The long-term component of a future-proof electricity market design

FSR Regulatory Policy Workshop Series 2022 – 2023

The European Union Electricity Target Model (ETM) underpinning the design of the EU Internal Electricity Market, which was developed in the mid-2000s and enshrined in the Third Energy Legislative Package, comprised five pillars: capacity calculation, the forward market, the day-ahead market, the intraday market and the balancing mechanism. For the day-ahead market, the ETM envisaged a single pan-EU price-based market coupling in which a two-sided auction-based market would be established in each market zone, and the emerging prices would be used to couple the zonal markets in the most efficient way. In the intra-day timeframe, continuous trading was envisaged, with the possibility of regular auctions; regulation now provides for three auctions for each day.

In the forward timeframe, the focus was more on the instruments to allocate the available interconnection capacity. It was considered that short-term markets provide the necessary price signals to promote the investment in the resources required to guarantee adequacy.

Therefore, according to the current electricity market legislation, Capacity Remuneration Mechanisms (CRMs) are considered only as a last resort temporary instrument to eliminate residual resource adequacy concerns while implementing measures to eliminate any identified regulatory distortions or market failures.

Other long-term instruments have been neglected by EU legislation. No provisions have been introduced to support the liquidity of long-term electricity (forward or futures) markets, with the results that liquidity of the markets for these instruments is limited to horizons of up to one year and only in a few jurisdictions, and it has been decreasing over the last year . Contracts for Difference (CfDs) have been used in some countries to support the development of renewable-based generation, but again there was no effort to harmonise their use.

However, the increasing penetration of variable renewable energy (VRE) sources in the electricity system is leading to more volatile prices, with the likely prospect of more frequent instances of low prices accompanied by infrequent price spikes. This price pattern creates more risk for investors in the electricity sector and for market participants alike. Therefore, the role of long-term instruments to support resource adequacy is being re-evaluated.

To take stock of the new reality of electricity markets, the European Commission will soon launch a consultation on elements for a future-proof market design.

Against this context, this Workshop will assess whether and how the different instruments currently being discussed – e.g. CRMs, electricity forward and futures contracts and CfDs – can play a role in promoting adequacy beyond the signals provided by short-term market prices.

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