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Geopolitical shocks are much more likely to trigger price bubbles in the British and European electricity markets than extreme weather events—and they are predictable, new academic research concludes.

Dr. Elisabetta Pellini and Dr. Peter Cincinelli from Bayes Business School and the University of Bergamo analyzed pricing data in 12 European wholesale "day-ahead" electricity markets.

They identified two distinct sudden and extreme price bubbles between 2006 and 2024. One was triggered by the Russian invasion of Ukraine in 2022. However, electricity prices had also risen significantly above their underlying value—the definition of a bubble—six months earlier. In October 2021, Russian president Vladimir Putin ordered Gazprom to prioritize natural gas supplies to the domestic market over European customers.

Both events significantly reduced supplies of natural gas—which is critical for electricity generation, especially when demand peaks.

Dr. Pellini is a lecturer in quantitative methods and econometrics at Bayes Business School (part of City St George's, University of London) and Dr. Cincinelli is associate professor in banking and finance at the Department of Management of the University of Bergamo.

The research is in the journal Energy Economics.

The study's key findings include:

• A one-point rise in the geopolitical risk index increased the chance of a price bubble by 8.23%.
• A one-degree increase in air temperature raised the probability by 0.15% as people turned on air conditioning.
• However, stronger wind (1 m/s increase) reduced bubble probability by 2.28%, as it boosts wind power output.
• More rainfall also reduced the likelihood of bubbles, as it supports hydro and nuclear power.
• Surprisingly, there is no significant link between changes in industrial production and bubble formation.

Dr. Pellini said that governments and industry partners should see their findings as added incentive to drive market reforms and the transition to sustainable energy.

"We've shown that electricity markets are vulnerable to both geopolitical shocks and climate variability. Governments can protect customers and avoid damaging instability in vital energy supplies by accelerating the transition to renewable energy—including investment in grid infrastructure and energy storage. Our work shows that the EU should press on with its planned electricity market reforms aimed at improving market flexibility and cross-border electricity trading.

"Countries can reduce their vulnerability to disruptions by promoting energy efficiency and rolling out smart meters and dynamic pricing to manage demand more effectively. However, it's clear that we're still going to be using carbon fuels for many years, so governments should also be diversifying gas supplies."

We can forecast bubbles

Dr. Cincinelli said, "Our study has some very definite implications for European governments, regulators and all involved in the energy markets. The statistical model used in the study accurately predicted periods when bubbles occurred, suggesting it could serve as an early warning tool in the future.

"The big impact of geopolitical shocks should remind us that even with an ever-greater share of our energy needs being supplied by renewables, new risks emerge. Much of the global supply of minerals essential for the renewables infrastructure is in China and in developing countries such as Chad.

"Europe also needs to expand its clean energy manufacturing production, which at present is largely outsourced. That poses fresh challenges given the lack of skilled labor and the aging population in most European nations."

The UK, France and Germany have the highest mean geopolitical risk, with values of 0.99, 0.53 and 0.44, respectively. By contrast, Portugal has the lowest, 0.02—but like other southern European states it has a high risk related to extreme heat.

Some countries experienced longer-lasting bubbles than others. For instance, Italy and the Netherlands saw bubbles for 50 and 44 weeks, respectively, while Sweden had only nine weeks. This reflects differences in how electricity is generated. Countries relying more on natural gas were more vulnerable, while those with strong hydro or nuclear sectors were less affected.