At The Margin
#45: Are Electricity Markets Fit For Purpose?
Energy prices are on everyone's mind lately since the Ukranian conflict began. Electricity markets have come under fire at a European level with Ursula von der Leyen saying they are no longer fit for purpose. Presumably this comment is in reference to the fact that wholesale electricity markets operate by setting the price at the cost of the most expensive unit to generate at a given moment. This guides good decision making, but has the side effect of creating windfall profits in extraordinary times such as this.
So the key question is - is there a way to reduce these windfall profits for firms, transfer those returns or economic rents to consumers, be it through a transfer or changes in prices? There are many options but all may interfere with the efficient operation of the market and create unintended consequences. One key point about electricity markets is that they are complicated and a good market brings on the right generation at the right time. This is really important for short-term efficiency but also in the long run. One example of a potential unintended consequence is in relation to decarbonisation - we need the right portfolio of wind and renewables, but also storage and flexible generation to operate when wind is idle. A good market will find the best mix for us, adjustments to the market must minimise the likelihood of interfering with this.
So that's the problem facing European decision-makers right now. In this episode I am joined by Bram Claeys, Senior Advisor with the The Regulatory Assistance Project (RAP), which is an independent, global NGO advancing energy policy innovation. This group have reviewed the potential options to solve this energy market conundrum, and have put forward some proposals of their own which we will discuss.