qatar Ras Laffan LNG production facility raises questions as to how local power infrastructure projects will be impacted by the crisis.
Europe
Regulatory change?
The UK perspective: post‑REMA direction
The UK power system is far more exposed to gas-fired generation than most other countries, with gas setting the wholesale price of electricity over 80% of the time, based on predictions for 2024. This makes it one of the costliest in Europe, despite the renewable share of total generation hitting record levels of over 50% in 2025.
In 2025, the UK’s Review of Electricity Market Arrangements (“REMA”) concluded with the decision to:
- retain a single Great Britain‑wide wholesale electricity market; and
- adopt a strategic, coordinated approach to improving system efficiency and balancing market performance.
Despite industry debate over whether the UK should pursue deeper reform as regards the use of marginal pricing, the government appears unlikely to implement radical changes. Instead, the emerging strategy appears to be to accelerate deployment of renewables and battery energy storage systems (“BESS”), thereby reducing reliance on gas-fired CCGTs and rely on the market to ‘achieve a practical decoupling’ of electricity prices from volatile gas markets.
This was demonstrated by the Energy Secretary’s announcement to bring forward the next CfD auction ‘AR8’ to July 2026. Energy Minister Michael Shanks also recently told the House of Commons Energy Security and Net Zero Committee that the government is “…going back to the drawing board” to consider other possibilities in terms of market reform.
The EU perspective: EU Grid Package and Citizens Energy Package
With over 500 GW of wind and solar capacity still waiting for grid connection across the EU and a number of member states falling far short of the long-standing 15% interconnection target, thereby limiting cross-border electricity flows, the emergence of a truly integrated Energy Union remains hampered. This growing strain on transmission networks reinforces the need for energy system planning aligned with consumption centres. Against this backdrop, on 10 December 2025, the EU unveiled the EU Grid Package which aims to:
- modernise and expand Europe’s electricity grids;
- strengthen interconnectivity;
- tackle long‑standing permitting and planning barriers; and
- support a system capable of accommodating high shares of wind and other renewables.
On 10 March 2026, the EU also introduced the Citizens’ Energy Package (COM/2026/115), aimed at lowering household energy bills, especially for the fuel poor, forming a central element of the Action Plan for Affordable Energy.
"The challenge for EU policymakers is the variety of generation portfolios of the different energy landscapes of its member states."
Diverging views across the EU
The challenge for EU policymakers is the variety of generation portfolios of the different energy landscapes of its member states. Nordic countries have the benefit of hydro energy with negligible reliance on fossil fuels. Similarly, France has nuclear; Germany has a mixture of coal and hydro; Italy, Greece and the Netherlands all use natural gas to varying degrees.
Given this wide spread of energy facility types, it is difficult to see what EU authorities could do on a mandatory basis regarding marginal pricing and decoupling electricity from high gas prices. The encouraged roll-out of renewable energy CFDs and PPAs seems likely as well as an acceleration of battery support schemes as an alternative to gas. This would support energy security and localisation of generation facilities thereby avoiding imports of fuels and exposure to world events.
EU Emissions Trading System (“ETS”)
Within the EU, rising gas prices have reignited longstanding disagreements about market design and climate policy:
- Nordic countries and Spain defend the ETS, arguing that higher renewable penetration will increase energy autonomy; meanwhile
- Italy, Poland and Austria, all dependent on fossil fuels to varying degrees, are calling for adjustments to the ETS to protect their consumers from price spikes.
These differing positions underscore the challenges of harmonising energy policy across diverse national energy mixes.
It is also important to note the indirect consequences of reducing ETS thresholds. The ETS funds the Modernisation Fund which funds renewable energy projects across EU countries.
Market Implications
Gas and electricity price volatility, CPI pressure and BESS revenues
Higher gas prices inevitably push up peak electricity prices, resulting in increased revenues for:
- BESS assets;
- peaking plants; and
- gas-fired CCGTs.
These rising prices also create additional pressure on inflation indicators such as the Consumer Price Index (“CPI”). With affordability concerns mounting, the UK Government faces great expectations ahead of the Autumn Budget, including efforts to cut average household energy bills by £150 from April 2026. This will also put strains on the EU Citizens’ Energy Package which aimed to lower household bills.
"With oil prices surpassing US$100 per barrel, pressure on transport fuel costs is increasing. "
Oil prices above US$100: renewed focus on transport fuels
With oil prices surpassing US$100 per barrel, pressure on transport fuel costs is increasing. This dynamic strengthens the case for accelerating production and adoption of:
- renewable transport fuels, including Sustainable Aviation Fuel (“SAF”); and
- localised fuel production capabilities, which help improve energy security.
Historically high costs have limited investment in these alternatives, but shifting economics and security concerns may now make them more commercially viable.
European gas storage pressures and the growing need for alternatives
High gas demand and limited storage capacity are heightening concerns across Europe, prompting pressure for:
- alternative gas and LNG supplies, including biomethane and hydrogen;
- the expansion of gas storage infrastructure; and
- accelerating the electrification of heating systems.
In some markets, rising gas prices have prompted a temporary switch back to coal, increasing demand for ETS allowances and driving further carbon price pressure.
Middle East and Gulf Co-operation Council (“GCC”) disruption
Force majeure, supply chains, and project risk
Recent strikes across parts of the Middle East have damaged airports, data centres and desalination plants.
Until recently, energy-related infrastructure remained intact, however, following the extensive damage to the Qatar Ras Laffan LNG production facility, there is the potential of power infrastructure being specifically targeted and damaged. Travel and transport disruptions will also pose challenges for major infrastructure and energy projects in the GCC, particularly those relying on:
- workforces from overseas; and
- imported materials and equipment.
The materiality of such an impact will vary depending on the technology.
There are multiple projects under constructions across the GCC and projects approaching financial close. No doubt these projects will be paying close attention to force majeure clauses (including so-called ‘political/government force majeure clauses’ providing compensation and/or relief) and insurance cover.
This is a repeat of what was experienced during the Covid-19 pandemic, where the force majeure provisions were given a very thorough analysis. There were various claims, some successful, others not, especially where the threshold under the relevant force majeure clause was too high in terms of obligations being prevented as opposed to being delayed by the pandemic. This resulted in the rewriting of force majeure provisions accordingly. Undoubtedly the same analysis will occur again, noting that the GCC countries themselves are not at war which also raises the question as to how the conflict should be classified and whether disruptions to the supply chain are caught. The subtlety of the drafting will require close attention.
"If there is prolonged instability the insurance markets may begin to harden in response to elevated regional risks by introducing higher premiums and making some risks uninsurable. "
Insurance implications for GCC projects
Whilst insurers remain resilient in the near term, prolonged regional instability could change this outlook.
If there is prolonged instability the insurance markets may begin to harden in response to elevated regional risks by introducing higher premiums and making some risks uninsurable. The most exposed sectors include marine, aviation, energy and cybersecurity.
GCC insurers, however, generally have limited exposure to war‑related claims, because:
- standard policies typically exclude war risks; and
- specialised war‑risk insurance is usually fully reinsured internationally.
GCC governments may ultimately need to backstop uninsurable risks.
Conclusion
European energy markets are navigating a complex web of challenges: soaring gas prices, infrastructure bottlenecks, policy disagreements and geopolitical disruptions heightened by the conflict in the Middle East. In response, we envisage that governments and regulators accelerate efforts to:
- expand renewable energy deployment;
- increase storage and flexibility;
- modernise grid infrastructure; and
- diversify energy supplies
How the conflict in the Middle East impacts the region will very much depend on how long the disruption continues.
