Working Paper: CEPR ID: DP17689
Authors: Natalia Fabra
Abstract: In the context of the debate about the reform of electricity markets in Europe, this document proposes a new electricity market architecture. It is based on two pillars: (i) a well-functioning short-run energy market; and (ii) a set of efficient and equitable long-run contracts, signed between firms and the regulator on behalf of all consumers. The design of long-term contracts takes into account the characteristics of the various technologies in order to strike the right balance between exposing them to the short-run price signals while de-risking the investments. The proposal would facilitate the achievement of carbon-free and diversified power markets, allowing for substantial reductions in the cost of electricity for consumers. The proposed design is mostly in line with the recent European Commission (2022b)’s proposal, and it further provides details on key elements that the European Commission has not yet specified.
Keywords: electricity; energy crisis; energy transition; market design
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current electricity market design (D47) | rising electricity prices (L94) |
| merit order system (C69) | inflated prices for all technologies (E31) |
| merit order system (C69) | excessive profits for non-fossil fuel generators (L94) |
| current market design (D47) | inadequate incentives for investments in renewable energy (Q48) |
| current market design (D47) | discouragement of necessary capital inflow for renewable investments (F21) |