Ipol Stu (2023) 740094 en

STUDY
Requested by the ITRE committee
The design of the

European electricity
market
Current proposals and ways ahead
Policy Department for Economic, Scientific and Quality of Life Policies

Directorate-General for Internal Policies
Authors: Georg ZACHMANN, Lion HIRTH, Conall HEUSSAFF, Ingmar SCHLECHT,
Jonathan MÜHLENPFORDT and Anselm EICKE EN
PE 740.094 - September 2023
The design of the
European electricity
market
Current proposals and ways ahead
Abstract
The proposed reform of the electricity market design maintains
crucial elements of the existing system to ensure continued
efficient operation. The impact that changing the rules on longer-
term contracts will have on consumer prices and investment will
depend on the concrete language of proposed legislation as well
as its ultimate implementation. Overall, neither the expected
mode of impact of individual reform elements, let alone their
interaction, is clearly spelled out by the legislators.
This document was provided by the Policy Department for
Economic, Scientific and Quality of Life Policies at the request of
the committee on Industry, Research and Energy (ITRE).
This document was requested by the European Parliament's committee on Industry, Research and
Energy.
AUTHORS
Georg ZACHMANN, Bruegel
Lion HIRTH, Neon
Conall HEUSSAFF, Bruegel
Ingmar SCHLECHT, Neon
Jonathan MÜHLENPFORDT, Neon
Anselm EICKE, Neon
ADMINISTRATOR RESPONSIBLE
Matteo CIUCCI
EDITORIAL ASSISTANT
Marleen LEMMENS
LINGUISTIC VERSIONS
Original: EN
ABOUT THE EDITOR

Policy departments provide in-house and external expertise to support European Parliament
committees and other parliamentary bodies in shaping legislation and exercising democratic scrutiny
over EU internal policies.
To contact the Policy Department or to subscribe for email alert updates, please write to:
Policy Department for Economic, Scientific and Quality of Life Policies
European Parliament
L-2929 - Luxembourg
Email: [email protected]
Manuscript completed: September 2023

Date of publication: September 2023
© European Union, 2023
This document is available on the internet at:

http://www.europarl.europa.eu/supporting-analyses
DISCLAIMER AND COPYRIGHT

The opinions expressed in this document are the sole responsibility of the authors and do not
necessarily represent the official position of the European Parliament. Reproduction and translation for
non-commercial purposes are authorised, provided the source is acknowledged and the European
Parliament is given prior notice and sent a copy. For citation purposes, the publication should be
referenced as: Zachmann, G., Hirth, L., Heussaff, C., Schlecht, I., Mühlenpfordt, J., Eicke, A. The design of
the European electricity market, Publication for the committee on Industry, Research and Energy, Policy
Department for Economic, Scientific and Quality of Life Policies, European Parliament, Luxembourg.
© Cover image by Jeanne Menjoulet, “old nuclear power plant & new wind turbine”, edited/cut,
https://flickr.com/photos/jmenj/34718926936/, licensed CC-BY-2.0.
The design of the European electricity market
CONTENTS
LIST OF BOXES 6
LIST OF FIGURES 6
LIST OF TABLES 7
LIST OF ABBREVIATIONS 9
ACKNOWLEDGEMENTS 10
EXECUTIVE SUMMARY 11
INTRODUCTION 13
1.1. Background to the study 13
1.2. The current European electricity market design 17
1.2.1. Legal basis 17
1.2.2. Agents in the European electricity markets 18
1.2.3. Overview of the different market timeframes 19
1.2.4. The role of marginal pricing 20
1.2.5. Emergency interventions introduced as part of Council Regulation
(EU) 2022/1854 25
1.3. Shortcomings of the current design 25
1.4. Overview of the European Commission proposal and European Parliament
amendments 27
1.4.1. The Commission proposal 27
1.4.2. ITRE’s position 27
MARKET DESIGN CRITERIA 28
2.1. Fairness 28
2.2. Optimal Investment 30
2.3. Optimal Operation 31
ASSESSMENT OF MARKET INSTRUMENTS AND DESIGN DETAILS 33
3.1. Long-term contracts 33
3.1.1. Contracts for differences (Regulation Art. 19b) 34
3.1.2. Power purchasing agreements (Regulation Art. 19a) 40
3.1.3. Virtual trading hubs (Regulation Art. 9) 42
3.2. Protecting consumers from future energy crises 44
3.2.1. Use of CfD revenues (Regulation article 19b(3)) 45
3.2.2. Hedging obligation (Directive Art. 18a) 46
3.2.3. Fixed-price vs. smart retail tariffs (Directive Art. 11) 48
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IPOL | Policy Department for Economic, Scientific and Quality of Life Policies
3.2.4. Electricity price crisis (Directive Art. 66a) 49

3.3. Demand-side flexibility 51
3.3.1. Peak shaving product (Regulation Art. 7a) 51
3.3.2. Flexibility target and support scheme (Regulation Art. 19c-f) 54
3.4. Other topics 59
3.4.1. Energy sharing (Regulation Art. 15a) 59
ASSESSING THE CURRENT MARKET DESIGN 63
4.1. Model overview 63
4.1.1. Motivation 63
4.1.2. Dispatch and Contracts (DISC) Model 64
4.2. Scenario analysis 69
4.2.1. Scenario design 69
4.2.2. Model results 73
4.2.3. Discussion 88
EXCURSE: LACK OF AN IMPACT ASSESSMENT 91
RECOMMENDATIONS 94
6.1. Overview of assessments 94
6.1.1. Performance of the current market design against criteria 94
6.1.2. Assessment of market instruments and design details 94
6.1.3. Results of quantitative modelling 95
6.2. Concluding recommendations 95
6.2.1. Specific recommendations 95
6.2.2. Priorities for reform 96
6.2.3. Future design considerations 96
A. TECHNICAL ANNEX 98
Software 98
Logical Structure 98
Data Inputs and Sources 99
Dispatch 99
Contracts 103
Dispatch Optimisation 105
Contracts 106
B. COMPLETE SCENARIO RESULTS 107
Dispatch Scenario 1 – ‘Normal’ 107
Dispatch Scenario 2 – ‘Crisis’ 107
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Dispatch 1 + Contract A: Normal Dispatch Conditions with Mixed Contracts 108

