European energy markets: navigating a perfect storm

The ongoing conflict in the Middle East has placed European energy systems under significant strain as gas prices surge to a 13-month high, intensifying concerns around market volatility, grid adequacy and geopolitical risk. As governments across the EU and in the UK grapple with the implications for affordability, security and decarbonisation, 2026 is emerging as a pivotal year for energy policy and system transformation.

Regulatory change in Europe

The sharp rise in European gas prices has drawn renewed attention to marginal pricing, where gas-fired generation sets the wholesale electricity price. The UK is particularly exposed — gas sets the wholesale price over 80% of the time, making it one of the costliest markets in Europe despite renewables exceeding 50% of total generation in 2025.

The UK's Review of Electricity Market Arrangements ("REMA") concluded in 2025 by retaining a single Great Britain-wide wholesale market and adopting a coordinated approach to improving system efficiency. Rather than pursuing deeper structural reform of marginal pricing, the government's emerging strategy is to accelerate renewables and battery energy storage systems ("BESS") deployment, relying on the market to achieve a practical decoupling of electricity prices from volatile gas markets. This was underlined by the Energy Secretary's announcement to bring forward the next CfD auction, AR8, to July 2026.

At EU level, the Grid Package unveiled in December 2025 aims to modernise and expand electricity grids, strengthen interconnectivity and tackle long-standing permitting barriers. In March 2026, the Citizens' Energy Package followed, aimed at lowering household energy bills, particularly for the fuel poor. The challenge for EU policymakers, however, remains the diversity of member states' generation portfolios, from Nordic hydro and French nuclear to Italian and Dutch gas dependency. Mandatory reform of marginal pricing across such varied landscapes looks unlikely; instead, an acceleration of renewable CfDs, PPAs and battery support schemes appears the more probable direction of travel.

Rising gas prices have also reignited disagreements over the EU Emissions Trading System ("ETS"). Nordic countries and Spain defend it as a driver of energy autonomy; Italy, Poland and Austria are calling for adjustments to shield consumers from price spikes. It is worth noting the indirect consequences: ETS revenues fund the Modernisation Fund, which in turn finances renewable energy projects across member states.

Market implications

Higher gas prices push up peak electricity prices, increasing revenues for BESS assets, peaking plant and gas-fired CCGTs, whilst simultaneously adding pressure to inflation indicators such as the Consumer Price Index. With oil prices surpassing US$100 per barrel, the case for accelerating sustainable aviation fuel and localised fuel production has strengthened considerably, historically high costs limited investment in these alternatives, but shifting economics and security concerns may now make them commercially viable.

Across Europe, high gas demand and limited storage are prompting calls for alternative LNG and biomethane supplies, expanded storage infrastructure and accelerated electrification of heating. In some markets, rising gas prices have already prompted a temporary switch back to coal, increasing demand for ETS allowances and driving further carbon price pressure.

Force majeure, insurance and GCC project risk

The damage to Qatar's Ras Laffan LNG production facility marks a significant escalation, raising the prospect of energy infrastructure being specifically targeted. For the many projects under construction or approaching financial close across the GCC, this brings force majeure provisions sharply into focus.

The Covid-19 pandemic prompted a thorough re-examination of such clauses — particularly the threshold question of whether obligations were prevented rather than merely delayed. Numerous claims followed, with varying outcomes, and force majeure provisions were widely rewritten as a result. The same analysis will undoubtedly occur again. Practitioners will need to pay close attention to the drafting, not least because the GCC countries themselves are not at war, raising genuine questions as to how disruptions to supply chains and workforces should be classified under the relevant contractual language.

On the insurance side, whilst markets remain resilient in the near term, prolonged instability could harden conditions, introducing higher premiums and rendering some risks uninsurable. The sectors most exposed are marine, aviation, energy and cybersecurity. GCC insurers have limited direct exposure to war-related claims given that standard policies exclude war risks and specialised cover is typically fully reinsured internationally; however, governments may ultimately need to backstop uninsurable risks if the situation deteriorates further.

Conclusion

European energy markets face a complex convergence of soaring gas prices, infrastructure bottlenecks, policy divergence and geopolitical disruption. The legal and commercial implications — from market design reform and CfD structuring through to force majeure litigation and insurance gaps — will keep energy practitioners busy well into 2026 and beyond. How long the disruption continues will, in large part, determine the depth of the response required.