Published in La Tribune, May 19, 2026
Whenever an energy crisis erupts, the same idea resurfaces in the political sphere: what if we changed the way electricity prices are set in wholesale markets? Since 2022, merit order and marginal cost pricing have become convenient scapegoats. They are accused of “contaminating” electricity with gas prices, enriching producers, and thereby fleecing European consumers, primarily French consumers. The debate reignited at the March 2026 European Council, which put the architecture of the electricity market back on the table. European Commission President stated in February 2026 : “the discussion is intense why our merit order system in the very end takes the most expensive resource, and this is the price-setting mechanism then. We did not come to a conclusion.” Before scrapping the entire system, it is worth examining what is causing such animosity.
The electricity market is not an invention of the Brussels administration
Let’s review the basics of the electricity market, which are far less mysterious than some people suggest. Every hour (or half-hour or quarter-hour), generators submit bids to the electricity exchange (epexspot. for France) specifying the volume and the minimum price at which they wish to sell that volume. The bids are ranked in ascending order: wind and solar power, with virtually zero variable costs, come first; next are nuclear and hydroelectric power; then gas, and sometimes coal or fuel oil. The last power plant that needs to be mobilized to balance supply and demand determines the price that all the resources called upon will receive. This single marginal spot pricing system is known as “pay-as-clear.”
This rule is often presented as an embarrassing legacy of the European directives of the early 2000s and the liberalization of the sector. This is a mistake for three reasons. First, from a historical perspective, marginal cost pricing is over seventy years old. In France, it was Marcel Boiteux who, as early as the 1950s, applied it to EDF’s pricing. His famous formula sums up the principle well: “Prices are meant to reflect costs, just as clocks are meant to tell the time.” This pricing system accompanied the entire development of France’s energy infrastructure—including nuclear power—at a time when consumption was doubling every ten years.
The rest of the world reached the same conclusion. In the United States, Fred Schweppe and his co-authors laid the theoretical foundations for the single marginal spot price in Spot Pricing of Electricity (MIT, 1988). The United Kingdom adopted the principle as soon as its wholesale market opened in 1990. The Nordic markets followed suit shortly thereafter, and the same rule is found in all major U.S. markets: PJM, CAISO, NYISO, ERCOT. The European Union did not, therefore, impose a model. It endorsed a system that was already functioning well within its own borders and in all countries open to competition.
Second, it is a mistake to believe that this system is an exception applied only to the electricity market. Many sectors operate on the same principle. In the energy sector, of course, with the gas market, but also for the allocation of landing and takeoff slots at certain airports such as Heathrow in London, online advertising, and telecom frequencies. Even fish auctions from Brest to Tokyo use this single marginal pricing. The underlying principle is always the same: when a scarce and hard-to-store commodity must be allocated in real time and an investment signal sent to producers, economic analysis ultimately converges on the marginal price. It is therefore not a peculiarity of the European electricity market.
Finally, since the price is set by the power plant with the highest operating cost, it is not unusual for the price of natural gas to be the determining factor in the price of electricity at certain times. Even in France, we still rely on gas-fired power plants during certain periods of high demand. During the week of April 13, 2026, France did not import any electricity, but gas-fired power plants accounted for up to 7% of electricity generation, representing approximately 4 GW of capacity in use (see eco2mix).
The advantages of the single marginal spot price
The primary benefit is the cost savings achieved: at every moment, pay-as-clear ensures that demand is met by the least-cost combination of available generation sources. Engineers call this “optimal dispatch”. This allocation method, based on auction theory, is not just an abstract concept. It enables substantial savings in fuel and CO₂ emissions, with a positive impact on consumers’ bills amounting to billions of euros each year across the continent.
The second advantage is informational. A single-price market, calculated and posted hourly, sends 8,760 scarcity signals per year to producers, consumers, retailers, aggregators, storage operators, investors, grid operators, and neighboring countries (sometimes negative, as in France on May 1, 2026 between 12 p.m. and 2 p.m., where the MWh sold for nearly -500€/MWh, to signal an oversupply). This hourly signal allows an interconnection to make its cable profitable, a battery and a pumped-storage hydroelectric plant to know when to charge or discharge, and an electrolyzer to decide whether or not to produce hydrogen. If this signal is removed, we will have to manually reconstruct—through subsidies and regulation—what the market does for free, with the risks of threshold effects, incomplete processing, and administrative burdens.