Dispatch 1 + Contract B: Normal Conditions with Wholesale Only 110
Dispatch 1 + Contract C: Normal Conditions with Contracts for Difference 112
Dispatch 1 + Contract D: Normal Conditions with PPAs 114
Dispatch 2 + Contract A: Crisis Conditions with Mixed Contracts 116
Dispatch 2 + Contract B: Crisis Conditions with Wholesale Only 118
Dispatch 2 + Contract C: Crisis Conditions with Contracts for Difference 120
Dispatch 2 + Contract D: Crisis Conditions with PPAs 122
REFERENCES 124
5 PE 740.094
LIST OF BOXES
Box 1: The importance of forward markets 43
Box 2: Network tariffs as a flexibility barrier 57
LIST OF FIGURES
Figure 1: The 2022 energy crisis 13
Figure 2: Electricity and gas prices in selected countries in 2021/2022 in EUR/MWh 14
Figure 3: Consumer electricity prices and utility revenues 15
Figure 4: Electricity market trading windows 20
Figure 5: A simple price-quantity diagram representing supply and demand 21
Figure 6: Supply and demand in the electricity market: The merit order model 22
Figure 7: EU27 average electricity prices by consumption band 29
Figure 8: Payments (left) and revenues (right) under the conventional CfD 35
Figure 9: Contractual relationships that can mitigate small-scale consumer exposure to price crisis
through either utilities or the state as intermediaries between them and generators 45
Figure 10: The supply-depressing effect of peak shaving (illustration) 53
Figure 11: Manipulating the baseline to maximize payout (illustration) 54
Figure 12: Effective network charges for an increase in consumption in i) all hours of individual peak
load (left) and ii) one single quarter of an hour (right) 58
Figure 13: DISC Schematic 64
Figure 14: Example of DISC Dispatch 66
Figure 15: Example of annual revenues by contract type for different technologies 68
Figure 16: Consumer costs and share of renewable electricity 74
Figure 17: Generator contribution margins and share of renewable electricity 75
Figure 18: Firm contribution margins in normal dispatch across contract scenarios 76
Figure 19: Firm contribution margins in crisis dispatch across contract scenarios 77
Figure 20: Firm renewable capacity share and contribution margins per megawatt 78
Figure 21: Firm gas capacity share and contribution margins per megawatt 79
Figure 22: Firm nuclear capacity share and contribution margins per megawatt 80
Figure 23: Contract-for-difference generator revenues between dispatch scenarios across all
countries (DE, FR, IT, ES, PL) 81
Figure 24: Contract-for-difference consumer costs between dispatch scenarios 81
Figure 25: Total consumer costs with and without contracts-for-difference 82
Figure 26: Renewable generator revenues by contract, in CfDs scenario under normal dispatch
conditions 83
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Figure 27: Renewable generator revenues by contract, in PPAs scenario under normal dispatch
conditions 84
Figure 28: Share of volumes covered by all contracts between CfDs and PPAs scenarios 85
Figure 29: Consumer costs by contract, in CfD scenario under normal dispatch conditions 86
Figure 30: All country total renewable generation revenues comparing PPAs vs Futures 87
Figure 31: All country total costs comparing PPAs vs Futures 87
Figure 32: Consumer cost breakdown with PPAs vs. Futures 88
LIST OF TABLES
Table 1: Scenario D1 Commodity Prices 69
Table 2: Scenario D2 Commodity Prices 70
Table 3: Scenario CA – Contract Volumes 71
Table 4: Scenario CB – Contract Volumes 72
Table 5: Scenario CC – Contract Volumes 72
Table 6: Scenario CD – Contract Volumes 73
Table 7: Installed Capacity Inputs [MW] 99
Table 8: Availability factors 100
Table 9: Generator Cost Assumptions 101
Table 10: Generator Technical Assumptions 101
Table 11: Normal Dispatch Scenario Commodity Prices 102
Table 12: Crisis Dispatch Scenario Commodity Prices 103
Table 13: Consumer share of load 103
Table 14: Contract Price Assumptions 103
Table 15: Firm ownership assumptions 104
Table 16: Normal Dispatch Scenario Results 107
Table 17: Crisis Dispatch Scenario Results 107
Table 18: Normal Dispatch Conditions with Mixed Contracts – Generation Results 108
Table 19: Normal Dispatch Conditions with Mixed Contracts – Consumer Results 109
Table 20: Normal Dispatch Conditions with Mixed Contracts – Country Results 109
Table 21: Normal Dispatch Conditions with Wholesale Only – Generation Results 110
Table 22: Normal Dispatch Conditions with Wholesale Only – Consumer Results 111
Table 23: Normal Dispatch Conditions with Wholesale Only – Country Results 111
Table 24: Normal Dispatch Conditions with CfDs – Generation Results 112
Table 25: Normal Dispatch Conditions with CfDs – Consumer Results 113
7 PE 740.094
Table 26: Normal Dispatch Conditions with CfDs – Country Results 113
Table 27: Normal Dispatch Conditions with PPAs – Generation Results 114
Table 28: Normal Dispatch Conditions with PPAs – Consumer Results 115
Table 29: Normal Dispatch Conditions with PPAs – Country Results 115
Table 30: Normal Dispatch Conditions with Mixed Contracts – Generation Results 116
Table 31: Crisis Dispatch Conditions with Mixed Contracts – Consumer Results 117
Table 32: Crisis Dispatch Conditions with Mixed Contracts – Country Results 117
Table 33: Normal Dispatch Conditions with Wholesale Only – Generation Results 118
Table 34: Crisis Dispatch Conditions with Wholesale Only – Consumer Results 119
Table 35: Crisis Dispatch Conditions with Wholesale Only – Country Results 119
Table 36: Normal Dispatch Conditions with CfDs – Generation Results 120
Table 37: Crisis Dispatch Conditions with CfDs – Consumer Results 121
Table 38: Crisis Dispatch Conditions with CfDs – Country Results 121
Table 39: Normal Dispatch Conditions with PPAs – Generation Results 122
Table 40: Crisis Dispatch Conditions with PPAs – Consumer Results 123
Table 41: Crisis Dispatch Conditions with PPAs – Country Results 123
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LIST OF ABBREVIATIONS
ACER Agency for the Coordination of European Regulators
CCGT Closed-Cycle Gas Turbine
CfD Contract for Difference
DISC Dispatch and Contracts Model
DSO Distribution System Operator
EEX European Energy Exchange
EMD Electricity Market Design
EU European Union
FCR Frequency Containment Reserve
ICE Intercontinental Commodity Exchange
ITRE Industry, Research and Energy Committee of the European Parliament
LMP Locational Marginal Pricing
LTTR Long-Term Transmission Right
LNG Liquified Natural Gas
NRA National (Energy) Regulatory Authority
OCGT Open-Cycle Gas Turbine
PPA Power Purchasing Agreement
PV Solar Photovoltaics
TSO Transmission System Operator
9 PE 740.094
ACKNOWLEDGEMENTS
This study benefitted from the excellent research assistance of Cecilia Trasi, George Dimopoulos and
Ben McWilliams.
PE 740.094 10
EXECUTIVE SUMMARY
Background
In March 2023 the European Commission proposed a reform of the European electricity market. The
proposed changes to the Electricity Regulation, the Electricity Directive, and the REMIT Regulation are
being negotiated with the European Parliament and the Council at the time of writing.
The reform was initiated by Commission President von der Leyen in the midst of the European energy
crisis in the second half of 2022. The main motive at that time was to mitigate the spill-over of the gas-
crisis, that led wholesale natural gas prices to increase ten-fold, into electricity prices for households
and industry. As demand reduction and additional supplies quickly alleviated the gas-price crisis and
as it became clear that simple fixes to electricity markets have massive side-effects, the discussion
moved to longer-term reforms. Most importantly, the framework for longer-term contracts between
producers and consumers was adjusted with a view to allow producers to better hedge and hence
more easily invest; and consumers to better protect themselves from short-term price spikes.
Aim
This study aims to assess the existing electricity market design according to how it functioned during
the energy crisis. The criteria of operational efficiency, fairness, and encouraging smart investment are
proposed as yardsticks for doing so. In assessing proposals for reforming individual components of the
EU’s electricity market the study develops a quantitative framework. This framework is used for
assessing key reform questions arising from the European Commission’s electricity market design
reform proposal.
The study contextualises the ongoing market reform discussion as a part of the necessary multi-year
reform cycle that will be needed to adapt power markets as a consequence of changes brought on by
the energy transition. We offer analytical recommendations for short- and long-term priority items.
Key Findings
The energy crisis tested the current market design on three key elements: operation, fairness, and
investment. From an operational standpoint, the electricity market continued to function well and
helped Europe to navigate a historically tight position. From a fairness perspective, the size of the shock
led to unexpected and substantial shifts in wealth, particularly hurting consumers who were not
hedged against price fluctuations. The largest problem exposed by the crisis in terms of current design
was investment incentives. The system had developed too little generation capacity, too little
interconnection, too little maintenance, and too high reliance on individual fuel supplies.
In response, the European Commission proposal for reforming electricity market design does not
propose a radical overhaul of the existing system, but rather a fine-tuning of existing market
instruments on a case-by-case basis. This includes proposals concerning Contracts for Difference,
hedging obligations, the design of an intervention framework for future price crises, an additional
product for peak shaving (reducing consumption during existing hours of high demand), and energy
sharing.
A fundamental and concerning conclusion of our paper is that Europe lacks the necessary assessment-
framework for objectively analysing the impacts of proposed adjustments to such isolated market
instruments. While a wealth of literature has investigated the least cost optimisation of power systems,
far less attention has been devoted to the development of tools that allow modelling the financial
flows that sit behind electricity trade. Our report proposes a highly stylised-tool the Dispatch and
11 PE 740.094
Contracts (DISC) model. The model represents financial flows as a result of contractual arrangements
between agents layered upon a physical electricity system.
We offer three specific recommendations for the ongoing electricity market design reform. First, any
protection offered to customers against future price increases should not interfere with short-term
price incentives. Incentives for demand to respond to prices were essential during the energy crisis,
and their importance will likely grow as grids integrate increasing shares of weather-dependent
renewable resources. Secondly, long-term contracts to encourage deployment of low-carbon
generation should be designed in a way to preserve short-term, operational efficiencies. This
particularly refers to the need for designing smart Contracts for Difference. Thirdly, excessive tinkering
with incentives for flexibility should be avoided. The existing mechanisms for balancing short-term
power markets already work well.
Moving beyond the current discussion, a more fundamental rethink of Europe’s electricity market will
be required as the energy transition progresses. A near-term priority should be to increase
transmission capacities – the ability of countries to trade electricity – which will lower electricity costs
across the continent. A second short-term threat to the efficient operation of grids are political
discussions to freeze prices for certain demand groups (e.g., large industry). Any move to overrule
market forces by government decree runs the risk of an inefficient subsidy race inside Europe, and
inefficient investment decisions.
Managing the correct balance of an electricity system caught between a market offering some
investment signals and a constant stream of evolving government intervention will be the key
challenge moving forward. Higher-quality and more transparent planning exercises at the European
level can help. Retaining sensible incentives for investment and operation will remain critical as the
continent transitions toward a system of more flexible supply, and an evolving and growing demand
mix.
PE 740.094 12
INTRODUCTION
KEY FINDINGS
Europe’s energy crisis of 2022 was driven by shortages of natural gas. The nature of electricity
markets meant that higher gas prices were passed through into higher electricity prices. This
experience, and the accompanying increased costs to consumers, pushed the reform of electricity
markets up the political agenda. The two driving factors of a perception that a new market design
is required are the need to ensure fair and efficient markets. These two elements manifested
themselves in the sense that electricity prices were overly reliant on the price of natural gas, and
that consumers were inefficiently protected.
Current electricity market design comprises a complex interaction between generators, traders,
retail suppliers, regulatory authorities, system operators, and consumers. Any reform to the system
should be designed to accommodate five core changes that are anticipated to electricity markets.
These are increased demand, renewable adoption leading to declining variable costs,
decentralisation, digitalisation, and a shift toward active demand that responds to prices.
1.1. Background to the study

Reform of the EU electricity market design is occurring during an unprecedented upheaval in European
energy markets. 2022 saw the most severe energy crisis experienced on the continent in decades.
Natural gas, a cornerstone of the energy system, became scarce and costly after Russia drastically cut
pipeline supplies. Increased imports of liquified natural gas (LNG) were required to make up the deficit,
purchased on international markets at a significant premium to historical prices. Drought conditions
causing low hydropower output and a series of exceptional nuclear outages in France exacerbated the
energy supply problem.
Figure 1: The 2022 energy crisis
Source: Bruegel based on Entso-G, Bloomberg and EnergyCharts.
13 PE 740.094
As the electricity system is dependent on natural gas to balance supply and demand, the unavailability
of sufficient cheaper production and the increase in gas costs transmitted to electricity. Consequently,
prices for gas and electricity reached record levels (Figure 2). In response, hundreds of billions of public
monies were spent to shield small businesses and consumers from the rising costs 1.
Figure 2: Electricity and gas prices in selected countries in 2021/2022 in EUR/MWh
TTF Spot Price Selected DAM Average 2021 Selected DAM Average
2022 Selected DAM Average 2021 TTF Spot Average 2022 TTF Spot Average
600
500
400
300
200
100
0
10/21
11/21
12/21
10/22
11/22
12/22
1/21
2/21
3/21
4/21
5/21
6/21
7/21
8/21
9/21
1/22
2/22
3/22
4/22
5/22
6/22
7/22
8/22
Source: Bruegel based on ENSTO-E and Bloomberg.

