Recent energy price dynamics and market enhancements for the future energy transition

Abstract

EU gas and electricity prices have increased rapidly over the last few months and reached unprecedented levels. While the recent energy price dynamics reflect current market conditions and have little to do with the future energy transition, they provide an opportunity to reflect on the most appropriate electricity market design to support this transition. As a reaction to the recent price surges, calls have been made by different stakeholders, including some national governments, to introduce changes in the electricity market design. Some of these proposals could be interpreted as calling for the ‘pay-as-cleared’ pricing approach in the wholesale day-ahead electricity market to be replaced by some version of the ‘pay-as-bid’ method. This is not the first time that ‘pay-as-bid’ has been proposed to replace ‘pay-as-cleared’ as the remuneration rule in the day-ahead electricity market and every time the conclusion is the same: ‘pay-as-cleared’ is a superior pricing method for the day-ahead electricity market. ‘Pay-as-bid’ pricing would not necessarily result in lower overall payments to resources selling electricity on the market, while possibly having a negative impact on the efficiency of the generation mix used to serve demand. This Policy Brief also assesses how consumers could be protected from the impact of wholesale price volatility on their energy bills and how best to protect vulnerable consumers from higher energy prices without depriving them of the opportunity to participate in electricity markets to offer their valuable flexibility, and which instruments can best ensure resource adequacy in the context of the future energy transition.