An Electricity Market Design Fit for Net Zero

After much preparation and hard work, this week we published our flagship report, an Electricity Market Design Fit for Net Zero . As a result of the energy crisis stemming from the Russian invasion of Ukraine, the European Commission has been spearheading an electricity market reform to tackle the price volatility observed over the past year. Alongside our knowledge partner, Compass Lexecon , we have been preparing this report to inform policymakers and ensure that any reform remains an evolution, rather than an evolution.

An Electricity #MarketDesign Fit for Net Zero already has the fundamentals in place. The report highlights the efficiency of the current market design, especially in short-term markets for matching demand and supply. What has become clear throughout the year’s energy crisis, however, is that the current market misses much of the longer-term elements which will be vital for reaching net zero. Specifically, there are three long-term elements that the report identifies to add to an already sound market:

1. A consumer contracting and engagement framework based on enhanced forward hedging opportunities and retail price structures. This will ensure that the benefits of low-cost renewable and low-carbon electricity generation are passed on more directly to consumers.
2. An investment framework underpinned by enhanced long-term hedging/contracting opportunities. This will ensure that investors have the confidence to make the much-needed investment in decarbonising Europe’s energy sector.
3. A framework to coordinate the future system needs to meet security of supply and policy objectives. This will ensure that the energy transition to secure energy provisions and decarbonise Europe’s energy are accounted for well ahead of time.?

Taking place live at Sparks meeting in Brussels, over 1,000 people tuned in for the hybrid launch event, welcoming high-level speakers, and attendees. Beginning the discussion and providing context to the report, European Commissioner for Energy Kadri Simson outlined the Commission’s electricity market design proposal , published just two weeks earlier and given priority status by Energy Ministers from the Member States at yesterday’s Energy Council . Capping off her keynote, Ms Simson summarised:

“The market has to evolve: the EU is on the right track for a clean and secure energy system and this proposal is a cornerstone for the green transition.”

Following up on this, the lead on the report from Compass Lexecon’s side, Fabien Roques , presented the report, stressing the need for the reform to provide the right investment signals needed for power markets to deliver affordable, secure and sustainable electricity to all European.?Eurelectric President and CEO of E.ON , Leo Birnbaum , then took the floor to address what is still needed/ what are the missing elements for industry to deliver on its quest towards net zero. He summarised by saying:

“We realised again what we already knew: that our sector isn't only about climate action, but also security of supply & affordability... Now we have a good starting point to work on.”

Shifting into the panel discussions, perspectives from the regulatory and stakeholders’ sides were fleshed out. On the regulatory side, panellists agreed on the principles guiding the revision of the market design by the Commission. However, considering the short timeline – with the Commission, Parliament and Council wanting to reach an agreement by end of the year – it was clear we must focus on effective and tested solutions.

“When in doubt, leave it out.” ~ Kristian Ruby , Secretary-General, Eurelectric

?To round things out, the second panel on the stakeholders’ side focused on what is important to them and what is at stake for their sector. Ranging from renewables providers to transmission, from electro-intensive industry to energy trading, one point stood out: there needs to be long-term visibility, and there is certainly more that can be done on that.

“The glass is about half full.” ~ Kristian Ruby, Secretary-General, Eurelectric

With the timely launch, we intend for this report and the complimentary recommendations for policymakers to be an esteemed piece of information to guide the debate and help deliver a market design fit for net zero. On the Commission’s proposal, the European Parliament will now be discussing and intends to have an agreed position by summer, with trilogues among the institutions wrapping up by the end of the year.