9/22
Note: Electricity prices are the average of day-ahead market prices in Germany, France, Italy, Spain and Poland.
While Europe appears to be better positioned for winter 2023/24 in terms of gas security of supply, the
energy crisis persists (McWilliams et al, 2023). Wholesale gas spot prices increased from an average of
43 €/MWh in 2021 to 122 €/MWh in 2022. In mid-September 2023, the average TTF spot price for 2023
is 35 €/MWh 2. Electricity prices are also persistently higher in 2023 than in pre-energy crisis years (120
€/MWh on average between January 2023 and August 2023 across Germany, France, Italy, Spain and
Poland 3). Policymakers are seeking means to manage the situation, including by making changes to
the European electricity market design.
The focus on electricity market reform stems from the view that there are elements of the existing
design that are inefficient and unfair. Consumer electricity prices substantially increased in 2022 and
2023 compared to previous years (Figure 3). In the same period, oil and gas firms posted huge profits.
European utilities also saw some revenue increases, although less significantly than the oil and gas
majors. In the context of rising consumer costs combined with increasing corporate profits, a
1 See Bruegel’s tracker of fiscal responses to the energy crisis to shield consumers across Europe
https://www.bruegel.org/dataset/national-policies-shield-consumers-rising-energy-prices.
2 Source: Bloomberg.
3 Source: ENTSO-E.
PE 740.094 14
perception understandably emerged that aspects of the policy framework around energy, and
especially electricity, was flawed.
After extensive public debate, two core issues were identified. First, the electricity system was reliant
on natural gas that is subject to the volatility of international commodity markets. Decoupling
electricity from gas therefore became an objective of the electricity market reform. Second, consumers
were insufficiently protected from severe price increases. Covering a higher share of electricity
deliveries with long-term contracts between generators and consumers therefore became another
goal. As a result, the initial reform proposal from the European Commission on 14 March 2023
(European Commission, 2023) set out a variety of instruments that would allow member states to
attract renewable generation through long-term contracts, as well as new options for price hedging
and consumer protection. By investing in renewables, the physical reliance on natural gas could be
reduced, and by adjusting the rules for long-term contracts, consumers might be better protected from
price volatility.
Figure 3: Consumer electricity prices and utility revenues
Household Consumer Electricity Prices Major European Utility Revenue and EBITDA
H1 2021 vs. H1 2022 H1 2022 vs H2 2022
0,4 160%
0,35 140%
Household Electricity Price (€/kWh)
0,3 120%
0,25 100%
0,2 80%
0,15 60%
0,1 40%
0,05 20%
0 0%
2021 H1 2022 H1 % change between 2022 S1 vs. 2021 S2
Source: Bruegel based on EUROSTAT and IEA.
While the need for reform emerged from the pressures of the gas crisis, electricity market design has a
critical role to play in the energy transition more generally. In March 2023, as part of the REPowerEU
plan, the EU finally agreed to substantially ramp up its ambitions in terms of decarbonising the energy
system with a target of 42.5% renewable energy by 2030. 4 If the EU wants to meet its ambitious
decarbonisation targets, a strong policy framework must be in place that can deliver appropriate
investment signals for renewable energy, most importantly in the electricity sector.
In the context of electricity market design, this strong investment signal means not only incentives for
wind, solar and other renewable electricity generation resources, but also for storage, demand
response, clean dispatchable generation, grid expansion, and the myriad other technologies needed
to deliver a reliable zero emissions electricity system. In addition to investment signals, the electricity
4 This is, however, only the confirmation of a renewables target proposed by the European Commission already before 2022. An increase
in the binding target to 45% proposed by Parliament and Commission in light of the new circumstances in 2022, did not gain the
support from member states.
15 PE 740.094
market should help to ensure that the costs of paying for the electricity system are fairly distributed
and that a decarbonising system is efficiently operated, as discussed in section 2.
The electricity system will undergo structural changes as a direct consequence of the transition to a net
zero. In Europe, these changes will be accelerated with more ambitious decarbonisation targets. It is
essential that electricity market design can continue to deliver fair outcomes, efficient investment
signals, and efficient system operation throughout the transition, even as the physical electricity
system changes. There are five essential ways in which the electricity system will change over the next
decades, as follows.
Demand increase
To meet the EU’s ambitious net zero target, a substantial increase in electricity demand is foreseen
(4900–6500 TWh of electricity demand in 2050 compared to 2800 TWh in 2020, according to Holz et al,
2022). Significant shares of energy demand in the heating, transport and industrial sectors must be
electrified. Electricity demand will likely double in the next three decades, when it only increased by
25% in the last three decades. Therefore, investment incentives must be clear and consistent until 2050
and beyond. As renewables (and in some countries nuclear) whose investment is currently driven by
idiosyncratic national polices will represent the bulk of the supply increase, designing efficient
investment incentives for those will be crucial to develop a cost-effective European electricity system.
Declining variable costs
The bulk of the lifetime cost of thermal power plants is driven by variable short-run fuel costs. In the
case of renewables, the asset structure is inverted. Solar and wind projects have no fuel costs.
Accordingly, their lifetime cost is dominated by the initial capital expenditure involved in developing
the project. Different financing requirements are needed for different asset cost structures, implying
that the investment signals that worked for thermal power plants like gas and coal-fired generation
may not be appropriate for renewables.
Decentralisation
The electricity system of the twentieth century was mainly centralised through a small number of large
power plants generating most of the electricity. Electricity flow was unidirectional, moving from
generation to consumption via the transmission and distribution grids. This configuration is challenged
by renewable technology. Wind and solar plants are more geographically dispersed than thermal
plants. Photovoltaics, battery systems, and electric vehicles mean that households and businesses can
now play an active role in the system, even producing their own power. The flow of electricity is now
bidirectional in the grid, with consumers now sending power back to the wider network.
Decentralisation will continue as more modular clean-energy technologies are added to the system
(Zachmann and Tagliapietra, 2016).
Digitalisation
The broader trend of digitalisation will considerably affect the power system and facilitate many
opportunities for innovation. Integration and optimisation of decentralised assets like wind and solar
will lead to improvements in their efficiency. More precise and granular data will provide consumers
with information to manage their electricity usage and actively respond to system conditions.
Demand becoming active
Decentralisation and digitalisation will facilitate electricity consumers to become active players in the
power system. Electrification of heating, transport and industry will further enhance demand-response
capabilities. Consumers of electricity will be able to co-optimise their use of electricity for multiple ends
PE 740.094 16
(so-called ‘sector coupling’). Critically, the demand-side will be responsive to system conditions, using
and storing power when it is abundant and reducing demand when it is scarce. More radical
possibilities are in the process of being realised in Europe, through the development of energy
communities. Such organisations typically own and operate their own shared energy assets, sharing
the benefits of the resource and at times selling their surplus to the grid.
Structure of the report
Electricity market design is part of complex set of levers to affect outcomes in the electricity sector,
which include the fiscal system and network regulation. This study will focus on the design of the
European wholesale electricity market. While retail markets are largely a national competency, the
study will also discuss the consequences of policy choices in this area. Network regulation and taxation
more broadly are also relevant for electricity sector outcomes and therefore the study will engage with
them as they relate to electricity market design. The analysis in the study is centred on the market
reform proposals put forward by the European Commission in March 2023 and the amendments
agreed upon in the ITRE committee of the European Parliament in July 2023, but will also consider
longer term issues for electricity market design.
The remaining parts of section 1 summarise the current European electricity market design, highlight
some of its recent shortcomings, and detail the European Commission and European Parliament
market reform measures. A set of criteria for assessing electricity market design are then presented
(section 2), after which a detailed assessment of the possible market instruments and design details of
the reform is presented (section 3). A stylised model of the European electricity market is then detailed,
which is applied through a scenario analysis quantifying the effects of market instruments (section 4).
An excurse on the need for an impact assessment when dealing with consequential policy areas is set
out in section 5. The study concludes with a set of policy recommendations for the current reform and
for the future (section 6).
1.2. The current European electricity market design

The European electricity market in 2023 is a complex system involving multiple economic agents at
various levels who trade in numerous market timeframes, both short and long-term. The following
description of the current electricity market is organised by first setting the legal basis for the electricity
markets, outlining the different economic agents, then detailing the market timeframe, followed by a
critical discussion on the role of marginal pricing. The emergency measures introduced during the
energy crisis are also described.
1.2.1. Legal basis

The last electricity market reform took place as recently as 2019. The ‘Clean Energy Package’, was, in
effect, the fourth electricity market reform, after legislative processes that happened in 1996, 2003 and
2009. The Clean Energy Package was comprised, inter alia, of Electricity Directive (EU) 2019/944, which
made amendments to the previous electricity market directive (2009/72/EC), and Electricity Regulation
(EU) 2019/943.
Electricity Directive (EU) 2019/944 further developed common European rules for the generation,
transmission, distribution, storage, and supply of electricity, as well as consumer protection measures.
The Clean Energy Package focused on increasing the integration of electricity markets, aiming to
enhance cross-border-trade and better harmonise market rules. Competition between suppliers was
also emphasised. Electricity Regulation (EU) 2019/943 set out the detailed rules for operating electricity
markets, including price formation and balancing responsibilities. Again, cross-border capacity
allocation was prominent, as well as provisions regarding network charges and design principles for
17 PE 740.094
capacity markets. The Agency for the Cooperation of Energy Regulators (ACER) was also established
through Regulation (EU) 2019/942. Regulation (EU) No 1227/2011 (REMIT), was not revised in 2019, but
is relevant for the functioning of the electricity markets as it covers market integrity and transparency
through market monitoring.
1.2.2. Agents in the European electricity markets

Generators, storage units & utilities
One principal economic agent in the European electricity markets is an electricity generation unit.
Some units transform other forms of costly energy entailed in uranium-rods, coal, natural gas,
hydrogen etc. into electricity; while others are basically having no variable cost, but might depend on
the natural forces such as solar irradiation and wind to power them. Typically, higher fuel cost correlate
with a higher ability to flexibly react to demand variations (nuclear and lignite units have rather low
fuel cost but are also more run to follow some seasonal trends; while hydrogen, oil and open-cycle gas
plants are only ramped up when all other (cheaper) sources are insufficient. Finally, storage-units can
shift electricity from hours of low demand and abundant production of cheap power production to
hours of high demand. Again, some units such as big hydro-damns are used for seasonal arbitrage
while pumped-hydro and batteries are used for faster cycles. This shows that power plants span a wide
portfolio of capex, fuel (cost), emissions, flexibility, variability, etc.
Some generation and storage units, or a small portfolio of them, are self-standing economic entities.
Then their owners sign contracts of various length and type to establish a position in electricity markets,
depending on the type of unit. They sell forwards and futures to hedge their position into the future
and trade in wholesale spot markets by submitting offers to sell electricity. Generators can also sign
power purchase agreements (PPAs) with large consumers to guarantee the delivery of a certain volume
of electricity and, if they are a renewable unit, participate in competitive government auctions for
contracts-for-difference (CfDs) (or, in the past, other forms of state support).
Some generation and storage units are owned by consumers directly. But most conventional and a
significant share of renewables generation units are owned by electricity utilities. Utilities mix several
electricity market functions, such as a broad portfolio of generation, trading and supplying of
electricity.
Traders
Traders buy and sell different electricity and related (gas, emission allowances, etc.) products typically
at the wholesale level to obtain arbitrage-gains.
Suppliers
Suppliers (also referred to as retailers) connect wholesale and retail electricity markets. They offer retail
contracts to various consumer types and must purchase sufficient electricity from wholesale markets
to serve the demand of their consumers. Typically, the contracts offered to consumers have prices
which periodically change based on the wholesale costs of a previous period, for example on a monthly
basis. In some countries, such as Spain, retail contracts have prices which dynamically change on an
hourly basis to reflect the price of electricity on the wholesale markets.
Industrial, business and household consumers
Electricity consumers can be categorised into industrial, business (or small-and-medium enterprise)
and household. Within each consumer category, there are different consumption levels and different
contractual arrangements regarding the price paid for electricity. For example, some industrial
consumers may trade directly on wholesale spot markets for electricity, bypassing the intermediary of
PE 740.094 18
a supplier. Other industrial consumers sign long-term PPAs directly with utilities and do not trade short-
term at all.
Business and household consumers purchase their electricity via a supplier, but their final bill can differ
based on the terms of their retail contract, the taxation rules in their country, and other particularities.
National regulatory authorities
National regulatory authorities (NRAs) are state agencies tasked with administering the legislation in
the electricity sector. Their core function is to oversee the natural monopoly part of the electricity
system – i.e., the transmission and distribution networks. NRAs must implement European legislation,
including changes to the electricity market design, at the national level. They also often have consumer
protection responsibilities. At the European Union level the Agency for the Coordination of Electricity
Regulators (ACER) is mandated with coordinating national regulatory activities and has some
regulatory powers of its own.
Transmission system operators
Transmission system operators (TSOs) are responsible for transporting electricity on a regional or
national level from generators to consumers, and, most importantly, ensure the secure operation of
the electricity system in real-time. TSOs must ensure a second-by-second balance of electricity supply
and demand. On a European level, TSOs coordinate through regional centres as well as through their
Brussels association ENTSO-E, that has been mandated by the European Union with several
coordination tasks.
Distribution system operators
Distribution system operators (DSOs) typically own and operate the electricity distribution system that
connects most consumers and an increasing number of distributed storage and generation assets to
the transmission system. They often also organise measuring. The corresponding local networks are
responsible for a significant share of the overall energy supply cost that is levied to consumers through
nationally regulated tariffs.
Market operators and energy exchanges
Market operators manage the business of an energy exchange. Energy exchanges bring together
producers and consumers of electricity (or suppliers trading on behalf of consumers) to facilitate the
trade of electricity products. Such products be physical, typically on short-term spot markets, requiring
the actual production and consumption of electricity. The products can also be purely financial, such
as futures over longer-term timeframes.
National governments
National governments are critical agents in electricity markets, affecting the distribution of costs and
benefits through taxation rules, setting frameworks for network regulation, mandating levies,
designing capacity mechanisms and other elements of national electricity markets and driving
investment through auctions for long-term state support such as contracts-for-difference.
1.2.3. Overview of the different market timeframes

Electricity markets are characterised by different tools used to trade. These mechanisms operate over
different periods of time, as shown in Figure 4. This sequencing of markets is a crucial element of
electricity markets, as it allows to continuously include new information on the expected state of the
world at the time of delivery. Accordingly, some market elements focus on predicting the long-term
demand supply balance in order to encourage efficient investments, others are used to make longer-
19 PE 740.094
term decisions on procuring fuels and planning output while some then fine-tune the operational
dispatch including close-to-real-time information on weather into account.
Figure 4: Electricity market trading windows
Source: Bruegel.
Subsidy schemes by governments and de-risking of investments typically provide a guaranteed price
to renewable projects for a period of 15 to 20 years. These include Contracts for Difference and public
power purchase agreements. Private power purchase agreements are also likely to operate over a
period of 15 to 20 years, allowing for investment decisions.
Capacity mechanisms are typically centrally organised remuneration schemes intended to ensure that
a certain amount of capacity (that exceeds expected peak demand) is available on a one-to-three year
ahead timescale. Meanwhile, mid-term physical and financial electricity markets allow producers and
consumers to hedge part of their volume and price risks. They do this by trading in forward and future
contracts, which may operate less than a month-ahead to multiple years ahead.
Closer to real time, day-ahead (spot) markets are where the merit order is established for each hour of
the following day and initial schedules for cross-border flows are determined. The day-ahead markets
are central benchmark for the aforementioned long-term markets. Intraday markets take place
between the day-ahead markets and the delivery of electricity, allowing market participants to adjust
their positions as uncertainty narrows about system conditions.
Balancing markets are operated by the transmission system operators in the respective regions to
correct any imbalances between supply and demand close to real time. Finally, reserve and ancillary
service markets provide remuneration for specific services that are required to ensure security and
quality of supply, but for which costs cannot be recovered from other markets. These services typically
occur over a period of minutes or even seconds.
1.2.4. The role of marginal pricing

