(A)Mending the Electricity Market

Later today, MEP Nicolás González Casares (S&D), is set to table his Draft Report as Rapporteur for the Electricity Market Design reform. Being set in motion by the European Commission last fall with a proposal tabled on 14 March 2023, the reform is now in the hands of the European Parliament on an expedited route to finalisation by year’s end. This comes out of concern that the current market design is not fit for purpose, as volatile energy prices plagued Europe following Russia’s invasion of Ukraine and subsequent energy blackmail in early 2022. Now, the debate is moving forward, despite a cooldown in energy prices, and we once again have our two cents to add.

Fit for purpose

Energy prices and the electricity market is something that we have had a lot to say about over the past year and something we are here to reiterate again today. What we have said very loudly over the past months is that the electricity market needs an evolution rather than a revolution, which culminated in our Electricity Market Design Fit for Net Zero study with Compass Lexecon that we launched just after the Commission’s proposal. Evolution, not revolution, because the current market design is fit for purpose and the market-based principles are what make it an effective and efficient allocative instrument. Throughout the price crisis that had its climax last year, the market behaved as expected while EU-level interventions in the market served to treat the symptoms – being high prices – rather than the root problem – an overreliance on imported fossil fuels that were used in extraordinary circumstances to blackmail Europe.

Missing from these reactionary measures was the truism that clean energy is cheap. They did not place the proper weight on the fact that prices are set by the last unit of electricity used to meet demand and that that unit was often times expensive fossil fuels. Remove fossil fuels from the equation and you not only have a cleaner energy sector, but also a cheaper one that supports Europe’s decarbonisation objectives and helps deliver energy independence to the continent. That’s why our study calls for evolutionary add-ons that bring more future consideration into today’s market, without destroying the market principles it’s based on.

Fit for net zero

Although the market is fit for purpose, it is also clear that Europe’s energy system is changing. It would be impervious to say that nothing should change in the market as we up-end the way we deliver electricity to the continent. Indeed, we need to think about the future of this energy system in the context of the energy transition, which leads us to the three add-ons we propose in the Electricity Market Design study. Those include:

1.??????Enhancing long-term contracting for customers

2.??????Fostering timely investment to meet decarbonisation objectives

3.??????Anticipating the needs of the future energy system

To give credit, the Commission’s proposal for reform does make a concerted effort to enhance long-term customer contracts and provide hedging opportunities to encourage investment in renewable energy sources and low-carbon technologies. However, five key issues still need to be addressed to ensure the proposal's success in making the market fit for net zero. These are detailed in a list of amendments we proposed last week and include a focus on:

1.??????Long-term contracts and markets: The design needs to be adequate to allow long-term instruments to complement each other. Retroactive changes should also be avoided, and measures facilitating the approval and long-term implementation of capacity mechanisms should be considered.

2.??????Enhancing forward market liquidity: It is essential, and quick wins based on the current setup should be implemented. Collateral requirements should also be addressed, and untested solutions like virtual hubs should be avoided.

3.??????The right balance between customer protection and supply regulation: Stress tests and reporting requirements should be encouraged instead of normalising hedging strategies and regulating supply offers to the detriment of retail competition and customers' choice.

4.??????Grid investment and modernisation: This is necessary for the energy transition, and tariff design should provide the right incentives to system operators. National regulatory barriers should also be removed to boost investment.

5.??????Flexibility potential: It should be unlocked in a technology-neutral and market-based manner. All flexibility options should be considered, and flexibility support should be embedded in existing markets and capacity mechanisms where they exist.

Coming up

Once the draft report hits the table, the next two weeks are the opportunity to Shadow Rapporteurs on the file, Morten Helveg Petersen (RENEW), Maria Da Gra?a Carvalho (EPP), Michael Bloss (Greens/EFA), Paolo Borchia (ID), Zdzis?aw Krasnod?bski (ECR) and Marina Mesure (Left), to propose amendments to the draft. This will be a critical point in shaping the final reform.

Meanwhile, at #PowerSummit23 next month, we will be discussing how that #MarketDesign plays into the energy trilemma of decarbonisation, energy security and affordable electricity. With the balance of power in flux, addressing this energy trilemma is central to Europe’s place when the scale comes to balance.

Be sure to join us at Power Summit in Brussels this year to learn more about this! We will be at Maison de la Poste on 20-21 June. You can register?HERE.

This week's edition written by:

Nicholas A. Steinwand, Strategic Communications Officer -?Eurelectric