The EU Commission’s Proposal for Improving the Electricity Market Design: Treading Water, but not Drowning

On March 14, 2023, the European Commission (EC) published the much awaited “Proposal for a regulation (…) to improve the Union’s electricity market design.” The proposed regulation reflects the verdict of the EC after several months of fervent debate triggered by the energy crisis that has affected the European region. In this paper, we discuss several crucial elements that are part of the proposed regulation.

In a nutshell, we deem the EC has done a great job managing a highly complicated situation. The proposal preserves the crucial role of short-term electricity markets and puts the focus on the key flaw: the perennial incompleteness of long-term power markets. The EC has put forward a large battery of measures, covering different dimensions and with very different potential impacts on the market design.

Here we focus on what we consider to be the four key elements of the proposal: (i) the promotion of long-term contracting, (ii) interventions during electricity price crises, (iii) the strategy for an efficient supplier risk management, and (iv) flexibility support schemes and capacity remuneration mechanisms.