Definition. Marginal pricing refers to electricity prices being shaped by the variable cost of the
marginal plant, i.e., the most expensive plant that is required to serve demand, and the willingness to
pay for electricity by the marginal consumer. This is how price formation on competitive commodity
markets works in general. In electricity, it is the principle that describes how prices form on competitive
PE 740.094 20
wholesale markets. At the same time, it is also the pricing rule used on organised auctions such as the
day-ahead market operated by power exchanges.
How markets work. To clear up many of the misconceptions around marginal pricing and the merit
order curve, it helps to revisit the basic microeconomic model of commodity markets, which graphically
can be depicted as demand and supply curves in a price-quantity diagram (Figure 5). The demand curve
generally has a downward slope, representing the fact that the demand for a good decreases with
increasing price. The supply curve is upward sloping, as supply increases at higher prices. The shape of
the supply curve directly reflects marginal costs of firms: at any given price, only firms whose marginal
costs are below the market price can operate economically. Increasing production above the quantity
supplied by these firms requires other firms with higher marginal costs to join, which they will only do
if prices rise accordingly. Marginal costs do not include fixed costs, such as investment costs. This makes
sense because once spent, fixed costs are sunk (at least for the time scale of short-term markets), i.e.,
they are not recoverable. Since fixed costs occur before the decision of a generator whether to produce
or not at any given time, they do not themselves affect this decision.
Figure 5: A simple price-quantity diagram representing supply and demand
Source: Neon.
Market equilibrium. The intersection of supply and demand determines the market clearing price -
the only price consistent with a market equilibrium, meaning there is no excess demand or supply. At
the same time, it is the welfare optimal price and quantity, since it guarantees that demand is satisfied
by those firms that can produce at the lowest costs and all consumers that are willing to pay this price
are being served. In power markets, this result is called “least cost dispatch”, indicating that power
plants with low operating costs are used (“dispatched”) before more expensive ones.
The merit order model. The merit order curve is just an electricity-specific term for the short-term
supply curve and the merit order model is nothing else than the plain microeconomic market model
applied to electricity. Figure 6 illustrates a typical merit order model. The merit order curve is derived
by denoting power plant capacities of the existing power plant fleet along the x-axis, ordered by their
marginal costs, which are denoted on the y-axis. Marginal costs of power plants in the EU are made up
of two main components: fuel costs and emission allowances in the EU ETS, both of which are added
21 PE 740.094
up to calculate marginal cost per MWh produced. The demand curve in electricity markets is nearly
vertical, i.e., demand is inelastic and hardly affected by prices.
Figure 6: Supply and demand in the electricity market: The merit order model
Source: Neon.
Marginal pricing. The equilibrium price in competitive electricity markets, as is the case in any
competitive commodity market, is determined by the marginal costs of the marginal producer, in this
example a gas-fired power plant. This means that there is just one, uniform price for the whole market.
Hence, all power plants, not only the marginal one, but also the other, inframarginal ones, earn the
same revenue per MWh. This allows all plants but the marginal one to make a short-term profit, also
called producer rent or contribution margin. This result is a necessary consequence of the fact that they
all produce the same homogeneous commodity and that gas fired power plants are needed to satisfy
demand. At any price below their marginal costs, gas power plants would not produce, resulting in
excess demand and no more competition among the remaining producers. Since inframarginal power
plant operators know this,, they have no reason to sell at a price below that of gas-fired plants.
The role of marginal pricing for cross-border trading. Marginal pricing also plays an important role
in the internal European market and its market coupling mechanisms. It provides efficient trading
incentives for cross-border trading that direct the flow of electricity to where it is needed most. The
market price in each bidding zone represents marginal costs - the cost of producing an addition unit
of electricity in this bidding zone. If the price in country A is higher than in neighbouring country B, the
market result will be that A imports from B, replacing expensive domestic with cheaper imported
electricity. In the case that the national available generation capacity falls short of demand, this
mechanism may even prevent load shedding that otherwise would be unavoidable to maintain system
stability. During the energy crisis, this principle guaranteed that electricity was flowing to France and
Italy, both of which were facing prolonged outages of substantial parts of their national generation
capacity. With marginal pricing, cross-border trading may raise the price in country B, but the savings
in country A will be larger. The result is the least-cost dispatch for the combined market of both
countries that guarantees the least total expenditure.
PE 740.094 22
Misconceptions. During the heated discussion on electricity markets during the energy crisis, we were
under the impression that a number of misconceptions existed with respect to marginal pricing. These
will be addressed in the following.
Misconception 1: The Merit Order Model is mandatory or prescriptive. The merit order model is
not an instruction of how markets ought to function, but a description of how individual decisions lead
to market outcomes. It tells you how prices emerge from decentralised decision-making. The model is
descriptive, not prescriptive. As long as energy trading is free, traders would make money by buying
any electricity offered somewhat below the systems marginal cost and offering it with a profit to
consumers at close to the system marginal cost. As some consumers will not be able to find better
offers, they will have to buy. Quickly, all prices converge to the system marginal price.
Misconception 2: Marginal pricing is an artificial and arbitrary rule. It is not a rule that some
institution or person came up with. It’s not an arbitrary choice among alternative “market designs” or
one of a range of possible “pricing rules”. It is the way prices emerge in free markets, and only these
prices are equilibrium prices, meaning that the market clears and there is no over- or undersupply.
Consequently, marginal pricing could only be abolished by forcing market participants to change their
behaviour. They won’t do this voluntarily. Generators sell electricity below the marginal price only if
they are compensated by subsidies or forced to by bans.
Misconception 3: Marginal pricing is unique to electricity markets. All commodities price on the
margin, and so does electricity. Commodities are homogenous, standardised, fungible goods not
differentiable by brand or quality that are traded in large quantities, often on exchanges. Commodities
other than electricity include bulk agricultural products such as grains, metals, or energy carriers such
as, oil, gas and coal. Prices of all these goods form along the principles of marginal pricing.
Misconception 4: It is a model of the day-ahead auction. In Europe, many different wholesale
electricity markets and trading platforms co-exist. Usually, the day-ahead auction is the most important
short-term market, but there is no obligation for firms to trade on this auction. Marginal pricing is both
an economic principle describing price formation on electricity markets per se, and the pricing rule that
is used on day-ahead auctions. In other words, the pricing rule that European power exchanges apply
in their auctions, sometimes called “pay-as-cleared pricing”, directly implements the principle of
marginal pricing. Other electricity market segments are no centralised auctions and hence do not have
a pricing rule, but still prices follow the economic principle of marginal pricing. Intraday markets, for
example, are organized through continuous trading where bid and ask bids are matched, therefore
there is no rule that establishes the marginal principle there. But traders, aiming at the best possible
price for their traded energy, would still ask for the best prices from their perspective, resulting in the
same outcome.
Misconception 5: Pay-as-bid would yield lower prices. For organised auctions such as the day-ahead
auction, a different pricing rule could be implemented. An obvious candidate would be pay-as-bid,
where each generator receives the price of their bid, independent from the bids of other generators. It
is sometimes believed that this would yield automatically lower prices, because each generator would
earn their individual variable cost. However, this ignores that the bidding behaviour of firms would
then change: They would try to anticipate the type of marginal power plant and its marginal costs (with
the help of a merit order type forecasting model) and adjust their bids accordingly if they expect to be
inframarginal. In the best case, all generators predict correctly, and the result will be exactly the same
as with marginal pricing. In practice however, it is likely that some generators would overestimate the
market clearing price, placing a bid that turns out to be too high, either becoming the marginal plant
themselves or bidding themselves out of the market, in which case plants that are more costly but with
23 PE 740.094
less inflated bids will take their place. In both cases, the costs to consumers rise. With uniform pricing
on the other hand, all generators can be sure they will receive the market clearing price, so there is no
need to inflate their bids. Instead, they can reveal their true marginal costs, resulting in altogether lower
prices than with pay-as-bid pricing.
Misconception 6: The power price is coupled to the gas price by law. The talk of “de-coupling”
power prices from gas prices has led some people to believe there is a law or a rule that connects those
prices. There is not. It is an economic mechanism, not regulation, that makes these prices move hand-
in-hand. They do so only under certain market conditions, not necessarily and not always, i.e., when the
marginal power plant is a gas-fired one. At times when no gas plants are needed to satisfy demand for
electricity, its price will always be decoupled from the gas price. Instead, it will then be set by the
marginal costs of coal power plants, or whatever happens to be the marginal power plant in that
moment.
Misconception 7: Inframarginal plants are making excessive profits. Power stations with low
marginal costs usually have higher investment costs. It is precisely the expectation of short-run profits
(producer rents) that motivates these investments. They are necessary as contribution margins to
finance these investments. Therefore, short-run profits usually do not translate into long-term profits.
Long-run profits only arise if contribution margins exceed what is necessary to recover investment
costs. It is true that during the energy crisis, electricity prices exceeded what could have reasonably
been expected, allowing inframarginal generators to take home windfall profits (the opposite was true
during the Covid crisis). However, windfall profits create an incentive to invest into new (renewable)
inframarginal plants which will help bringing down electricity prices in the future. One special case
where even under marginal pricing excessive profits can occur is in the presence of market power, i.e.
dominant players in highly concentrated markets. However, due to the size, interconnectedness and
low concentration of the European electricity market, the market power of individual generators is
relatively low, which makes market power less of an issue in the energy market. For special markets,
like balancing power markets, it is of greater concern (see e.g. Ehrhart et al, 2021).
Misconception 8: Spot prices determine electricity bills. All the above discusses short-term spot
markets. Wholesale electricity markets are much broader and include forward contracts, power
purchasing agreements and other long-term contracts. When thinking about policy interventions, we
must account for long-term markets. If, say, a plant owner sold this year’s production a long time ago
during the Covid pandemic at rock-bottom low prices, there is no profits to be taxed away. The current
crisis also underlines the need for more long-term contracting to hedge consumers against price
spikes.
Misconception 9: High gas and electricity prices are a sign of market failure. The power market,
the mechanism that clears demand and supply, is not dysfunctional or broken. During the energy crisis,
it worked exactly as expected, given sky-high gas prices. While the outcome was certainly undesirable,
it does not correspond to the economic definition of a market failure. This would have been the case if
market actors had exerted monopoly power by artificially withholding supply in order to drive up
prices. Such anti-competitive behaviour is typically unlawful under competition law. So far there is no
clear evidence that anti-competitive behaviour played a major role in driving prices in 2022. Rather, the
high electricity prices were reflecting the fact that gas, as an indispensable input to its production, had
become scarce. On the gas market on the other hand, it could be argued Gazprom was exerting market
power by deliberately withholding supply before fully shutting down delivery. However, this
perspective is not helpful, as this was a political decision by a foreign actor, and it is unrealistic to expect
appropriate compensation for the damages caused by Gazprom’s behaviour through EU competition
policy enforcement. Instead, gas must be seen as an increasingly scarce resource with competing uses
PE 740.094 24
in industry, residential heating an electricity generation. In this situation, a free market remains the
most efficient allocation mechanism, directing the scarce gas to where it can generate the most value.
High prices during the energy crisis fulfilled two important functions: Incentivising consumers to
reduce consumption as well as motivating producers to ramp up production. In the case of the
electricity market, price differences between bidding zones (which for the most part coincide with
country borders) regularly direct the flow of electricity between them. During the energy crisis, high
power prices in France and Italy meant they could import large amounts of electricity from their
neighbours, substituting for their non-operational nuclear and hydro power plants.
1.2.5. Emergency interventions introduced as part of Council Regulation (EU) 2022/1854

