Policy Insight 120: Electricity market design: Views from European economists
Europe has faced – and still faces – an unprecedented energy crisis that has translated into record-high gas and electricity prices. The rise in energy costs has been the main driver of inflation, with the EU average reaching 11.5% in October 2022, pushing the ECB to increase interest rates. Inflation, coupled with the hike in interest rates, has reduced European households’ disposable income and purchasing power, put the competitiveness of European industry at risk, and forced governments to implement – subject to their asymmetric fiscal capabilities – costly support mechanisms to mitigate some of the economic and social consequences of the energy crisis.
These events have put electricity market design under the spotlight. The question is not only how to avoid the energy crisis from repeating itself in the future, but also how to promote low-carbon investments at the scale and speed necessary to decarbonize our economies while preserving security of supply. The shared view now is that these endeavours call for electricity market reform. The question is: in which direction?