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The role of geopolitical and climate risk in driving uncertainty in European electricity markets

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  • Cincinelli, Peter
  • Pellini, Elisabetta

Abstract

This paper examines the occurrence of price bubbles in wholesale day-ahead electricity markets and investigates the impact of geopolitical and climate risk on such extreme price movements. The empirical analysis is executed for twelve major European electricity markets, namely APX (Netherlands), BPX (Belgium), EEX (Germany), EPX (United Kingdom), GME (Italy), NordPool (Finland, Norway and Sweden), OMEL (Portugal), OPCOM (Romania) and POWERNEXT (France). Our findings reveal that the probability of price bubbles increases with higher geopolitical risk and elevated air temperatures, while it decreases with greater precipitation and stronger wind speed. Specifically, a one-unit increase in geopolitical risk raises the probability of price explosiveness by 8.23%. These results underscore the urgent need for European countries to accelerate renewable energy deployment, enhance power system flexibility, and strengthen electricity market integration. Such measures are critical to achieving climate targets, protecting consumers from future energy crises, and supporting the affordable electrification of the manufacturing sector.

Suggested Citation

  • Cincinelli, Peter & Pellini, Elisabetta, 2025. "The role of geopolitical and climate risk in driving uncertainty in European electricity markets," Energy Economics, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325000994
    DOI: 10.1016/j.eneco.2025.108276
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    More about this item

    Keywords

    Wholesale electricity market; Geopolitical risk; Climate risk; Energy transition; Price bubbles; Backward supremum ADF;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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