In the midst of the energy crisis, the Council of the European Union used Article 122 (1) of the Treaty
on the Functioning of the European Union to introduce a set of emergency interventions in energy
markets (Council of the European Union, 2022). The main electricity sector provisions of this regulation
were the introduction of the so-called inframarginal revenue cap, voluntary electricity demand
reductions, allowing member states to temporarily set retail electricity prices. A ‘temporary solidarity
contribution’, or a windfall tax on upstream energy companies for the fossil fuel sector, was also
introduced.
The inframarginal revenue cap does not directly change the spot market price but instead limits the
revenues that technologies with low variable cost can earn from the market. The demand reduction
aspects of the regulation were not binding but instead attempted to encourage member states to cut
peak demand (the hours in which gas is typically used) both to save gas and to reduce prices. The price
setting measures allowed member states to set prices below cost to temporarily protect consumers
from exceptionally high prices.
A report from the European Commission (2023a) has stated that these measures should not be
prolonged, in line with feedback received in a public consultation. Regarding the demand reductions
measures, the Commission argues these are no longer required as it has proposed structural demand
response instruments in its market reform proposal. On the basis that the diversity of implementation
of the revenue cap across Member States has caused investor uncertainty, the Commission states that
the benefits of the cap no longer outweigh such negatives. Finally, on price setting measures, the
Commission has included provisions to allow Member States to temporarily intervene in retail
electricity markets in extraordinary circumstances.
1.3. Shortcomings of the current design

The energy crisis revealed structural shortcomings of the current European electricity market design,
along several interrelated dimensions. Firstly, insufficiently strong investment signals for renewables
meant that the European electricity system was vulnerable to a supply shock in a critical fuel, natural
gas. Secondly, consumers were poorly protected against price spikes, with some facing huge and
unaffordable increases in their final bills. Thirdly, a lack of demand response meant that scarce gas
continued to be consumed, instead of a reduction in demand leading to lower prices.
If the European electricity market had attracted more investment in renewables in recent years, the
impact of the gas supply shock (and nuclear outages) would have been milder. Countries with a large
dependence on gas for electricity generation faced huge price increases. Higher levels of wind and
solar would have reduced the need to continue burning gas for power generation, saving precious fuel
for other uses, and reducing prices, ultimately benefiting consumers.
The unaffordable prices faced by some consumers due to the price increases could have been avoided
with more efficient hedging and appropriation of risk by electricity retailers. However, the correct
25 PE 740.094
balance between long-term price hedging and short-term price exposure is not obvious. To achieve
effective demand response, which is needed during supply shocks and will become more important as
the electricity system decarbonises, consumers cannot be completely insulated against short-term
price signals. During the energy crisis, significant interventions from the EU and national governments
were required to deliver meaningful demand reductions in the electricity markets. The current
electricity market design did not find the correct balance between short-term and long-term contracts,
and failed to both protect consumers and encourage demand response.
PE 740.094 26
1.4. Overview of the European Commission proposal and European

Parliament amendments
1.4.1. The Commission proposal
The European Commission set out its proposal for reforming the electricity markets on 14 March 2023
(European Commission, 2023b). The Commission diagnosed the current market design shortcomings
as an issue in which volatile fossil prices affect short-term electricity markets which then expose
consumers to sharp price spikes. To address this issue, the Commission proposal broadly introduces
three types of measures: improvements to short-term markets, increasing the uptake of efficient long-
term contracts, and consumer empowerment & protection.
The short-term market improvements are about improving trading granularity through smaller bids
and small trading periods.
Regarding long-term contracts, the measures cover forward markets, power purchase agreements
(PPAs), contracts-for-difference (CfDs) and flexibility mechanisms. The proposal suggests integrating
forward markets through regional trading hubs that would allow participants from neighbouring
countries to trade. On PPAs, Member States can provide guarantees to reduce financial risks in these
contracts, while for CfDs, they are recommended as the default state-support scheme for low-carbon,
low operational cost technologies (e.g., wind & solar). The revenues earned from CfDs should be passed
onto consumers. In terms of flexibility mechanisms, capacity markets are one of a number of measures
that are intended to be reformed to promote technologies to complement renewables. A peak-shaving
product is also suggested, which would be sold by transmission system operators to encourage
demand response.
The consumer-focused measures aim to increase protection by requiring retailers to offer fixed price
contracts, facilitating energy sharing, and, notably, allowing governments to set consumer prices
during crisis periods. The latter measure effectively structurally maintains the emergency retail price
setting intervention, albeit with specific caveats regarding the circumstances of such crisis periods.
Overall, the proposal strengthens protection for consumers while formalising member states authority
to direct the cash flows of domestic investors.
1.4.2. ITRE’s position

The European Parliament Committee on Industry, Research and Energy (ITRE) voted on 19 July 2023 for
an amended version of the Commission proposal (European Parliament, 2023). ITRE’s position softened
some the concrete aspects of long-term contracts set out by the Commission. Specifically, the
extending the inframarginal revenue cap was ruled out by the Parliament, while other subsidy schemes
for renewables besides CfDs are allowed under the ITRE position (European Parliament, 2023).
Regarding PPAs, they are encouraged in the text of ITRE’s position, and the Commission would be
tasked with establishing a specific marketplace for their trading by the end of 2024.
The main thrust of the Parliament’s amendments focused on consumer protection. Vulnerable
consumers cannot be disconnected by suppliers. All consumers have a right to electricity if their
supplier were to go out of business. Other consumer related measures introduced through the ITRE
vote involved requiring distribution system operators to take account of energy community
specificities during the grid connection procedure.
On 14 September 2023, lawmakers in the European Parliament approved the position of the ITRE
committee in a vote, with the package now awaiting negotiation in the European Council. The position
passed with 366 votes in favour, 186 against, and 18 abstentions.
27 PE 740.094
MARKET DESIGN CRITERIA
KEY FINDINGS
Fairness, encouraging optimal investment, and ensuring optimal operation are considered as the
set of normative criteria against which to assess proposals for electricity market reform.
Fairness is understood as the distribution of economic rents between agents involved in electricity
markets. While electricity markets are balanced minute by minute, long-term investment decisions
determine the generation mix of the future. It is desirable that markets send sensible signals to
encourage efficient investment – this might include the need to strengthen transmission capacity
between two adjacent markets or ensuring sufficient renewable deployment by 2030. Finally, a
fundamental objective of the market is to match supply and demand in the short run. Through
price signals, the market should incentivise running the cheapest available resource each hour to
minimise final cost to the consumer.
Electricity market design is a complex policy area in which multiple aims are simultaneously sought. To
frame the discussion of the specific market design instruments and the following chapter detailing the
results of a quantitative scenario analysis, this chapter describes a set of normative criteria for electricity
market design outcomes: fairness, optimal investment, and optimal operation. The criteria are
normative in the sense that they describe three criteria that electricity market design should aim to
achieve. It is envisioned that, when considering alternative market design choices, such criteria may be
used to clarify and define the intended outcome of policy changes, thereby facilitating a common
understanding of a challenging and technical topic.
2.1. Fairness
Electricity market design choices have distributional consequences. Together with other policy levers
such as the fiscal system and network regulation, electricity market design choices determine how
economic rents in the electricity industry are shared between the different stakeholders. These
economic rents are quite substantial as consumers would be willing to still consume electricity at
drastically higher electricity prices 5, while most generators would continue to offer electricity at
drastically lower prices than we normally observe 6.
Fairness is not detached from optimal operation (2.3) and optimal investment (2.2) as very unfair
treatment of individual stakeholders changes their (long-term) incentives – e.g., unfairly retroactively
expropriating investors might cause underinvestment in the future.
In an economist’s ideal world electricity market design would pay the economic value to each “service”
provided and let consumers pay this economic cost for each “service” consumed. Then competition
should ensure that consumers eventually get the best deal. But services such as supply security are
hard to put in a market, other economic cost are very small (inertia) or highly dynamic and some
services are tied to natural monopolies (networks). Hence regulators choose which services get a price
and how it is determined.
More importantly, political economy considerations imply that market design choices are used to
favour/disfavour individual generators and consumers. This sometimes has to do with the energy
5 For household consumers the estimates of the value of lost load are often put at around 1 € per kW – that would translate into 1000
€/MWh in specific situations – substantially more than household prices of 200-400 €/MWh.
6 For example, a legacy hydro-power plant would produce at almost any positive electricity price.
PE 740.094 28
transition that drastically changes the value of specific assets – and where then market design choices
are used to avoid windfall profits or compensate losers. One example are decade old hydropower dams
whose value might substantially increase with power prices in hours with little wind and sun becoming
much higher, than was anticipated when those plants were built. To illustrate how market design
choices impact legacy generators: in the context of the Commission proposal it has been discussed if
legacy producers should get the voluntary option to sign Contracts for Differences (CfDs) – this would
have meant they can possibly make more money as they can chose what is best for them, or if
governments can force them into CfDs, which would likely have meant that they are worse off as
governments take their freedom away to seek better prices at free markets.
The same political-economy considerations hold for the consumer side. For example, policymakers like
to protect legacy consumers against changing market conditions. As a result, distributional effects are
felt within countries, as various consumer and income groups might pay different prices for electricity
depending on the regulation of retail markets, for example. Figure 7 shows the difference between the
cost of electricity paid by large non-household consumers (e.g. industry), medium sized non-household
consumers (e.g. SMEs) and by medium sized households as an average across the EU.
Figure 7: EU27 average electricity prices by consumption band
Source: Bruegel based on EUROSTAT.
Note: HH = Households. IND = Industry.
Fairness considerations not only permeate through price levels – but also through volatility that neither
consumers nor producers like. Electricity prices are expected to become more volatile as renewable
energy penetration levels increase (Cevik and Ninomiya, 2022). The energy crisis has also decisively
demonstrated that Europe’s position as a net importer of energy leaves it vulnerable to supply shocks,
29 PE 740.094
as was experienced with gas last year. In the context of price volatility, consumers should have
equivalent options to hedge their consumption and guarantee a certain level of price stability. That is,
cost of hedging should not be substantially higher for some consumers, than for others, without due
economic justification 7. Likewise, all electricity producers should be equally able to hedge against low
prices, which are also expected to result from more renewables.
The distributional impacts of electricity market design also occur between countries. National and
European market design choices affect prices in all connected markets. Hence some stakeholders
might get better off from a certain reform while the same stakeholder group in a neighbouring country
might lose. If, for example, one country organises a capacity market that provides an additional revenue
stream to gas fired power plants in that county, those plants might get better off. Similarly, power
plants in a neighbouring country that are not eligible might, by contrast, see day-ahead prices in the
common market somewhat decline – leading to lower income for them. At the same time, consumers
in the market with capacity mechanisms might end up paying more – also providing supply security
for the neighbouring country.
Fairness is not an easy to operationalise criterion. But making the distributional consequences of the
current system and eventual reforms transparent is crucial as distributional effects take centre-stage in
the political discussions. In the end it is a political decision which distributional consequences are
acceptable, which can be best dealt with through other means (especially the fiscal system) and where
there are trade-offs between slightly less efficient but significantly more “fair” market design choices.
2.2. Optimal Investment

