Why gas sets Germany's electricity price (and how that's changing)

Hi, this is David! For this week's Weekly Chart, I want to take a look at electricity in Germany and how renewables help lessen the impact of price shocks of fossil fuels.

When gas prices rise, electricity bills in Germany rise with them. That feels unfair to many people: why should the price of electricity — much of it generated by wind, solar, and coal — be dragged up by gas?

When you look at the sources of power generation in Germany, you can see their point:

Gas makes up only around 13% of Germany's electricity, so why should it dominate the price? The answer lies in how the energy market works: The grid operator stacks all bids from cheapest to most expensive — the so-called merit order — and works up the stack until supply meets demand. The last plant switched on sets the price that all generators receive.

This might sound counterintuitive, but it makes sense: since every generator gets paid the same clearing price, they can simply bid their true production cost without having to guess what the market will bear. A wind farm doesn't need to strategize: it bids zero, gets dispatched first, and pockets the difference to the clearing price as profit. But it also means that when gas prices spike, as they did in 2022, electricity prices spike with them — even though most electricity isn't actually generated from gas.

How renewables are changing the equation

Wind turbines and solar panels have a marginal cost of essentially zero. When they flood the market, they push expensive gas plants down — and sometimes entirely off — the merit order. Gas no longer sets the price in every hour. On a sunny summer day, so much solar can pour into the German grid that wholesale prices can even become negative. Consumers on dynamic tariffs were literally paid to use electricity.

And there's a lot more renewable power than there used to be. Germany's electricity mix has transformed: renewables have grown from under 10% in 2002 to over 60% today. Nuclear is gone since April 2023. Coal has been roughly halved. The more hours renewables dominate, the more the annual average electricity price breaks away from what gas alone would predict.

So… has it decoupled yet?

This chart tracks exactly this. The solid line is Germany's actual wholesale electricity price; the dashed line is what the price would be if gas still set it every hour. For years, the two ran nearly on top of each other. But in recent years, a gap has been opening.

Gas prices have risen again — driven by wars, geopolitical risks, and competition for LNG — yet electricity hasn't followed with the same intensity. Every new gigawatt of solar, every hour where wind sets the price instead of gas, widens the gap a little more, resulting in lower prices for consumers.

I hope you enjoyed reading today's Weekly Chart! A special thank you to Strommarktberatung, whose analysis Has electricity decoupled from gas prices in Germany? was the inspiration for this post. Next week, you'll hear from another one of my colleagues.