Europe’s electricity market design recommendations – CERRE

Recommendations for regulation to future-proof Europe’s electricity market have been proposed by the Centre on Regulation in Europe (CERRE).

With the double challenges of managing the current energy crisis while simultaneously navigating the energy transition, the electricity market design is coming under increasing focus as a widely interconnected market with a growing number of players.

This double challenge is exacerbated by the need for both short and long term actions, with the former potentially having lasting repercussions.

CERRE, an independent regulation think tank, has been focussing on this issue and has now released an over 200-page study containing over 70 policy recommendations, which the organisation believes should shape a European electricity market that is resilient to shocks and supports the accelerated rollout of renewables over the next three decades.

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A key finding of the study is that the market design legislation is essentially still fit for purpose but needs some broad revision with targeted improvements.

In this connection there is thus a need to clearly distinguish between the measures to meet the net zero objectives with those to respond to short-term disruptions.

Another point stated is that as Europeans are in this together at the wholesale market level, the crisis calls for a joint approach, while especially the previously Russian gas-dependent countries will need the integrated energy market to support them.

In addition, the impact of climate disasters on the energy value chain and electricity output and the need for weather conditions as important considerations in the design of future electricity markets, is noted, as also is the impact of high energy prices on households and industry.

Recommendations for future-proofing the market

The recommendations are grouped into six areas:
● Double down on demand reduction, including cutting the aggregate gas demand and making better use of smart meters and smarter contracts.
● Deepen the integration of the single energy market, including removing the remaining energy trade barriers and harmonising the regulation of capacity remuneration mechanisms.
● Fast-track the rollout of low carbon investments, including a push for greater levels of investments and prioritised permitting new low carbon generation.
● No dramatic changes: stick to a market design that works, including not ‘decoupling’ energy prices between power, heating and transport at the wholesale level and not moving to the US standard market design.
● Auctions for long-term PPAs can provide stability and lower costs as well as competition both for and in the market.
● Better link the wholesale and retail markets, including reflecting wholesale prices in retail prices, encouraging longer-term consumer contracting and reinforcing financial regulation of suppliers.

The lead authors of the report were the CERRE academic co-directors Professors Michael Pollitt from the University of Cambridge and Nils-Henrik von der Fehr from the University of Oslo.