Rapidly deploying renewables is essential, both to reduce Europe’s strategic dependency on fossil fuels
and to decarbonise our power system. Electricity markets should send strong signals for private
investment in renewables as the state cannot underwrite all capacity in the system. EU annual
generation investments alone would amount to 1% of GDP for a net-zero compatible power system.
Furthermore, the investment risks should be appropriately allocated between private entities, the
state, and consumers. Clear market-based signals are required to attract private companies to invest.
More broadly, electricity market design should consider the whole system cost. Renewables have
recently become the cheapest source of generation, but due to their characteristics they require
additional investments to support them. To provide electricity when and where it is useful they need:
1) to be connected. Hence there is a trade-off between more power lines to connect the best
renewable resources, or installing second-rate resources closer to consumption (example:
connecting Spanish PV to Swedish consumers).
2) to store abundant generation. Hence there is, for example, a trade-off between more storage
units to capture the best renewables resources, or installing renewables in a way they might
on aggregate produce a bit less, but in a more even pattern (example: west-facing solar; good
solar-wind mix; broad geographic distribution).
3) to be backed up when unavailable. Hence there is again a trade-off between maximising
annual production and maximising the contribution to meet peak demands to reduce the cost
of dedicated back-up plants (example: some overbuilding of renewable energy sources that
also produce in winter can save on back-up capacities).
7 Such as different credit risk or load profiles.
PE 740.094 30
But it is not only the renewables themselves, that need to be encouraged to be developed as “system-
friendly” as possible – all parts of the system need to be set up with a view to provide real value for the
system. New glassworks that can stop for two weeks in winter when electricity is very scarce, hydrogen
peakers that back-up the system in critical moments (there are interesting trade-offs between making
those more efficient and burning hydrogen at the price of higher capital cost), batteries that reduce
local network constraints are only some examples. Getting investments right into renewables, demand
side, the supporting system in a coordinated way will be key to a low-cost, low-carbon system.
This not only means avoiding adding expensive capabilities that are not needed (e.g., additional solar
plants that only produce when there is already more electricity than the system can absorb), but also
finding combinations of assets that provide the needed capabilities at the lowest cost.
The efficient investment criterion can hence be phrased as the absence of lower cost alternatives -
which in reality is not easy to operationalise, given the uncertainty of future supply technologies and
demand patterns.
Security of supply
In all this, a cost-efficient development of the system needs to consider the massive cost of supply
disruptions, when they happen. Under uncertainty of future electricity demand and especially supply
– including technical, environmental and cybersecurity risk on all elements of the system – maintaining
security of supply requires some degree of costly redundancies in the system. A mix of policies,
institutions and market arrangements is likely needed to ensure that the probability and impact of
failures is acceptably small.
2.3. Optimal Operation

Efficiently and reliably matching supply and demand in every instance is a fundamental objective of
the electricity system. The demand for electricity constantly varies, largely following predictable
periodic patterns (higher demand during daytime, work-days, winter) and some idiosyncratic
fluctuations (e.g., weather related). With an increasing share of renewables there are also largely
predictable periodic patterns (solar peaks during summer day-time, more wind in European winter) as
well as their fluctuations (e.g., for wind and clouds) driving a constant need for rebalancing the system.
Optimal operation means using the existing system in a way that minimises the operations cost.
This is complicated by the fact that some cost of running or not running plants are not very explicit. For
example, switching off a nuclear plant because the wind is blowing in one minute might not be cost-
optimal, because it requires time and resources to restart the nuclear plant (hence maybe better curtail
the wind turbine). And using all water in a hydro-damn to produce electricity already in summer is not
ideal either, as keeping some water for winter when electricity might be more valuable makes more
sense. Ideally the system is optimised not only within, but also across national borders – i.e., when the
wind is blowing into the Dutch wind-farms, Belgian gas fired power plants can reduce their output. The
corresponding benefits can be very substantial, especially when residual demand 8 is imperfectly
correlated between countries. In any case, safe operation requires that the optimal dispatch needs to
observe network constraints.
Importantly, optimal operation more and more also needs to co-optimise the operation of storages
and of electricity demand. Heating with electricity and charging electric vehicles might be significantly
cheaper from a systems perspective, if they are done in hours where they do not necessitate natural
gas or hydrogen power plants to burn expensive fuel and/or emit carbon-dioxide. In the future it might
8 Electricity demand minus renewables generation.
31 PE 740.094
carry increasing benefits to co-optimise other energy supply, storage and demand systems (such as
heating networks with heat storage, or hydrogen networks with electrolysers, storage and hydrogen
peakers) with the electricity system.
This shows that coordinating millions of consumers as well as thousands of generators and storage
units in every instance is not a trivial exercise and getting it wrong can have substantial cost. The
current system, built around marginal prices (reflecting the cost of supplying one additional unit of
electricity), sends broadly efficient signals (see section 1.2.3), albeit it has been argued that more
granular locational and temporal price signals as well as wider geographic optimisation carry additional
efficiency potential.
Hence, the ideal efficiency criterion would be to compare an optimal dispatch for a given load situation
with that incentivised by a given market design. A more qualitative approach would be to identify if a
market design sets gross incentives for expensive plants to run instead of cheaper ones or reducing
unnecessary demand.
PE 740.094 32
ASSESSMENT OF MARKET INSTRUMENTS AND DESIGN DETAILS

3.1. Long-term contracts
KEY FINDINGS
The Commission proposal does not specify a completely new market design but mainly regulates
specific aspects of the market design. Thereby the details of the proposed intervention are of crucial
importance.
The success of the approach to make CfDs the main tool for support will strongly depend on their
design and on keeping a European dimension to markets. They should be designed in a way to
avoid distorting short-term power markets.
Hedging obligations can be a useful tool to prevent moral hazard, but they need to be tailored to
the specific situation in electricity markets. Virtual forward hubs are a major intervention that
requires further impact assessment.
An intervention framework for price crisis is an ambiguous tool. On the one hand it creates
uncertainty to market actors by threatening state interventions, on the other hand it reduces said
uncertainty by spelling out trigger conditions and consequences. Hence, such a tool needs to
properly balance conditions and consequences in a way that reduces and not increases uncertainty
for market participants.
Energy sharing can increase acceptance and deployment of renewables. But it runs a high risk of
socialising cost and privatising benefits.
Additional products for peak shaving or flexibility procurement in our view only increase
uncertainty and system costs. Existing short-term markets work well and are more efficient. The key
barrier to flexibility provision, inflexible grid tariffs, is not addressed by the reform, which could be
a focus of future reform efforts.
One of the key focus areas of the EMD proposal are long-term contracts. This includes government-
backed Contracts for Differences (CfDs) and private Power Purchase Agreements (PPAs). Discussions
on market design in the past decade have often focused on the efficiency of short-term markets, which
are now well-working and very advanced in Europe.
The crisis showed a lack of long-term contracts. Forward markets are at the heart of the reform
proposal for two main reasons. First, the crisis has laid bare a lack of long-term contracting (including
the shorter 1-3 year forward market horizons), resulting in windfall profits and revenue clawbacks to
contain them for suppliers at the expense of high costs for consumers. This was for example the case
for renewables in countries where renewable support schemes were designed as market premia
without a clawback component.
Low-carbon assets have high fixed costs. The second reason why long-term contracts are becoming
increasingly important is the cost structure of low-carbon generators: They usually are high fixed-cost
assets with low or zero variable costs. This amplifies the importance of capital costs as a share of overall
costs, and thus makes revenue stability even more important.
Co-existence with efficient short-term markets. A desirable property of long-term contracts – if
carefully crafted – is that they can co-exist with short-term electricity markets. Forward contracts can
take the role of ensuring cost and revenue stability for all market parties, while short-term markets take
the role of efficiently coordinating dispatch and flexibility use of all assets. However, to enable such co-
33 PE 740.094
existence, it is crucially important that the chosen types of forward contracting do not distort short-
term markets. This is achieved if forward contracts are designed such that the payments accruing from
them are independent of the dispatch of a specific asset, as we explain in the subsections below.
Interrelated instruments. Different types of long-term contracts are not independent from each
other. A generator can only hedge its production once and must decide between conventional futures
contracts, PPAs or CfDs. Thus, when determining the price of a PPA, the investor will consider the
alternative opportunity of going for a CfD, or future product or even spot sales. Such competition of
instruments can be beneficial, because it ensures that if governments set maximum strike prices for
CfDs too low, low-carbon asset buildout is not stopped, because investors can contract directly with
the demand side through PPAs, and such investments can help drive down costs.
This section. In the remainder of this section, we analyse the different types of long-term contracts in
turn, from CfDs, to PPAs, to futures products and the proposal to increase their liquidity by setting up
virtual trading hubs.
3.1.1. Contracts for differences (Regulation Art. 19b)

