Electricity prices and market design – Policy Workshop

FSR Regulatory Policy Workshop Series 2022

The surge in electricity prices over the last few months have led to calls by different stakeholders, including some national governments, to introduce changes in the electricity market design. For example, on 5 October 2021, the governments of Spain, France, the Czech Republic, Romania and Greece issued a common statement calling for a reform of the day-ahead electricity market, which would need to be improved “to better establish a link between the price paid by the consumers, and the average production cost of electricity in national production mixes. This is all the more important as decarbonisation will increase the use of electricity in our economy”.

Following this call, a number of ‘non-papers’ were released in November 2021 proposing a variety of measures. For example:

• In a ‘Non-paper on energy and electricity & gas markets’[1], it is argued that urgent action is needed to ensure that “final consumers pay electricity prices that reflect the costs of the generation mix used to serve their consumption” and that this could be achieved through “mechanisms based on financial transfers between producers and consumers, [which] would have no effect on the functioning of the wholesale market, nor affect the merit order of the different generation plants mobilised in the energy market on an hourly basis”.
• In a ‘Non-paper on electricity, gas and ETS markets’, after indicating that “a common European approach is our preference for the whole European energy internal market”, it is suggested that “in exceptional situations, Member States have to be allowed to adapt the electricity price formation to their specific situations (mix, resources, level of interconnections)” and therefore it is proposed that consideration be given to reforming the electricity market design so that “the electricity price would be obtained as an average price with reference as well to the cost of ‘inframarginal’ clean technologies (particularly renewables)”.

These are just examples of the kind of (often contradictory) proposals that have been floating around in recent months. In the first non-paper quoted above, financial transfers are advocated which “would have no effect on the functioning of the wholesale market, nor affect the merit order of the different generation plants mobilised in the energy market on an hourly basis”. In the second non-paper, it is proposed that Member States “be allowed to adapt the electricity price formation to their specific situations” so that “the electricity price would be obtained as an average price with reference as well to the cost of ‘inframarginal’ clean technologies (particularly renewables)”.

To tackle rising energy prices, while preventing damage to the internal energy market from uncoordinated national actions, in October 2021 the European Commission proposed a ‘toolbox for action and support’[2], which outlined a set of measures which the Commission itself and the 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 vulnerable ones. However, and interestingly, the Commission also expressed its intention of “task[ing] 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].

In fact, some of the proposals floated in the debate in recent months, including one of those above, could be interpreted as calling for the ‘pay-as-cleared’ pricing approach in the DAM to be abandoned in favour of some version of the ‘pay-as-bid’ method[4].

This is also the interpretation followed by ACER, which, intervening in this debate with a note in October 2021, indicated that: “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”[5].

However, there is a sense that there might be more in the proposals recently voiced than a switch from the ‘pay-as-cleared’ to the ‘pay-as-bid’ remuneration method, which is not a new issue and has been already resolved, in favour of “pay-as-cleared” pricing approach, many times in the past[6].

Against this background, and without trying to pre-empt the assessment being conducted by ACER, but rather possibly contributing to it, the Workshop will aim at digging deeper in the proposals recently floated and discussed by many stakeholders to assess whether and which other measures related to the electricity market design, beyond the pricing mechanism, could and should be considered to deal with the much higher electricity prices now and, most likely, in the forthcoming energy transition.

For this purpose, the Workshop will be structured in two sessions:

• Session I will aim at identifying the scope and details of the proposals on market design enhancements which have been put on the table over the last few months;
• Session II will consider these proposals and assess the extent to which (some features of) the current electricity market design could be enhanced or complemented to support the future energy transition.

Sustainability assessment

The FSR assesses the sustainability and carbon footprint of all its Workshops of the Regulatory Policy Series. This Workshop is run online due to the COVID-19-related restrictions. Therefore, there is no travel involved and the Workshop’s carbon footprint is limited to the impact of using ICT. It is considered that there are no viable ways further to reduce the carbon footprint of the Workshop.

Please note that this event is by invitation only. For further information, please contact Elena Iorio.

[1] Non-paper by the Spanish, French, Italian, Romanian and Greek governments.

[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] It seems that this is the way in which ACER also interpreted at least some of the proposals voiced in the last few months. It addresses the ‘pay-as-bid’ vs. ‘pay-as-cleared’ debate in its Preliminary Assessment of Europe’s high energy prices and the current wholesale electricity market design, Part 1, November 2021, Section 4.3.

[5] ACER, High Energy Prices, October 2021, page 12.

[6] Cfr., among many, Susan Tierney, Todd Schatzki and Rana Mukerji, “Pay-as-Bid vs. Uniform Pricing: Discriminatory Auctions Promote Strategic Bidding and Market Manipulation,” Public Utility Fortnightly, March 2008.