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* A. Rüdinger, M. Mathieu, "How to solve the crisis in the EU electricity market", Energy Post (Noember 4, 2014)

Getting out of the perfect storm: towards coherence between electricity market policies and EU climate and energy goals

Working Papers N°12/2014. Iddri, 2014. 20 p.

This paper offers a diagnosis of the current situation in European electricity markets, as well as a perspective on the long-term trends and structural changes implied by the shift to a low-carbon electricity sector. It then provides a first framework to consider the interactions between electricity market policy and decarbonisation policy at Member State, regional, and EU levels in order to inform the 2030 energy and climate framework, as well as EU and Member State energy and climate policies.

Highlights:

  • ADAPTING THE DESIGN OF THE EU ELECTRICITY MARKET TO A NECESSARY DECARBONISATION

In recent years, the EU power market has been hit by a "perfect storm", combining multiple interacting factors: revision of demand expectations, growth of both conventional and renewable capacities, a drastic shift from gas to coal power plants and a lack of visibility on future evolutions. Some of these factors are related to the climate agenda, but mostly, they show the inherent and structural difficulties of the current design of the EU power market itself. Within the debate on EU’s 2030 framework for climate and energy policies, this situation raises the question: how can the EU’s policies address current difficulties of the power market while simultaneously achieving the structural targets of security, affordability and sustainability of supply in the context of decarbonisation?

  • COMBINING ELECTRICITY MARKET AND CLIMATE POLICIES

Hitherto, the two agendas of internal electricity market policy and climate policy have been largely considered in isolation or even as conflicting agendas. However, a secure low-carbon transition will require significant policy intervention in the electricity sector, including in electricity market design. And, vice versa, an ambitious and coherent package on climate and energy policy can help restore an efficient and competitive electricity market, by strengthening investment signals, improving coordination among member states and providing a sound market framework to improve the technical and economic integration of new low-carbon technologies. Against this background, future challenges for the European policy framework should be considered along two lines: the balance between market forces and regulatory intervention, and the interplay between national and regional approaches.

  • REINFORCING EU LEVEL GOVERNANCE AND COOPERATION

A reinforced EU ETS will have an important role to play, but will not be sufficient on its own to guide both dispatching and investment decisions. Complementary policies will be needed, to provide visibility on the retirement of old carbon intensive plants as well as enhanced coordination and development of flexibility and adequacy measures across borders. Furthermore, the increasing mutual dependence and interactions between Member States implies reinforced governance mechanisms to provide more visibility on national choices and their implications on neighboring countries and the EU market in order to assess how European policies can support the implementation of decarbonisation strategies. Furthermore, it appears crucial to shift the focus of future adequacy and flexibility measures towards the regional market and EU level, rather than national level to strengthen coordination.