CfDs. Contracts for differences (CfDs) 9 are financial contracts that specify payments from a buyer to a
seller if the price of an underlying is below the agreed-upon strike price. In two-sided CfDs, sellers have
to give back money to buyers if prices increase above the strike price. For the electricity CfDs discussed
here, the strike price is often determined competitively in an auction before the investment takes place
and remains constant throughout the lifetime of the CfD, which is often in the range of 20 to 30 years.
Public CfDs may be best understood as a support scheme for renewables (and sometimes nuclear) with
implicit clawback mechanism. The fact that two-sided CfDs, unlike most other support schemes,
generate public income in times of high electricity prices has made them attractive to policymakers
particularly since the onset of the energy crisis. The UK introduced CfDs in 2014 and they are widely
used in Europe today.
Reform. Already under existing State aid guidelines, the Commission’s DG Competition sees two-way
CfDs as a preferred (and increasingly as the only) choice for support mechanisms. The Commission
proposal goes a step further by clearly specifying them as the only allowed option for direct price
support, setting out rules on how government revenues from CfDs are to be used, and defining which
technologies are eligible. With the inclusion of CfDs in the regulation’s core text, State aid approval
might also become easier for Member States wishing to implement them. The reform proposal stops
short of more far-reaching proposals, such as the one brought forward by Greece in 2022, that would
have made CfDs mandatory for all existing or new generators.
a. Two-way Contracts for Differences and how they impact plant design and operation
Electricity CfDs. Electricity CfDs 10 traditionally use the day-ahead spot price as an underlying. The
payment is calculated for each hour as the spread between strike and spot price, multiplied with the
electricity produced by a specific asset, such as a wind park. This “weighting” of price spreads with
fluctuating volumes sets electricity CfDs apart from those used in security and commodity markets, but
also from electricity future contracts. It also makes these contracts more complex than many realize, in
terms of both incentives as well as risk allocation.
9 Significant parts of this section are based on our paper Financial Contracts for Differences (Schlecht et al., 2023), which is joint work with
Christoph Maurer.
10 Note that consistent with most of the academic literature, in this text we refer to two-way CfDs simply under the name “CfD”, without
repeating their two-way property, as that is the standard for CfDs. In other words, we only discuss two-way CfDs here.
PE 740.094 34
Goals. The objective of public CfDs is to increase long-term price stability for both producers and
consumers, intermediated by the state. With price risk mitigated, generation investors have lower cost
of capital and hence lower levelized energy costs.
Conventional CfD. There are many ways Contracts for Differences are specified in electricity markets.
We first discuss the basic specification that we use as a point of reference. This contract, which we refer
to as the “conventional CfD” and which resembles the contracts introduced in the UK in 2014, it is
specified as follows:
• The strike price is fixed (e.g. in an auction).
• The underlying is the hourly day-ahead spot price.
• The CfD is linked to a specific physical asset.
• Volumes are “as produced” in every hour.
The hour-by-hour payment obligation is calculated as
Paymentt = (strike price – spot pricet) x produced volumet
If the spot price for an hour is below the strike price, governments make a payment to generators, and
vice versa. The fact that it is physical production (metered output) that determines the payments is the
reason these CfDs are sometimes described as called “injection-based”.
Figure 8 illustrates payments for five hours. The payment in each hour is calculated as the price
difference (height of the boxes) multiplied with the quantity produced (width). For the generator, this
results in stable per-MWh prices. However, a generator’s total revenues still depend on the production
volume (i.e. how much wind blows, for a wind generator) and therefore remain volatile.
Figure 8: Payments (left) and revenues (right) under the conventional CfD
Source: Schlecht et al. (2023).
Asset-specificity. While the conventional CfD is in some ways similar to a financial derivative such as
futures or a forward contract, the fact that it is linked to a specific asset makes it different. Not only does
this feature make it impossible to trade CfDs on secondary markets without selling the asset too, but,
more importantly, it entails that CfDs provide incentives to adjust the dispatch of the asset to
manipulate payments.
35 PE 740.094
Two problems. The conventional CfD comes with two problems: produce-and-forget incentives and
distortion on intraday and balancing markets. We discuss them in turn.
Produce-and-forget. The conventional CfD provides a simple incentive to the generator: maximize
production. In this regard, these contracts work much like traditional feed-in tariffs which isolate
generator’s revenues from market incentives entirely. Because the revenues per MWh always equal the
strike price, there is no incentive for the generator to increase output at times of high prices (scarcity),
to schedule maintenance at periods of low demand, to reduce output at times of low/negative prices
(abundance), or to invest in power plants that reap above-average market prices (flexible or system-
friendly plants). This has a range of adverse consequences:
• Investment choices: When selling to the spot market, wind and solar investors can maximize
their revenues by investing into what is sometimes called “system-friendly renewables”: wind
turbines with higher towers and larger rotors that produce electricity more continuously;
tracking solar panels with higher capacity factors; or west-facing solar that contribute more to
high demand during late afternoons. The conventional CfD provides no incentives for such
system-friendly plant design. For hydroelectric and thermal power plants, the incentive to
simply maximize production results in plants being optimised for base load operations and a
lack of flexibility including load-following capabilities, ramp rates, and part-load efficiency.
• Retrofit and repowering choices: Investments are not one-off decisions. Maintenance, retrofit,
and repowering investments are decided on during an asset’s lifetime. Conventional CfDs often
distort such choices, because they mute spot price variation, the core scarcity signal of power
markets. This means that under such contracts, in an energy crisis, too little would be invested
into maintenance and retrofitting. In an electricity glut, too much would be invested, just to
cling to an old contract. The same applies for repowering of wind turbines, i.e., replacing older,
less productive wind turbines with larger, new ones. Since the conventional CfD ends with the
life of the asset, an old wind turbine might not be replaced by a newer, more productive one
just to keep the payments of the old contract.
• Maintenance scheduling: Under the conventional CfD, generators have no incentive to schedule
maintenance at times of low demand. Nuclear power generators may instead schedule
maintenance when engineering teams are cheapest, which is often in the winter. Intermittent
renewables, regularly incur imbalance settlement costs since their actual generation may
deviate from scheduled generation due to forecasting errors. Imbalance settlement prices are
correlated with spot prices, which means that generators have an incentive to schedule
maintenance in the hours with the highest spot prices to avoid high imbalance costs – which
is the opposite of what they should do.
• Dispatch: Under the conventional CfD, generators have no incentive to increase production in
high-price hours or to decrease it in periods where prices are below their production costs.
Wind, solar and nuclear plants should curtail output whenever prices drop below their variable
costs, but under the conventional CfD they keep producing – even when prices turn negative.
This distortion is even more damaging for technologies with higher variable costs and/or if
these costs change over time. This includes all thermal power plants (including hydrogen and
nuclear power plants 11), reservoir hydropower and storage plants, for which the conventional
CfD is particularly ill-suited. These flexible generators must follow prices to be economically
11 Under certain conditions, the variable costs of nuclear plants are rather dynamic: when refueling cycles are planned and fixed some
time ahead, the short-term dispatch of the plants faces opportunity costs driven by the available fuel until the next refueling. This
results in opportunity costs somewhat similar to the water value of reservoir hydro plants.
PE 740.094 36
viable. Providing an incentive to continuously generate electricity would invalidate their

economic value as a flexible asset. Such distortions tend to become more damaging if larger
fractions of the market are covered by CfDs.
Improved CfD specifications. Some (but not all) of the “produce-and-forget” issues of the
conventional CfD are fixed in more advanced CfD specifications that have been proposed or
implemented in recent years, in particular monthly or yearly reference periods. The reference price is
usually the monthly or yearly weighted or unweighted average spot price, e.g. the average capture
price of a wider set of wind turbines. This is for example done in the German market premium (a one-
sided downside-cap CfD) or in the Danish hybrid CfD. By calculating the CfD payment based on longer
reference periods, intra-period price differences are no longer muted for the generator and create
incentives again. Therefore, generators are incentivised to optimise dispatch and maintenance within
these periods to capture the highest prices, and to make investment choices with a view to producing
at the highest priced hours within the reference periods.
Problems of improved CfDs. While improving some of the misaligned incentives, such improved CfDs
still come with three problems. First, they resolve only part of the misaligned incentives. This is because
price differences across reference periods are leveled out and thus fail to create incentives. For
example, while a monthly reference period creates incentives to capture high prices within the month,
it does not create incentives in a seasonal perspective across months, and thereby sub-optimally
suppresses incentives to focus on high winter yields. Yearly reference periods suppress output
maximisation in high-price crisis years. Second, they distort bids on the day-ahead markets. Given that
the CfD payments per MWh are equalised throughout the reference period (such as months or years),
this payment (or the expectation thereof) is known ahead of day-ahead bidding, which provides
incentives to take the payment into account at the bidding stage, distorting bids in a similar way as
taxes or subsidies do. This can lead to withholding of generation at low prices during clawback times
and above-optimal generation e.g., at negative prices when the CfD acts as a subsidy. Third, due to
common fixes to the problem mentioned before, they reduce the revenue certainty for investors. This
is because to avoid the distortive effects on day-ahead markets, improved CfDs (such as the Danish
hybrid CfD) have often been extended with specific correction clauses. These suspend payments from
CfDs in hours when they would distort day-ahead bids, i.e., by suspending payments during hours of
negative day-ahead prices or by suspending clawbacks at low positive prices. However, by making a
plant’s revenues dependent on power prices, this creates new revenue risks, and thus undermines the
original purpose of CfDs to provide revenue stability.
Intraday/balancing distortion. A second problem of conventional CfDs is the distortion on intraday
and balancing markets. This is because the day-ahead price is used as the underlying of the contract.
After that auction has cleared, the price of the hourly CfD payment is fixed and known to the generator.
From this moment on, it constitutes an opportunity cost and will be priced in, just as any other variable
cost component. This has implications for the subsequent market stages, the intraday and balancing
markets. The effect has different signs in high-price and low-price hours:
• During high price hours, the payment obligation works like a tax. If, say, the strike price is 80
€/MWh and the day-ahead price was 200 €/MWh, generators must pay 120 €/MWh for every
MWh they produce in that hour. If the intraday or imbalance price drops to 119 €/MWh, it is
rational for the generator to curtail output to avoid the payment and buy the power which they
sold day-ahead back on the intraday market. This example assumes operation costs of 0
€/MWh. If they were higher, the minimum price at which curtailment becomes more profitable
than production would shift upwards accordingly. This implies the waste of low-cost (and low-
37 PE 740.094
carbon) energy and an upward pressure on intraday prices, which arbitrage trading will
transmit back to day-ahead prices.
• The opposite effect occurs in low-price hours, when governments make payments to
generators. Then the payment works like a subsidy. In such hours, plant owners deduct the
payment from their optimal intraday bids, which means they inefficiently bid into intraday
markets below their own variable costs. If, say, the strike price is 80 €/MWh and the day-ahead
price was 60 €/MWh, generators receive 20 €/MWh. If their marginal costs are zero and the
intraday or balancing price becomes negative, it would be economically efficient and welfare
optimal if they would buy electricity on the intraday market instead of producing it themselves.
However, due to the payment from the CfD, prices would have to drop further (to -20 €/MWh)
for this behaviour to also become rational from their individual perspective. CfDs hence put
downward pressure on prices that had been low (i.e. below the strike price) anyway.
Difficulties closer to real-time. If real-time (balancing) prices rather than day-ahead prices were used
as underlying, these intraday/balancing distortions would not occur. However, this would make risk-
averse generators dump all production into the system imbalance rather than revealing their available
generation already at day-ahead stage, which would compromise operational system security.
Scale of the problem. If CfDs are only used for a small share of the market, the distortions mentioned
above seem small enough to ignore, if they are outweighed by the upsides of CfDs such as reducing
financial risks for investments. This is because the volumes that are shielded from price incentives are
small. While they might render the dispatch of plants under CfDs suboptimal and to some degree
inefficient, the overall market outcome is not greatly impacted. However, the larger volumes under
CfDs (or similar support schemes) become, the more impact they have on overall market outcomes. In
the worst case, misaligned incentives from support schemes can lead to a failure of market clearing
and security of supply issues. There is also a feedback loop of simple CfDs leading to more investment
in renewables not optimised for system-friendliness (i.e. with highly correlated output), which leads to
price cannibalisation and thus to higher CfD payments, i.e. increased support costs. Therefore, the
issues become highly significant if the predominant generation technologies such as wind, solar or, in
some countries, existing nuclear plants are to be subjected to CfDs.
Negative prices as one result. Shielding generators from short-term prices, as conventional CfDs do,
exacerbates price volatility in both upward and downward directions. One clearly visible example of
hours in which market distortions from support scheme design affects market outcomes are hours with
negative prices. They are one example where distortions from support schemes impact overall market
results and sometimes even lead to difficulties with market clearing. This was the case in spring 2023
when the Dutch hourly electricity prices hit the technical lower price limit of the power exchange and
a second day-ahead auction had to be called. Negative prices are predominantly an artefact of
renewable support policies, not a fundamental market outcome. If all generation units were exposed
to wholesale price incentives, wind and solar would economically curtail at prices of 0 €/MWh, reducing
support costs and stress on the system, enabling thermal plants to continue running to avoid resource
intensive shutdown and startups that cause further physical costs through wear-and-tear. If incentives
from support schemes continue to be misaligned and to shield generators from market prices, more
events are to be expected in which demand and supply are hard to match.
Fundamental fixes. More recent approaches aim to fix the distortions arising from CfDs and related
support schemes more fundamentally. The key innovation in such approaches is to decouple the
calculation of the payments from the asset’s production volumes. Examples for such approaches are
Capability-based CfDs (ENTSO-E, 2023), Yardstick CfDs (Newbery, 2023) or Financial CfDs (Schlecht et
PE 740.094 38
al., 2023). By making payments independent of actual production, and instead basing them on
independent variables like weather measurements, they avoid the distortions of injection based CfD
specifications. It should be noted however that these approaches have so far not been implemented
and tested anywhere, so that their real-world performance cannot be evaluated yet.
b. CfDs in the reform proposal

