Paper on electricity market design

Executive Summary

On the 15th of December 2022, the European Council will start discussing the future of the electricity market design. Subsequently in Q1 2023, the European Commission is expected to adopt its proposal for a new electricity market design. In this context, the following document will outline the main considerations and key building blocks that this proposal should contain from the perspective of Eurelectric – the Union of the Electricity Industry.

It is essential to understand that the current market design is not the cause of high electricity prices. The current market design, based on the merit order and marginal pricing, ensures the short-term optimisation and operation of the energy system while delivering significant benefits for consumers. As reported by ACER’s Final Assessment of the EU Wholesale Electricity Market Design, cross-border trade and efforts to integrate electricity markets over the last decade delivered approximately EUR 34bn per year in benefits for consumers. Thus, it is essential to retain the underlying features of the current market design and assess any possible changes considering their long-term benefits, rather than the impact of the current crisis.

To deliver ‘A Market Design Fit For Net Zero’ the upcoming legislative proposal will not only need to preserve the internal EU energy market, its cost-efficiency, cross-border exchanges, and competition between market players; it must include the following additions to the existing market framework:

a. An enhanced customer contracting framework, enabling sufficient possibilities for long term hedging and contracts, to bring the benefit of RES and low-carbon generation more directly to consumers, while fostering customer engagement.

b. A market-compatible investment framework for renewables and low-carbon technologies (including firm and flexible resources such as demand-side response and storage), which are capital-intensive technologies, that still preserves competition.

c. A framework that maintains adequacy and security of supply and that meets evolving power system requirements, in particular because of decentralisation and increasing flexibility and firmness needs.

The implementation of these proposals raises questions about the degree of harmonisation which would be desirable across the EU. There are alternative approaches for market design based on the market principles outlined in this paper, and it is likely that different countries will have different preferences depending on local specificities, but overall priority must be given to preserve the European internal energy market.

A high level of harmonisation should be sought for wholesale (spot and future) markets across the EU, while some diversity of retail markets – acknowledging the different realities across the EU – will be inevitable. A key role of the European Commission will be to ensure – while respecting the principles of subsidiarity – that national implementation does not distort the common EU energy market, instead contributes to its further development, and ensures a competitive level playing field. In this regard, it is important to continue in the path set by the Clean Energy Package.