Ahead of the European Council meeting on 19 and 20 March, this memo, drafted by Neon and commissioned by Eurelectric, is designed to provide analytical background to feed into the discussions. The memo is split into three parts.
First, it addresses the question of whether energy prices are actually so high in Europe. It explains that the current situation is entirely different from the energy prices faced in 2022 — indeed, prices have largely returned to pre-crisis levels. Nonetheless, major price differentials remain within Europe, and in some parts of Europe electricity prices are extremely internationally competitive. Other parts of Europe continue to face higher prices than parts of the US. By comparing Texas with Germany, the memo shows that the key driver of this structural price differential is natural gas, where prices are three times lower in the US than in the EU. While this differential may be reduced, it cannot be entirely eliminated.
Second, it asks whether the current market design, based on marginal pricing, is the optimal system to deliver a functioning, clean electricity system. It shows that marginal pricing is commonly used across commodity markets and illustrates its functioning through a simple commodity analogy. It highlights that marginal pricing is a standard feature of electricity markets globally, including across North America. The analysis concludes that marginal pricing remains the most efficient mechanism for dispatch, as it ensures that the lowest-cost generation is prioritized, and it debunks some of the key “myths” about marginal pricing.
Third, it asks what effects proposed changes to the market design would have. It analyses in detail some of the alternatives proposed to the current scheme. Two proposals are considered: (i) the “Iberian/Italian mechanism” (gas subsidy) and (ii) the “Capros proposal” (market split). The analysis demonstrates that the existing design delivers the greatest benefit to consumers and that alternatives would either lead to the same outcomes with a more complex electricity system, or to more expensive electricity for consumers.
This memo has been commissioned by Eurelectric and independently drafted by Neon. None of the views expressed should be understood as the official Eurelectric position.