In a report commissioned by the European Parliament’s Committee on Industry, Research and Energy (ITRE), the proposal for reform of the electricity market currently being negotiated by the co-legislators (see EUROPE 13255/1) is scrutinised by the European Parliament’s Policy Department for Economic, Scientific and Quality of Life Policies. The latter argues that neither the expected mode of influence of the various elements of reform nor their interaction are clearly defined by the legislators.
The report looks back at the energy crisis in Europe, which has put the design of the existing market to the test “in terms of operation, fairness and investment”.
Operationally, the electricity market is said to have performed well during the crisis, but it has revealed shortcomings in terms of investment incentives. Consumers, who were not protected against price fluctuations, suffered major shifts in wealth.
The reforms proposed by the European Commission are aimed at refining existing market instruments rather than overhauling the entire system. This includes adjustments to contracts for differences (‘CfDs’), hedging obligations, frameworks for responding to future crises, reducing consumption during peak demand hours and energy sharing.
A major concern highlighted by the authors of the report is the lack of an objective evaluation framework for analysing the impacts of these adjustments to isolated market instruments. The document therefore presents the “Dispatch and Contracts” (DISC) model, which represents the financial flows resulting from contractual agreements in electricity trade.
The authors then make a number of recommendations for ongoing market reforms, including protecting customers but without compromising short-term pricing incentives, preserving operational efficiency in the design of long-term contracts for low-carbon generation, and avoiding excessive tinkering with flexibility incentives. “The existing mechanisms for balancing electricity markets in the short term are already working well”, the document states.
Furthermore, the authors argue that as the energy transition progresses, a more fundamental overhaul of the European electricity market will be required. The priorities will be transmission capacities and the need to avoid price freezes for certain sectors, such as large-scale industry.
“Any attempt to circumvent market forces by government decree risks leading to an unnecessary subsidy race in Europe and inefficient investment decisions”, the document states.
According to the authors, it will be crucial to strike a balance between market signals and government intervention as Europe moves towards a more flexible energy system with evolving demand patterns. Transparent planning at European level could help achieve this balance.
To see the report: https://aeur.eu/f/8td (Original version in French by Pauline Denys)