The full-scale invasion of Ukraine in February 2022 intensified the fossil energy supply crisis that was already being experienced in Europe and beyond. Supply shortages and spiking fossil gas prices drove up the wholesale market prices for electricity, because electricity generated with natural gas often sets the market clearing price. The energy price crisis has brought about a broad political commitment to strengthen the resilience of the EU’s power system, in order to improve the management of future shocks and prevent negative impacts to households and firms. In this policy brief we propose several elements that a short-term reform should focus on.
We show that investment in renewable energy can provide a structural solution to the fossil fuel supply crisis while putting Europe on track to achieve climate neutrality. We also illustrate the key importance of an integrated European wholesale power market with marginal pricing to ensure the efficient use of electricity while also maximizing power system flexibility and security of supply. In addition, we explain how Europe’s power market can become more resilient to fossil fuel price shocks through voluntary two-sided contracts for difference, PPAs, and a coordinated policy for skimming-off windfall profits, thus shielding consumers from electricity price spikes. Finally, we set out further elements of short-term market design reform and provide an outlook concerning a more far-reaching reform of the market’s design.