Finally, contrary to what is often criticized about this system, the marginal price does not “overpay” inframarginal producers—that is, those who submitted lower bids due to their lower operating costs. The difference between the market price and their variable cost is precisely what they need to cover their fixed costs—the power plant, the photovoltaic farm, the wind turbines. Marcel Boiteux already demonstrated this for EDF: this “rent” is not a gift to producers; it is what makes it possible to finance them. Eliminating it means depriving investments of their return. Who, then, will finance the investments? The taxpayer, through subsidies, and/or the consumer, later on, based on administered prices detached from the hourly market data.
The Fair of Miracle Solutions
For several years now, the fair of outlandish ideas has been in full swing. We will discuss three of them.
The first solution is to pay each producer a price equal to their bid (known as the “pay-as-bid” system). On the surface, this seems like a “fairer” system. In practice, however, since market participants are rational, they stop bidding at a price that merely covers their variable costs. Their calculations now factor in not only fixed costs but also their predictions of what the equilibrium price will be. Academic studies on auctions have been saying this since the 1990s: with pay-as-bid, bids lose consistency, average prices do not fall, and dispatch is no longer efficient. This is what happens when you try to lower the temperature by breaking the thermometer.
Second suggestion: the “Iberian mechanism”, which involves subsidizing gas to drive down the wholesale electricity price. This temporary system was implemented under very specific circumstances: the peninsula is poorly interconnected, and gas prices were abnormally high. If applied on a European scale, it would involve levying taxes on consumers to subsidize gas-fired power producers and prevent electricity prices from rising. This encourages neighboring countries to import this artificially cheap electricity. The European association Eurelectric has quantified the impact: the net gain for the European consumer is, in the best-case scenario, close to zero.
Finally, we can mention the proposal put forward in 2022 by Pantelis Capros, a Greek economist at the National Technical University of Athens, which involves splitting the market in two: an “administered” price for inframarginal producers and a marginal price for gas. This would add a considerable layer of complexity, new regulation, and, above all, a price disconnected from the system’s physical constraints. If we superimpose multiple signals, we end up hearing none amid the informational cacophony. This also holds true in any extensive version of market partitioning, where each production technology would have a dedicated market to reconstruct an average electricity price a posteriori.
Ursula von der Leyen’s (Very) Low-Key U-Turn
We must give the President of the European Commission credit for one thing: she changed her mind. In September 2022, speaking before the European Parliament, she stated: “This market system no longer works; we must reform it.” The diagnosis was uncompromising, similar to that of French Minister of Economy and Finance Bruno Le Maire who, a few months earlier, in the Senate and on television talk shows, declared: “The European single electricity market isn’t working; it’s absurd,” criticizing its “obsolete” rules. While Le Maire has remained steadfast in his position, the letter sent by Ursula von der Leyen to heads of state and government on the eve of the European Council meeting on March 19–20, 2026, reaches a markedly different conclusion: “A market system based on marginal price delivers, on the whole, clear benefits.” Between the two communications, not much has changed regarding marginal pricing. Rather, it was the Commission that, following the Draghi report and several studies by DG Energy, finally verified for itself what economic theory has been saying since Boiteux. Better late than never.
What needs to be reformed: do not confuse incompleteness with imperfection
Defending the marginal price does not mean leaving everything as it is. The real challenges are known and, for many, already underway. Accelerate the deployment of low-carbon technologies such as nuclear power and renewables. Contractualize decarbonized production via Contracts for Difference (CfDs) and long-term power purchase agreements (PPAs) that protect consumers and producers from price volatility without destroying the short-term price signal. Finally, make flexibility (load shedding, storage, electric vehicles, smart heating) the cornerstone of the system.
The battle, therefore, is not the one being presented to us. It is not being fought over price formation rules; it is being fought over the structure of supply and the long-term contracts that govern that supply. Attempting, for the third time in twenty years, to rebuild the very mechanism of the market risks, above all, once again freezing the investment decisions that Europe urgently needs.
The marginal price is not perfect—no price is. But it fulfills an essential function: it tells the truth about what the next kilowatt-hour costs at the very moment it is called upon. In a sector where decisions involve tens of billions of euros over several decades, doing without such a signal would not only be ill-advised; it would be a step backward.
Photo from Leo_Visions Unsplash
