Energy markets in Europe operate under a paradox. Physically and financially, they have become deeply integrated. Regulators, however, still govern them through fragmented frameworks designed for a world of separate sectors and largely national systems. This mismatch between unified market risk and fragmented rules has become a structural source of volatility rather than a stabilising force.
Regulation remains divided along fuel and jurisdictional lines. Electricity market design focuses on marginal pricing, balancing responsibility, and capacity adequacy within national borders. Gas regulation centres on network codes, storage obligations, and supply security, often with limited reference to power-sector dynamics. Oil policy emphasises strategic reserves and transport security, treating its influence on gas and power as secondary. Each framework is coherent in isolation, yet collectively they fail to reflect how risk actually materialises.
In an integrated system, regulatory interventions rarely stay confined to their intended target. A measure designed to stabilise electricity prices can distort gas demand and storage behaviour. Gas-market interventions can alter power dispatch and cross-border electricity flows. Oil-related sanctions or reserve releases influence logistics and freight costs, reshaping LNG economics and, indirectly, power prices. The risk produced by these interventions is unified, even if the rules that generate it are not.
South-East Europe is particularly exposed to this dynamic because it sits at the intersection of multiple regulatory regimes. National market rules interact with EU-level frameworks, while physical flows ignore legal boundaries. A regulatory change in one country can alter incentives across the region, shifting flows and prices elsewhere. The resulting volatility is often misattributed to market failure, when it is in fact a product of regulatory misalignment.
Electricity price interventions illustrate the problem. Caps or emergency measures may dampen prices domestically, but they also reduce incentives for imports or flexibility provision. Neighbouring markets experience tighter conditions, and cross-border flows adjust accordingly. The intervention exports volatility rather than eliminating it. Similarly, gas-market measures that prioritise national storage filling can tighten regional supply, raising prices and affecting power markets beyond the regulating country’s borders.
Timing further complicates matters. Regulatory decisions are often reactive, introduced in response to visible stress. Markets, however, price expectations forward. Anticipation of intervention becomes a factor in price formation, increasing uncertainty. Participants adjust behaviour not only to current rules, but to what they believe regulators might do next. This expectation-driven volatility is difficult to quantify, yet it materially affects market outcomes.
Fragmentation also undermines investment signals. Flexibility, storage, and interconnection are system-wide needs, but investment incentives remain largely national. Developers face uncertainty about future market rules and revenue streams, particularly when past interventions have altered outcomes retrospectively. As a result, capital allocation becomes cautious, exacerbating the very scarcity that regulation seeks to address.
The unified nature of risk means that no single regulator can fully control outcomes. Actions taken in one domain reverberate across others, often in unintended ways. This does not imply that regulation is unnecessary, but that its design must reflect systemic interdependence rather than sectoral boundaries.
For South-East Europe, recognising this reality is crucial. The region’s exposure to cross-border flows and external shocks makes it a testing ground for regulatory coherence. Fragmented rules increase volatility and shift risk onto those least able to manage it, particularly industrial consumers and smaller market participants.
Elevated by clarion.energy
