EPICO KlimaInnovation and Aurora Energy Research assess currently discussed models to reform the design of the electricity market, and suggest measures to build on the merit order, making it future proof.
Berlin/Brussels, Friday 19 December 2022: Today, EPICO KlimaInnovation and Aurora Energy Research published a report on the currently most discussed models to reform the electricity market design. The report provides policy recommendations for a new market design that builds on the functioning of the merit order-based integrated European energy market. The publication suggests crucial reforms to ensure that consumers profit from low costs of renewables and that the system is fit for a high share of renewables.
Following the Russian aggression and invasion of Ukraine, the EU’s energy market has been affected by dire consequences such as raising costs of gas and electricity. On top of adopting short-term measures, in the 2023 Working Programme, the European Commission pledged to introduce more permanent reforms to the current energy market by the end of the first quarter of 2023. The currently most debated measures are (I) the Europeanisation of the ‘Iberian model’, and a pan-European ‘Greek model’. The authors assess such models against their impact on five variables, as to turn the spotlight on respective benefits and drawbacks that each model presents regarding:
- The merit order
- The buildout of renewables
- Demand-side signals
- Cross-border flows
- Consumer participation and vulnerable consumers
Given the context, the report argues in favour of future-proofing the current market design. It argues that it is crucial to ensure a system friendly buildout of renewables and to maximise the efficiency of cross-border flows within Europe, as it would be extremely costly for any member state to ensure security supply on its own. In view of the proposal to be issued by the European Commission, EPICO KlimaInnovation and Aurora Energy Research suggest a reformed market-design that builds on the success of the past decades, instead of undoing it. To make the system future-proof, the EU should:
- Extend the hedging opportunities with Power Purchase Agreements (PPAs) as long-term purchase contracts, with baseload Contracts for Difference (CfDs) as support mechanism where needed
- Introduce block tariffs only temporarily and only for vulnerable consumers to shield against high prices while permanently incentivise long-term contracts for end-consumers
- Increase the system flexibility through the aggregation and integration of flexibility requiring swift implementation of smart metering and flexible tariffs.
- Provide additional incentives for flexibility through an innovation-oriented capacity mechanism
- Implement existing regulations for more demand-side flexibility
The recent crisis teaches us that there is no silver bullet to forge a future-proof energy market design. Assessing approaches, which want to change how prices are set in the market is playing whac-a-mole. When coming up with a new market-design, we need to build on the successes of European energy integration of the last decades, instead of undoing it. It does not help to put a car in reverse once you drove it off a cliff. Instead, we need crucial reforms for making the merit-order based market design future- and crisis-proof.
Ensuring a market design that is setting the right incentives for system integration of all forms of demand and supply is key for a competitive and decarbonized electricity supply. This means that all types of generation assets and consumers should be incentivized to provide flexibility by a joint price signal and encourage long-term hedging for end-consumers.
Download our Paper here.
Press contact:
Nassos Anastasilakis