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ACER: electricity market design is worth keeping but it must adapt to emergency situations

In the second half of 2021, average household electricity prices in the EU increased sharply compared with the same period of 2020, standing at 23.7 euros per 100 kilowatt-hours (kWh), as reported by Eurostat. Also, average gas prices in the EU also increased compared with the same period of 2020, to 7.8 euros per 100 kWh.

Expressed in euro, average household electricity prices were lowest in countries from the Central and Eastern European region: Hungary (10 euros per 100 kWh), Bulgaria (10.9 euros) and Croatia (13.1 euros). Also, the lowest household gas prices in the second half of 2021 were recorded in Hungary (3.1 euros per 100 kWh), Croatia (4.0 euros) and Lithuania (4.1 euros).

Well before the height of the current crisis, the EU’s wholesale electricity market design has been the subject of debate (in technical, academic as well as policy circles), in particular as to whether the current market design is fit for purpose given the significant changes needed to deliver the clean energy transition or whether, and if so, to what extent, the market design would need further adjustment.

Today, the European Union Agency for the Cooperation of Energy Regulators (ACER) has proved that whilst the current circumstances impacting the EU’s energy system are far from normal, the current electricity market design is not to blame for the current crisis. On the contrary, the market rules in place have to some extent helped mitigate the current crisis, thus avoiding electricity curtailment or even blackouts in certain quarters.

According to ACER’s Final Assessment of the EU Wholesale Electricity Market Design, the current energy crisis is in essence a gas price shock, which also impacts electricity prices. With the economic recovery in 2021, global gas demand bounced back to pre-pandemic levels and outstripped supply. Despite increasing LNG deliveries to Europe (linked with the rise in gas prices), sharply decreasing Russian gas pipeline supplies and the related geopolitical uncertainty put strong upward pressure on prices.

Already in October 2021, in its Toolbox Communication, the European Commission tasked ACER with assessing the benefits and the drawbacks of the EU’s current wholesale electricity market design and with providing recommendations for its improvement. ACER’s assessment is that the current market design is worth keeping. However, the electricity market design is not designed for the emergency situation that the EU currently finds itself in.

Indeed, 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 (estimated to be approximately 34 billion euros a year) and possibly increasing the overall cost of the energy transition up ahead.

Especially considering that, going forward, the EU’s ambitious decarbonisation trajectory requires fast and massive transformation across sectors. The market design will need to facilitate a massive rollout of low-carbon generation and in particular renewable generation characterised by high upfront investment costs, while ensuring that flexible resources complement intermittent renewable production where and when needed. Related to this, price volatility in the electricity system is likely to increase in the years ahead, indicating the increasing flexibility needs of the system. Hence the market design will need to send adequate price signals to meet flexibility needs going forward, again where and when needed.

That’s why ACER’s assessment identifies several areas where policymakers could put further emphasis. First of all, by making short-term electricity markets work better everywhere. Second, by driving the energy transition through efficient long-term markets, which, currently lack liquidity, particularly beyond three years in the future. In this regard, the access for smaller market participants to Power Purchase Agreements (PPAs) could be improved and liquidity could be further stimulated via so-called market-making efforts to help independent companies and traders to compete with large established firms.

ACER is also suggesting increasing the flexibility of the electricity system by removing current barriers and protecting consumers against excessive volatility. Finally, Member States should consider enhanced coordination of approaches to and plans for large-scale generation and grid infrastructure deployment, as a likely prerequisite for the efficient and accelerated roll-out of such investment. And, they should prepare for future high energy prices in peace time, being very prudent towards wholesale market intervention in war time.

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