Electricity systems across Europe are increasingly powered by low-cost renewable generation. Wind and solar now supply a substantial share of electricity in many markets, including the United Kingdom. Yet electricity prices remain closely tied to the price of natural gas. When gas prices rise sharply, electricity prices rise with them, even when most electricity is produced from sources whose operating costs have not changed. At first glance this appears illogical. If renewable energy has near-zero fuel cost, why should electricity prices depend on fossil fuel markets at all?
What appears to be a pricing anomaly is in fact a structural feature of the electricity market.
Most liberalised electricity systems use a marginal pricing model in which generators submit bids to supply electricity into a wholesale market. The system operator accepts the lowest-cost offers first and continues accepting bids until demand is met. The final generator required to supply electricity sets the market price for all electricity traded in that period. This mechanism ensures efficient dispatch. Low-cost generation runs first and more expensive generation runs only when demand requires it.
In many systems the marginal generator is a gas-fired power station. Gas plants can start quickly and adjust output rapidly when demand rises or renewable generation falls. Because they provide this flexibility, they frequently supply the final unit of electricity required to balance the system. When this occurs the cost of gas determines the wholesale price of electricity, even though much of the electricity being generated may come from sources whose operating costs are far lower.
This pricing model worked well when fossil fuels dominated electricity generation. Coal, gas and nuclear plants all had meaningful operating costs and these costs broadly reflected the economics of generation. Short-run marginal cost pricing therefore produced price signals that were reasonably stable and aligned with the long-run cost of supplying electricity. The market dispatched generation efficiently and investment signals remained broadly credible.
The rapid growth of renewable generation has changed this relationship. Wind and solar require substantial capital investment but have almost no marginal operating cost. Once built they generate electricity at very low cost whenever wind or sunlight is available. As renewable capacity expands, a large share of electricity is produced at near-zero marginal cost. Yet the wholesale price remains determined by whichever generator provides the final unit of supply. If that generator is a gas plant, the price of electricity reflects the cost of gas rather than the cost of producing electricity across the system as a whole.
This mechanism became visible during the European energy crisis following Russia’s invasion of Ukraine in 2022. Gas prices rose sharply as pipeline supplies to Europe were disrupted. Electricity prices rose across the continent even in countries where renewable and nuclear generation continued to operate normally. The electricity market transmitted the shock from global gas markets directly into domestic electricity prices.
Recent geopolitical tensions affecting global energy transport routes have again highlighted the same exposure. When conflicts threaten major shipping lanes or LNG supply chains, gas prices respond quickly. Because gas often remains the marginal generator, electricity prices follow the same movement. The result is that geopolitical shocks in global energy markets are now amplified through electricity prices into domestic economic and policy pressures.
From a narrow economic perspective the system continues to operate as designed. Generation is dispatched efficiently and market participants respond rationally to price signals. The pricing mechanism ensures that the system always calls upon the lowest-cost available generation before turning to more expensive sources. The market clears supply and demand reliably in real time.
From a systems perspective the picture is more complex. Electricity systems require a balancing layer that ensures supply and demand remain aligned at every moment. Historically gas plants have provided this flexibility because they can respond quickly to fluctuations in demand or renewable output. Their presence allows the system to remain stable under changing conditions. The market therefore prices the cost of maintaining that stabilising capacity rather than the average cost of producing electricity.
As renewable generation expands this distinction becomes increasingly visible. A growing share of electricity is produced at very low marginal cost while the price of electricity continues to reflect the cost of the technology that stabilises the system. In practice electricity prices often reflect the cost of managing uncertainty rather than the cost of producing energy itself.
This is where ecosystem risk becomes visible. The electricity system does not operate in isolation. It sits within a wider ecosystem that includes global fuel markets, international shipping routes, geopolitical alliances, financial markets and regulatory regimes. The marginal pricing mechanism links these domains together. When a shock occurs in one part of the ecosystem, such as a disruption to gas supply or maritime transport, the consequences propagate through the electricity system and ultimately reach households and businesses.
Ecosystem risk arises when systems become tightly coupled in this way. Individual components may operate correctly, yet the interaction between them transmits shocks across the wider system. The electricity market illustrates how a pricing mechanism designed to promote efficiency can also become a channel through which external volatility enters a domestic infrastructure system.
Understanding these dynamics requires a different analytical lens. Traditional risk management focuses on controls within individual organisations or sectors. It asks whether risks have been identified, measured and mitigated within defined boundaries. Risk intelligence begins from a different starting point. It asks how systems behave when the boundaries between sectors become porous and when shocks originate outside the domain that appears to be under management.
Electricity markets provide a clear example of this challenge. The infrastructure that generates and distributes electricity is largely domestic. The marginal fuel that sets electricity prices is traded in global markets shaped by geopolitics and international energy flows. The market design links these two domains together through a single pricing mechanism. When volatility emerges in the global energy system, the electricity market transmits that volatility across the domestic economy.
The policy debate now emerging across Europe reflects a growing recognition of this structural exposure. Governments and regulators are exploring mechanisms that separate long-term investment in generation from short-term balancing markets. Long-term contracts for renewable generation increasingly reflect the cost of building new capacity, while balancing markets continue to price the cost of maintaining system stability. The objective is not to abandon marginal pricing but to recognise that electricity markets must now solve two distinct problems: financing long-term generation capacity and balancing supply and demand in real time.
Electricity markets therefore illustrate a broader governance challenge. Infrastructure systems, financial markets, supply chains and energy networks now operate within complex global ecosystems in which shocks propagate rapidly across boundaries. Pricing mechanisms, regulatory frameworks and operational structures often embed assumptions about stability that no longer hold. When geopolitical shocks propagate through these interconnected systems, the effects are transmitted directly into domestic economies and policy debates.
Risk intelligence requires recognising these structural connections before they become sources of systemic instability. Boards, regulators and policymakers cannot govern complex systems effectively if they focus only on the risks visible within their immediate domain. They must also understand how the architecture of the wider ecosystem transmits uncertainty across the boundaries of their own institutions.
Electricity markets offer a clear warning. A mechanism designed to promote efficient dispatch now transmits geopolitical volatility directly into domestic economic and policy pressures. The task of governance is no longer simply to manage individual risks. It is to understand the architecture through which risk moves across the ecosystem of modern systems.
Richard Anderson
Founder, AndersonRisk
This essay was first published on 13 March 2026 on my Substack.