How important is the new electricity market reform?
The European Commission's reform proposal, published on 14 March, is the fifth major electricity market package. But will the proposed changes to two regulations and one directive substantially change the way in which electricity trading is organised in Europe?
It is likely that the reform heralds a paradigm shift, but in ways than were not discussed in 2022. Because of record-high electricity prices and concerns over security of supply, the focus last year was on short-term prices. The subsequent discussion showed that moving away from setting short-term prices based on the cost of the last required unit to meet aggregate demand (marginal pricing) would substantially undermine the efficiency of dispatch.
The proposal of the Commission took a very different route, essentially formalising the tools member states can use to incentivise investments.
While the proposed electricity market reform defends the idea of ensuring optimal European dispatch, national instruments will now be allowed to do the heavy lifting in steering investment decisions. Hence, European markets will not be allowed to help determine the efficient amount, technology and location of investments.
In contrast, several institutions – national governments, the European Commission, national and European networks, market operators as well as national and European regulators – will be given partial responsibilities for designing and allocating individual long-term instruments such as Contracts for Difference (CfD), Power Purchase Agreements (PPA) and Forwards and Flexibility. While the supply and demand for these traded products overlaps and spills across borders, it is not immediately clear how this interaction will be managed.
The good news is that the Commission proposal drives the conversation towards a reform of Europe's electricity market design, which encourages the necessary investment for a smooth transition to a climate-neutral economy.
The Why Axis is a weekly newsletter distributed by Bruegel, bringing you the latest research on European economic policy.
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