Reacting to changing paradigms: How and why to reform electricity markets

Abstract

The energy crisis and the accelerated transition to climate neutrality result in a shift from the traditional energy trilemma to an “energy quartet” across Europe. Firstly, the criteria of affordability, previously focused on short-term price developments, broadens to reliable affordability including in crises. Secondly, clean energy traditionally focused on clean production now extends to clean energy systems with climate neutral provision of flexibility and enhanced energy efficiency. Thirdly, generation adequacy extends to energy system resilience, for example to interruptions of fuel supply. Fourthly, a new objective of reliable speed is emerging, responding to the constrained carbon budget and the need for predictable demand for energy technologies to unlock investments in manufacturing capacity. Synergies can be realized by jointly addressing the energy quartet. First, hedging of both consumers and producers against power costs (but not price) fluctuations by passing on the conditions of contracts for differences to consumers can enhance speed and predictability of renewable investments. Second, nodal pricing allows the demand side to resolve rather than contribute to transmission constraints, enhancing system security and reducing emissions from fossil assets, which are currently dispatched to resolve transmission constraints. Third, a reformed strategic reserve can contribute to reliable affordability and system security.