The New Geography of Energy

The energy transition is not only reshaping our sources of power; it is redrawing the economic map of Europe. The structure of energy markets is being rebuilt from the ground up — with carbon as a cost, renewables as the major source of power, and electrification as the target of a broad industrial and social transformation. This transformation is indeed not just technological; it is institutional, financial and deeply geopolitical.

When the EU launched its Emissions Trading System in 2005, it did not set electricity prices directly. But it changed the hierarchy of technologies generating electricity. By pricing carbon, it pushed carbon-emitting sources such as coal and oil up the cost curve and, over time, made renewables more attractive, translating climate ambition into real market behavior. So, if on the one hand, subsidies to renewables production incentivized their deployment, the price of carbon lowered the appeal of investments in the thermal sources, especially the most polluting ones. Today, after two decades, the result of these movements is a profound shift: in Italy in 2024, solar and wind generation accounted for 36% of net installed capacity and, together with the other renewables, for 55% of net installed capacity from renewables. 

A New Challenge

Yet this success has exposed a new challenge. The very markets that once rewarded efficiency now struggle to signal the right incentives for the transition. In 2024, Europe saw solar installations collapse by 90% after the record year before. The causes were not political, but structural: a shortage of available sites, grid bottlenecks, slow permitting, and volatile short-term prices that confuse rather than guide investment. The electricity auctions that once represented the triumph of market design now show negative prices and erratic spreads — symptoms of a system out of sync with its own goals.

At the macro level, the implications are equally striking. Using state of the art econometric tools, we can trace how a carbon price shock propagates through the economy. Prices rise, output falls, unemployment ticks up — but emissions decline. The mechanism works, yet the cost is real and uneven. Some sectors bear the burden more than others, depending on how deeply they are electrified. Industries that rely more on electricity show remarkable resilience: their investment declines are one-third those of fossil-intensive sectors, and they recover faster. Electrification, in this sense, is not just an environmental strategy — it is a competitiveness strategy.

But the key to that resilience lies in the source of the electricity itself. Clean electrification, based on renewables, can shield economies from shocks, provided we redesign markets to support long-term investment. The core problem is temporal: renewables require large upfront capital but face volatile revenues in short-term markets. Prices that swing from negative to triple digits cannot finance a solar plant. This is why long-term instruments are emerging as the backbone of the new energy order.

Thinking Long Term

Two models dominate this landscape: Power Purchase Agreements (PPAs) and Contracts for Difference (CfDs). PPAs are private, long-term contracts between producers and corporate buyers — powerful tools that reveal the real value of renewable energy and mobilize private capital. CfDs, by contrast, are public contracts that stabilize prices through auctions, reducing financing costs but requiring careful design to avoid crowding out private deals. The future of the European market depends on how these two forms of contracting coexist — how public and private risk-sharing can be aligned rather than opposed.

The Role of Institutions

For Italy and Europe alike, this is an institutional frontier as much as a technological one. Reforming public procurement to integrate renewable PPAs, coordinating CfD auctions across borders, and using public guarantees wisely — not as subsidies, but as enablers of private investment — will determine whether the transition is efficient, fair and durable.

Energy markets have always reflected our economic order. The challenge now is to make them express our collective ambitions: not only efficiency, but resilience and justice. Moving beyond prices means designing institutions that turn climate goals into stable incentives and ensuring that the energy map we are drawing today can sustain growth, innovation and hope for decades to come.