While not trying to pre-empt or anticipate the conclusions which ACER will reach in its assessment of the existing electricity market design, this Debate will aim at discussing the dimensions of the current market design which might need to be enhanced or supplemented to improve its performance in the context of the energy transition.
Background
EU gas and electricity prices have increased rapidly and reached unprecedented levels. Gas prices in early October were 400% more expensive than in April 2021, driven significantly by global supply and demand dynamics. Electricity prices have increased by 200% over the same period, driven mainly by the gas prices [1].
There seem to be many causes for the sharp increase in world gas prices, but the main ones appear to be a faster economic recovery after the pandemic, boosting a strong growth in demand in many regions, and a tight global LNG market.
While being the largest buyer of internationally traded gas (accounting for almost half of the volumes), Europe has little leverage on the global LNG market, where it is often a price taker.
Instead, electricity prices in Europe reflect demand and supply conditions in the Continent. These are clearly affected by international fuel prices, but also by other, more local factors, such as weather conditions and renewables-based electricity generation, as well as the market design.
A number of EU Member States have taken or are considering taking national uncoordinated actions to mitigate the impact of higher energy prices on consumers. Some of these measures are likely to affect – and possibly distort - cross-border trading. To tackle rising energy prices, while preventing damage to the Internal Energy Market, the European Commission has proposed a toolbox for action and support [2], outlining a set of measures which the Commission itself and Member States could adopt to deal with the current high-price situation. Many of these measures are aimed at mitigating the impact of higher energy prices on industry, businesses and households, especially the vulnerable ones. However, and interestingly, the Commission also intends to task ACER to study the benefits and drawbacks of the existing electricity market design and propose recommendations for assessment by the Commission by April 2022 [3].
At the same time, ACER has already shared some considerations on the current electricity market design, including on the evergreen debate on pay-as-bid vs. pay-as-clear market models: any future market design needs to be able to (a) remunerate technologies above their marginal costs, sometimes quite significantly so, and (b) incentivise the alleviation or smoothing of volatility in the market. The ‘pay-as-clear’ model allows for both of these elements [4].
Join us to discuss energy prices and market design in the context of the energy transition.
A Q&A with the audience will follow.
1] ACER, High Energy Prices, October 2021.
[2] Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, Tackling rising energy prices: a toolbox for action and support, Brussels 13.10.2021, COM(2021) 660 final.
[3] Ibid, Section 3.2.1, page 15.
[4] ACER, High Energy Prices, October 2021, page 12.