The recent energy crisis in Europe, caused by a reduction in gas supply and increased energy demand, has highlighted the need for fundamental reform in the design of the electricity market. Energy prices increased significantly throughout 2021 and 2022, resulting in price shocks for households, industries, and businesses across the European Union (EU). In response, the EU provided short-term measures to address high prices, including income support, tax breaks, and demand reduction measures for gas and electricity.
However, the crisis has also shown the lack of resilience to energy price spikes and the need for longer-term measures to improve the functioning of short-term markets, better integrate renewables, and enhance the role of flexibility while empowering and protecting consumers. The European Commission President announced in the 2022 State of the Union Address the need for a fundamental reform of the electricity market design.
Tackling volatility and uncertainty
The European Union is reportedly planning to introduce measures to create a more stable electricity market across the bloc. According to a recently leaked document, the EU aims to tackle volatility and uncertainty in the electricity market by introducing a range of measures, including a new market design and enhanced regional cooperation. The plans are part of the EU’s wider strategy to achieve its ambitious target of becoming climate-neutral by 2050.
The electricity sector is a key area in achieving this goal, as it accounts for a significant proportion of greenhouse gas emissions. One of the key proposals in the leaked document is the creation of a new market design that would ensure a more stable and predictable electricity price. The current system, which relies on a wholesale market that operates in real-time, is highly volatile and subject to fluctuations. The proposed new design would introduce a range of market mechanisms to help manage price volatility, including capacity mechanisms and price floors and ceilings.
Another important element of the plans is enhanced regional cooperation. The EU aims to create a more integrated and interconnected electricity market across the bloc, with better coordination between different countries and regions. This would help to improve the security of supply, as well as enable the more efficient use of renewable energy sources. The EU is also considering the introduction of cross-border tariffs to help balance supply and demand across different regions.
The proposals have been welcomed by many in the energy sector, who believe that a more stable and predictable electricity market would be beneficial for both consumers and producers. However, there are also concerns that the measures could have unintended consequences. Some have warned that price floors and ceilings could lead to market distortions and reduce competition, while others have raised concerns about the impact on energy-intensive industries.
Despite these concerns, the EU is pressing ahead with its plans to create a more stable and predictable electricity market. The leaked document suggests that the proposals could be formally announced in the coming weeks, and we at Fusebox wholeheartedly support this as a faster deployment of renewable energy and clean flexible technologies is the most sustainable and cost-effective way of reducing the demand for fossil fuels.
The document itself can be viewed here: Draft Electricity Market Design Proposal