Reminder: the link between gas and power prices makes sense, today

Everybody seems to want to cut the link between gas and power prices these days. But this is not a good idea.

lectricity is hard to store and physically needs to balance supply and demand at all times. This can be done (well) by a centralized administrative system, like we used to have until the 80s, but we've moved toward a market system that works on marginal pricing. The issue is that demand is very inelastic in the short term (to simplify: you don't check the price before switching on the light), so the balancing is mostly done on the supply side. But demand is not flat, and is actually very peaky (on a daily basis, and then with seasonal additional fluctuations). The marginal supply that can fulfill demand at the peak is only going to used a few times per year, and thus structurally needs to be expensive, so that it can be profitable. That's ok in normal times when such peaks are rare and localized.

But now we have a supply shock, taking out a lot of normal supply - note that this shock comes from French nuclear and a lot of hydro missing, not really from lack of gas:

Source: FT Europe’s new dirty energy: the ‘unavoidable evil’ of wartime fossil fuels

Expensive marginal production is suddenly called a lot more often - and has been made more expensive by higher gas prices. But there is no substitute to flexible gas-fired plants that are usually idle - all the cheaper capacity is already producing... If you cut the price link the gas producers won't join the market and you'll have brownouts.

You can cut the link for other producers by offering them fixed price contracts like CfDs - it's happening for a share of the market, but not all, yet.