Wood Mackenzie Report Shows Europe Leading Global Decarbonisation But Facing Price Volatility, Weak Demand, And Weather-Driven Variability

Europe continues to lead the world in power sector decarbonisation, with more than half of its electricity now generated from renewable sources and nearly two-thirds coming from low-emissions technologies. This progress is highlighted in the “Wood Mackenzie” report, “6 Factors Shaping European Power Markets”. The region’s transformation has been driven by long-standing policy support, large-scale investment, and a coordinated push to expand renewable generation, strengthen grids, build storage, and upgrade infrastructure.

According to Peter Osbaldstone, Research Director at Wood Mackenzie, Europe’s rapid progress brings its own challenges. He notes that the scale of the transition is unprecedented, and a wide range of stakeholders—policymakers, regulators, investors, utilities, and system operators—are learning and adapting in real time. As renewable capacity grows quickly while electricity demand remains weak, new market pressures are emerging. These pressures include increased price volatility, greater sensitivity to weather conditions, and a stronger dependence on flexibility resources such as storage and demand response.

One of the biggest structural issues shaping the market is Europe’s persistently low electricity demand. Consumption has yet to return to pre-pandemic levels, even as renewable capacity continues to expand. With supply rising faster than demand, competition among generation sources intensifies, and the market becomes more vulnerable to fluctuations in resource availability. This imbalance also contributes to sharp swings in power prices.

Despite these challenges, Europe reached an important milestone in 2025: its second consecutive year with over 50% renewable electricity supply. This achievement solidifies Europe’s status as a global leader in clean energy deployment. The shift toward majority renewable generation has created new market dynamics—greater variability in supply, stronger seasonal patterns, and an urgent need for more flexible systems capable of balancing rapid changes in wind and solar output. Europe’s early leadership in this area has helped shape regulatory frameworks that attract new investment and accelerate decarbonisation.

The year 2025 also illustrated how weather can significantly shape the power mix. Poor wind conditions early in the year reduced generation, and hydro output fell back to its long-term average after previously strong performance. However, continued growth in solar capacity helped compensate for these declines, demonstrating the value of a diverse renewable portfolio. Even so, the variability across wind, solar, and hydro underscored the increasing importance of grid flexibility, energy storage, and adaptable system design as renewables become more dominant.

Higher gas generation requirements pushed electricity prices up across most European markets in 2025. Gas-fired plants continue to act as the marginal price setter, especially when wind and solar output is weak. As a result, even relatively small gaps in renewable production can lead to noticeable price increases. This dynamic highlights the ongoing importance of flexible, dispatchable generation as Europe transitions toward a cleaner grid.

Another emerging trend is the widening of within-day price spreads in day-ahead markets. As the difference between the highest and lowest hourly prices increases, opportunities grow for flexible assets such as batteries, pumped hydro storage, demand-side response, and fast-acting generation. These technologies are becoming more valuable as the system experiences stronger swings between surplus renewable generation and periods of tight supply.

At the same time, negative pricing events are becoming more common across Europe. These occur when renewable generation exceeds demand, forcing prices below zero. While negative prices present revenue challenges for generators, they open opportunities for storage operators and flexible consumers who can absorb excess supply. Their growing frequency reflects the need for better grid integration, cross-border interconnections, demand-response programs, and smarter market mechanisms to handle renewable surpluses.

Wood Mackenzie’s analysis shows that Europe’s power markets are entering a more complex phase as renewable dominance reshapes traditional behaviors. Mark Pyman, Senior Analyst at Wood Mackenzie, notes that the six key market factors highlight both the achievements and the difficulties of this transformation. He emphasizes that long-term success will depend on accelerating investments in flexibility solutions, strengthening grid infrastructure, and developing market designs that can efficiently manage variable renewable output.