The ongoing energy crisis is in essence a gas price shock which also impacts electricity prices, and if policymakers intend to intervene in the electricity market, they need to target this problem, rather than the market framework, says the EU Agency for the Cooperation of Energy Regulators (ACER). The agency also recommends structural measures to hedge electricity customers against possible future periods of sustained high energy prices.
In its Final Assessment of the EU Wholesale Electricity Market Design, ACER says that the current electricity market design is not to blame for the energy crisis, and sees the price volatility in the electricity system likely increasing in the years ahead.
The report was requested by the European Commission, in its toolbox communication in October 2021. In November, ACER submitted its preliminary assessment of Europe’s high energy prices and the current wholesale electricity market design.
ACER’s assessment also proposes 13 measures for policymakers.
Ill-designed emergency measures may endanger the achieved benefits
ACER finds that the current wholesale electricity market design ensures efficient and secure electricity supply under relatively ‘normal’ market conditions, and that it is worth keeping. Some longer-term improvements are likely to prove key in order for the framework to deliver on the EU’s ambitious decarbonization trajectory over the next 10-15 years.
Ill-designed emergency measures or distorting price signals by interfering in market price formation may roll back EU market integration and overall competition, thereby endangering the benefits achieved up until now and possibly increasing the overall cost of the energy transition up ahead, ACER said.
Over the last decade benefits for consumers are estimated at EUR 34 billion.
What are the measures for gas prices?
Regarding measures to alleviate the impact of the high prices taken by member states, ACER believes that the more interventionist the approach, the higher the potential to distort the market, especially in the medium to long term.
The need for interventions in electricity market functioning in the current circumstances should be considered prudently, and if pursued, policymakers should tackle the root cause of the problem (currently gas prices) rather than the electricity market framework itself, the report reads.
New gas supply or lower-price supply coming to Europe could put downward pressure on gas prices
Measures for a ‘root cause’ intervention include the acceleration of gas demand reduction (efficiency efforts, fuel switching etc.) and/or deployment of additional efforts that can put downward pressure on gas prices (e.g. new supply or lower-price supply coming to Europe), while retaining prices that still secure needed liquefied natural gas (LNG) deliveries. The latter effort would likely require intense dialogue between governments in the EU and key gas suppliers.
Finally, regarding more structural measures for the future, ACER points to a few options being debated in academic circles for hedging against future periods of sustained high energy prices.
Energy interdependence among EU member states needs to rise
The report underlines that electricity market integration across EU member states will be key to pursue power sector decarbonization at lower cost, in turn ensuring security of supply by being able to draw on neighboring jurisdictions in times of need.
While increased energy independence vis-à-vis (particular) third-countries is a policy objective of growing importance, realizing this may well depend on enhanced energy interdependence among EU member states, ACER said.
Price volatility in the electricity system is likely to increase in the years ahead
In new circumstances the market design will need to facilitate a massive rollout of low-carbon generation, and in particular renewable generation characterized by high upfront investment costs, while ensuring that flexible resources complement intermittent renewable production where and when needed.
Price volatility in the electricity system is likely to increase in the years ahead, indicating growing flexibility needs of the system, the report reads.
ACER’s assessment identifies several areas where policymakers could put further emphasis to strengthen current electricity market design:
- Making short-term electricity markets work better everywhere
- Driving the energy transition through efficient long-term markets
- Increasing the flexibility of the electricity system
- Protecting consumers against excessive volatility while addressing inevitable trade-offs
- Tackling non-market barriers and political stumbling blocks
- Preparing for future high energy prices in ‘peacetime’; being very prudent towards wholesale market intervention in ‘war time’.