Electricity

The solution that is clearly emerging in the long-term is that of electrification and decarbonization of the power industry through renewables, as well as other sources such as nuclear.

Soaring electricity prices pose challenges for both decarbonisation and competitiveness. Electro-intensive industries are particularly exposed to high and unpredictable electricity prices. Other energy-intensive industries whose decarbonisation pathway involves electrification (e.g. steel) are likely discouraged from making the relevant investments.

The reform of the EU electricity market design (EMD) has been a recurring topic since several years in academic circles (especially in the UK); it gained increasing attention in EU political circles since the end of 2021 and in the course of 2022 amidst soaring energy prices that put the focus on affordability.

The European Commission President Ursula von der Leyen provided in June 2022 the political direction for the EMD reform, with her initial statements alluding to a review and a potential overhaul of the marginal pricing mechanism. A central consideration has been the observation that although the EU generates twice as much electricity from renewables as it does from gas, the power market design was not adapted to the new realities of renewables to allow for the falling cost of renewables to be sufficiently reflected in bills.

Decarbonisation requires a significant amount of investment, and as such the signal from the electricity market, the carbon market, and the interaction between these two needs to ensure a good framework that will incentivize these investments.

Against this backdrop, ERCST launched at the end of 2022 a workstream on the “Interlinkages between Climate Policy and Electricity Market Design”.