Electricity market reform: promoting investment while maintaining the price signal

Why reform the electricity market?

The agreement on electricity market reform reached on October 17 by European energy ministers brings to an end a public consultation launched by EU member states and prompted by the 2022 energy crisis. The aim of the agreement is to organize exchanges among electricity producers, retail suppliers and industrial users. It is designed to meet two challenges. The first one is to promote investment in low-carbon power generation equipment. The needs are tremendous, and the remuneration system needs to reassure investors that new wind, solar or nuclear power plants will be financially viable. Such investment is jeopardized in particular by the lack of long-term visibility on green policies and by the long tradition of underpricing of carbon emissions, hence the search of a solution in the form of long-term green supply agreements. The second challenge is to ensure that the installed plants are used efficiently. On the supply side, the cheapest sources of electricity production should be called upon first. On the demand side, the most productive uses of electricity must have priority. Dispatching according to the merit order in the wholesale market meets the second challenge. The price signal thereby generated measures resource scarcity and leads to allocative efficiency. This organization of the short-term wholesale market was reaffirmed in the compromise signed on October 17...

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