Following the publication of its Preliminary Assessment in November 2021, on 29 April the EU Agency for the Cooperation of Energy Regulators (ACER) published its Final Assessment of the EU Wholesale Electricity Market Design. The report provides an in-depth analysis of energy prices and drivers, current wholesale electricity market design, ways to future-proof the wholesale electricity market, extreme price shocks, and the impact on retail markets.
ACER provides a backdrop to the current energy crisis, likening it to a gas price shock, which also has resulting impacts on electricity prices. Global economic recovery in 2021 saw global gas demand rise back to pre-pandemic levels and outstrip supply. Despite increasing LNG deliveries to Europe, sharply decreasing Russian gas pipeline supplies and the related geopolitical uncertainty put strong upward pressure on prices. The Russian invasion of Ukraine has heightened this situation, resulting in high gas and electricity prices that have been felt across the market.
However, the report states that while current circumstances impacting the EU’s energy system are far from ‘normal’, ACER finds that the current electricity market design is not to blame for the current crisis. It is highlighted that the main focus of the report is a long-term perspective on the EU’s wholesale electricity market design with considerations 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.
ACER finds that whilst the current electricity market design is worth keeping, improvements must be made to enable the EU’s decarbonisation trajectory. The report identifies several areas where policymakers could put further emphasis to future-proof the current electricity market design:
- Making short-term electricity markets work better everywhere – Overall, short-term markets are working well. To realise further benefits, Member States and national regulatory authorities should implement what has already been agreed in EU legislation and beyond. ACER highlights four such areas relevant for enhanced EU market integration: meeting the minimum 70% cross-zonal capacity target by 2025 (thus enhancing electricity trade between Member States); rolling out flow-based market coupling in the Core and Nordic regions as soon as possible; integrating national balancing markets; and reviewing the current EU bidding zones to improve locational price signals.
- Driving the energy transition through efficient long-term markets – Long-term markets and improved hedging instruments need more attention to drive the massive investments needed up ahead. Currently, such long-term markets lack liquidity, particularly beyond three years in the future. ACER highlights that access for smaller market participants to Power Purchase Agreements (PPAs) could be improved, that liquidity could be further stimulated to help independent companies, traders etc. compete with large established firms, that national forward markets should be further integrated, and that collateral requirements imposed on market participants could benefit from being reviewed. Market-based centralised procurement could complement long-term electricity markets to address market failures or to speed up the deployment of specific technologies.
- Increasing the flexibility of the electricity system – Enhanced flexibility resources will be key for the electricity system going forward. ACER views freely determined and competitive price signals as invaluable instruments for showing true system flexibility needs, arguing price signals should thus be preserved to drive relevant investment efficiently. Hence, national regulatory authorities and system operators should focus on removing barriers to the use of such flexibility resources.
- Protecting consumers against excessive volatility whilst addressing inevitable trade-offs – Targeted measures to protect vulnerable consumers should be considered in times of sustained high prices, whilst not limiting the ability of energy communities or aggregators to provide energy services for the benefit of the system. Preserving some price signalling to incentivise desired behaviour remains important. In addition, Member States should strike a balance between ensuring the financial responsibility of retail energy suppliers for the benefit of consumer confidence and market stability, and keeping the market open for new suppliers to reduce costs for consumers.
- Tackling non-market barriers and political stumbling blocks – 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. This in turn will rely on greater attention being paid to cross-border perspectives and needs, supplementing more national perspectives. In addition, addressing barriers and recurrent delay factors to infrastructure roll-out remains key.
- Preparing for future high energy prices in ‘peace time’; being very prudent towards wholesale market intervention in ‘war time’ – The need for interventions in market functioning should be considered prudently and carefully in situations of extreme duress and if pursued should, ideally, seek to tackle ‘the root causes’ of the problem (currently gas prices). Additionally, ACER points to a few structural measures for hedging, which might be considered to alleviate possible concerns about future periods of sustained high energy prices.