EU energy ministers meet as Iran war drives gas prices to 2023 highs

European energy ministers gather in Brussels on Friday with benchmark gas prices at their highest since 2023, the immediate consequence of U.S. and Israeli strikes that have effectively closed the Persian Gulf to tanker traffic and taken the world's largest liquefied natural gas production facility offline. The price spike arrives on top of a structural gap: European industry already paid far more for energy than competitors in the United States and China before the latest escalation. The meeting is unlikely to produce quick fixes. The policy options on the table, redesigning the electricity market, weakening the carbon market, accelerating electrification or simply buying more fossil gas, are each either politically explosive, technically slow or both.

The merit order fight returns

At the centre of the debate sits the merit order mechanism that sets wholesale electricity prices across the EU. Power plants are dispatched from cheapest to most expensive; the marginal plant, frequently a gas-fired station, determines the price paid to all generators, including wind and solar farms whose running costs are near zero. The result: renewable output is remunerated at gas-linked prices even when gas plays no role in that hour's generation. The argument is not new. It dominated the 2022 crisis and produced no lasting change. Commission President Ursula von der Leyen revived it last month, signalling that the March 19-20 European Council would discuss market design. That signal alone triggered a lobbying offensive.

Heavy industry, represented by Eurofer, contends the system no longer fits a crisis driven by fossil fuels. Axel Eggert, the federation's director general, put it bluntly: "The war in the Middle East is also fossil-fuel based. Fossil fuels are impacting the EU energy markets. Most of the electricity today is already clean or renewable, but those prices are also impacted directly." Power generators see it differently. In a letter to the Commission and national leaders on Monday, Eurelectric defended merit order pricing as "the most efficient and robust mechanism to ensure cost-effective dispatch, transparent price signals, and efficient investment incentives" available. Seven energy ministers backed that view in a joint statement on Thursday, declaring that "no satisfactory alternative model has been identified." France and Finland issued similar warnings separately. As in 2022, the reform push looks likely to stall against a coalition of generators and member states that benefit from the status quo.

Carbon market under pressure from Berlin and Rome

If electricity market reform is controversial, tampering with the EU Emissions Trading System is explosive. The ETS, launched in 2005, remains the bloc's primary climate instrument, forcing power plants and heavy industry to buy permits for each tonne of carbon dioxide emitted. An upcoming revision was meant to strengthen the law. Instead, Germany and Italy, the EU's two largest manufacturing economies, both still heavily reliant on gas, have used broader dissatisfaction with green policy to push for weakening it. Chancellor Friedrich Merz crashed the carbon price last month by suggesting the law should be softened, then hastily withdrew the remark. His economy minister, Katharina Reiche, doubled down days later, telling reporters that the mechanism for calculating free pollution permits for certain sectors was "not feasible" for Germany's chemical industry.

Rome has launched a two-pronged assault. The Italian government has called for the free allocation mechanism to be frozen until reforms are adopted, while a domestic legislative proposal would reimburse gas-fired power plants for the carbon cost they incur. High-emitting industries are lobbying hard, though the chemicals lobby's claim to speak for all energy-intensive sectors is contested. Pushback has been fierce. Spain leads a group of member states defending the ETS, and a draft European Council statement obtained this week indicates that a comprehensive gutting of the policy is off the table. The carbon market survives for now, but the political fracture is visible.

Electrification is the answer, on a timeline of decades

For climate and energy advocates, the Gulf crisis is further proof that Europe must accelerate the transition. Renewables now generate nearly half of the EU's electricity, yet electricity itself accounts for only around 20 percent of final energy consumption. Cars, heating, steelmaking and chemical production still burn fossil fuels directly. Closing that gap means electrifying everything, heat pumps, electric vehicles, electric arc furnaces, green hydrogen, and building the wind farms, solar arrays, nuclear plants and grid infrastructure to power them. Teresa Ribera, the Commission's executive vice-president for the clean transition, urged the bloc on Wednesday to respond with "maximum electrification, maximum reduction in the consumption of fossil fuels, maximum efficiency." UN climate chief Simon Stiell echoed the point. Seda Orhan of Climate Action Network Europe added that "the acceleration of renewables should be coupled with the acceleration of energy efficiency, but also the phasing out of fossil gas." The arithmetic is unforgiving: the required investment runs into trillions of euros and the physical deployment takes not months but decades.

The fossil fallback: more LNG, new suppliers, old taboos

While the long-term build-out proceeds, the Commission is pursuing near-term supply diversification. Since Russia's full-scale invasion of Ukraine, the EU has replaced Russian pipeline gas with flows from Norway, North Africa and Central Asia. This week Commissioner Dan Jørgensen visited Baku to advance a tentative gas deal with Azerbaijan, hailing it as an energy security win. Norway, already the bloc's largest gas supplier, is expanding its own drilling. The United Kingdom faces pressure to increase North Sea output. U.S. majors Chevron and ExxonMobil are preparing to drill in Greek waters. The most significant pivot has been to liquefied natural gas, particularly from the United States. The EU has commissioned multiple new LNG terminals since 2022; more are under construction in Italy, Greece, Latvia, Estonia and Ireland, many sized for American cargoes.

One option would deliver immediate price relief: reopening imports of Russian pipeline gas. That taboo has not been seriously entertained outside Budapest and Bratislava. The political cost of reversing the post-2022 consensus remains prohibitive for Berlin, Paris and Brussels, even as industrial competitiveness deteriorates. The result is a strategy that bets on LNG infrastructure and new producer relationships to bridge the gap until electrification catches up, a bridge that must span a decade or more.

Why the structural gap persists

Europe's energy price disadvantage is not new. Before the Gulf crisis, industrial electricity prices in Germany and Italy were roughly double the U.S. average, according to Eurostat and IEA comparisons. The merit order system amplifies gas volatility; the ETS adds a carbon cost that U.S. competitors do not face; and the grid build-out needed for mass electrification lags behind renewable generation targets. The European Council has repeatedly called for a "competitive" energy union, but national vetoes on market coupling, capacity mechanisms and state aid rules have blocked deeper integration. Each crisis, 2022, now 2026, restarts the same arguments without resolving the underlying misalignment between a single electricity market and 27 national energy policies.