Contentious issues. The most contentious points in the proposal are whether and to what degree
investments into existing nuclear plants qualify for CfDs, how revenues are to be distributed and which
requirements CfDs must fulfil so that distortions to power markets are avoided.
CfDs for existing nuclear plants. The reform proposal enables CfDs for investments into existing
generators, such as existing nuclear power plants. In the initial proposal by the Commission, this could
be interpreted to mean that a small investment into an existing plant would enable the whole plant’s
revenues to qualify for CfDs. This in turn could result in very significant capacity to be likely subject to
CfDs. Given that CfDs shield generators from (some or all) price signals in power markets, to subject
such large volumes to CfDs could be detrimental not only to efficiency but also to system stability.
These large volumes of existing generators would then potentially no longer react to (some or all) price
signals and thus reduce overall flexible capacity. Both the Council General Approach (REV4) and ITRE’s
positions provide safeguards to limit existing assets to qualify for CfDs, either by asking for “significant”
investments (Council of the European Union, 2023) or by applying CfDs only to a share of a plant’s
overall output depending on the size of the new investment (European Parliament, 2023).
Contract design requirements. Good design of CfDs is essential to ensure that electricity markets
continue to function efficiently, even as increasing proportions of the total generation fleet, potentially
including existing nuclear plants, are subject to such contracts. CfDs should be designed in such a way
that short-term electricity prices continue to provide incentives for units under CfDs, as discussed in
the previous section. This can be done either by setting higher level principles or by requiring specific
contract specifications. Higher level principles could be to require that CfDs provide incentives for
efficient participation in electricity markets. A weaker form is to simply require some form of 'market
responsiveness', e.g., by referring to Article 4(2) of the Renewable Energy Directive (Directive (EU)
2018/2001), as the Commission did in Article 2 of its proposal. However, these criteria have proved
rather weak in preventing several existing support schemes for renewables from distorting short-term
electricity markets. For example, existing market premium and CfD designs continue to give incentives
to distort bids on intraday markets. ITRE and the Council are tending towards stronger language in their
positions, requiring CfDs to maintain incentives to operate efficiently in electricity markets. An
alternative is to prescribe the CfD design more specifically, such as by asking that CfD payments be
decoupled from the amount of electricity generated by the plant, so that only the specific specification
proposals that take such an approach (i.e. capacity, yardstick or financial CfD) would be allowed.
However, given the novelty of such approaches, it might be advisable to stop short of prescribing
concrete designs and go for general principles instead, making them robust enough to prevent
distortive support scheme designs.
Distributing revenues. A contentious issue also was the settlement of the financial position that
emerges from CfDs, i.e. the way proceeds are paid out and costs are recovered. We discuss this issue
separately in section 3.2.1 in the context of protecting consumers from future energy crises.
Mandatory CfDs are off the table. Given the very high electricity prices caused by the crisis, the year
2022 triggered heated discussions on revenue recovery and options to pass on the low costs of
renewable generation to consumers. Against this background, the Greek government (European
Council, 2022) argued for the introduction of mandatory CfDs for generators, while prohibiting market
39 PE 740.094
access for new generators without CfDs. In effect, this would have been price discrimination against
technologies under CfDs. It would also have discouraged investment in technologies such as wind and
solar by making any investment with a cost above the government-set CfD strike price unviable, even
if it was profitable at market prices. By deciding to propose CfDs that are voluntary for generators, i.e.
still allowing market access without them, the Commission has chosen not to go down this route, which
could have significantly damaged market confidence and reduced investment. Given the obvious
downside of crowding out investment, the imposition of mandatory CfDs appears to be off the table
in recent discussions.
Contentious issues. The most contentious points in the proposal are whether and to what degree
investments into existing nuclear plants qualify for CfDs, how revenues are to be distributed and which
requirements CfDs must fulfil so that distortions to power markets are avoided.
3.1.2. Power purchasing agreements (Regulation Art. 19a)

PPAs. Power purchasing agreements are generally understood as long-term contracts between
commercial entities, usually electricity generators and consumers, but possibly also utilities as
intermediaries. These contracts can stipulate electricity purchases in the sense of physical delivery or
be financial in nature, similar to financial forward contracts. Usually, the purpose of PPAs is to satisfy
the preference of stable power prices (price hedging) that generators share with consumers. The
Commission proposes to foster such PPAs through state guarantees.
Proposal. Several years ago, the Renewable Energy Directive (Directive (EU) 2018/2001) tasked
Member States to assess and remove regulatory and administrative barriers preventing the uptake of
PPAs in their jurisdictions. The Commission proposal goes beyond that by obliging Member States to
reduce the financial risks associated to off-taker payment default. The Commission proposal remains
rather vague on how this should be achieved, but it suggests “guarantee schemes at market prices”, to
which ITRE added “private guarantees”. In the following, we discuss if (and how much) government
should charge for guarantees and how PPAs can be set apart from other contracts.
Guarantee schemes. After being signed, PPAs create an obligation for financial payments, just like
forward contracts. This obligation has a positive or negative economic value (hence is an asset or a
liability), depending on the evolution of power prices. If power prices decline below the price level
specified in the PPA, the bankruptcy of the off-taker would require the generator to sell the electricity
at a lower price. Hence the possibility of such a default constitutes a financial risk to the seller of the
PPA, driving up financing cost via the associated risk premium required by creditors. Guarantee
schemes essentially work like an insurance against this risk, allowing to transfer it to another party such
as a private or public financial institution. Such an insurance has an economic value which in a private
market would be reflected in the insurance premium. Offering such guarantee schemes free of charge
would therefore constitute an economic subsidy. The reform proposal seems to rule this out by
requiring guarantees to be “at market prices”, suggesting that beneficiaries should pay their full price.
However, it does not specify how such market prices should be determined. Crucially, market prices
would have to reflect individual off-taker default risk.
Distortion of incentives. Ignoring the financial stability of a PPA off-taker would particularly benefit
financially poorly positioned companies, muting the allocative effect of credit ratings and risk
assessment. Risk premiums have an economic significance though: they mean that particularly risky
transactions are only carried out if they are particularly promising. This corrective would be levelled out
by non-discriminatory state guarantees. A concrete consequence could be a selection effect on the
participating customers: If they are all charges the same, on-discriminatory “market prices”, the
guarantee schemes are increasingly only attractive for companies with poorer credit ratings. For
PE 740.094 40
customers with high credit ratings, it may be more profitable to abstain from the guarantee scheme,
and to offer generators slightly higher electricity prices instead. The reform proposal tries to address
this by requiring guarantees schemes only for customers that “are not in financial difficulty”, however
the described selection effect still applies to the remaining set of customers, i.e., by favouring
customers with moderate over those with high creditworthiness.
Definition. Independent from the question of if and how much counterparties should be charged for
state guarantees, PPAs must be defined. The definition of PPAs provided in Article 2(77) of the
Regulation proposal states that “‘PPA’ means a contract under which a natural or legal person agrees
to purchase electricity from an electricity producer on a market basis”. This definition raises a series of
questions. On the one hand is very broad, as it allows for any electricity market transaction to qualify as
a PPA – including forward and spot market trades as well as retail contracts. This is problematic as it
implies Member States must become guarantors for all these contracts. It is hard to believe that this
scope is something anyone would like to demand; it seems rather more like a technical glitch in the
definition, but one with potentially dramatic consequences. Therefore, more rigorous eligibility criteria
should be added as discussed in the following.
Contract period. One aspect that sets PPAs apart from other electricity contracts is their duration. They
are usually understood as spanning several years, longer than spot, forward or retail contracts. It seems
sensible to include a minimum duration in the definition of PPAs, e.g. five years.
Linking to assets. Another property of PPAs is that they are usually linked to specific physical
generation assets, such as a wind park that is mentioned by name in the contract. It seems sensible to
include such a requirement in the definition. They should, however, not be tied to the physical
generation in order to uphold efficient dispatch incentives.
Settlement. While in these ways, the definition of PPAs is very broad and it seems sensible to narrow
it down, in a crucial aspect it seems too narrow and should be broadened up: in practice, PPAs may
either require the physical delivery of electricity or, increasingly common, the financial settlement
(“virtual PPAs”). In case of virtual PPAs, buyer and seller trade on the spot market independently from
each other at market prices. If the spot price exceeds the PPA price, the seller pays a compensation to
the buyer and vice versa. The current proposal could be interpreted as allowing only physical delivery.
It seems sensible to explicitly include both physically as well as financially settled PPAs.
Objectives. The proposal mentions two distinct goals to be achieved by fostering PPAs: To accelerate
the decarbonisation of the electricity system and to provide long-term price stability for consumers.
While there is some overlap between these two goals, they are not identical: while the price stability
objective suggests incentivising as many generators as possible to sign PPAs in order to maximise the
amount of fixed-price energy available, the decarbonisation objective warrants a narrower definition
in terms of eligible technologies and existing assets. The two objectives have distinct implications on
eligible technologies and existing assets.
Technologies. The Commission proposal specifies that PPAs must not be applied to the purchasing of
generation from fossil fuels. Beyond that, no further hard technological eligibility criteria are
mentioned, although ITRE’s position underlines that guarantee schemes shall exclusively support the
purchase of new renewable generation “whenever conditions allow”. Still, the guarantee schemes may
thus also be applied to nuclear, hydrogen or other low-carbon generators.
New or existing assets. If decarbonisation is the main goal of the guarantee schemes, government
support should be focused on de-risking investments and facilitating market-based capacity expansion
of low-carbon technologies. Towards this end, the guarantee schemes should be limited to new
41 PE 740.094
renewable assets. Opening them up for existing assets would risk creating windfall profits for plants
operators.
3.1.3. Virtual trading hubs (Regulation Art. 9)

Trading hubs. The proposed new Article 9 of the Electricity Regulation introduces the concept of
regional virtual trading hubs for forward markets into European legislation. In the context of a zonal
spot market design, virtual hubs are groups of bidding zones for which a price index is calculated to
serve as an underlying for forward contracts. In practical terms, where today forward contracts use the
spot prices of one bidding zone as underlying, hub forwards would use e.g. a weighted average of
multiple bidding zones for settlement, where the weights are pre-defined and time-invariant. For
example, the underlying could be calculated as 50% of the German, 30% of the French and 20% of the
Belgium hourly spot price. In the Nordic market, the system price, a hub-like price index, is calculated
not as the average of zonal prices but a hypothetical price that would emerge if cross-border capacity
was unlimited. Virtual hubs are better known in the context of locational marginal pricing (LMP), where
they are calculated as a weighted average of LMPs, but the same principles apply to zonal markets.
Regulation. The legislative proposal does not force market participants to use hub-based forwards,
nor does it prescribe power exchanges to offer such future contracts. It does, however, regulate the
supply of Long-term transmission rights (LTTRs) by TSOs, requiring that they must be defined as the
price spread between bidding zones and a regional virtual hub (zone-to-hub), rather than between two
bidding zones (zone-to-zone). The idea is that market parties in smaller bidding zones will hedge by
using hub-based forward contract in combination with such zone-to-hub LTTRs covering the price
spread between an individual bidding zone and the virtual hub. This is supposed to shift trading of
forwards and futures away from zone-specific products towards regional hub products, even if not
legally mandated. The trade of local, bidding-zone specific forward and futures products continues to
be allowed but might fade away.
Pool liquidity. A motivation underlying the reform proposal towards virtual hubs is to pool the
liquidity of multiple bidding zones to increase the availability of hedging products with little basis risk
in smaller zones. Essentially, this would allow parties in small zones to be better hedged, to reduce the
cost of hedging, and to increase overall market depth.
Prepare for market split. Another motivation for virtual hubs might be to lay the ground for possible
splits of larger bidding zones into smaller ones, as such a move could be easier in a setting of virtual
hubs than in zonal forward markets. In particular, splitting the German bidding zone, which hosts the
by far largest forward market, would effectively require a solution for the forward market – for example,
virtual trading hubs. Splitting large bidding zones such as the German one is sometimes discussed as
a policy option because it would reduce grid congestion and the need for costly remedial actions when
the grid is congested, reduce loop flows in neighbouring countries and it would improve overall market
efficiency through better representation of location and grid constraints in the wholesale market.
Risk: Split liquidity. A risk in the setup of virtual hubs is that market actors in large zones with liquid
forward markets continue to trade locally on their home market, while market actors from smaller
zones hedge using hub forwards. That would split the liquidity of forward markets and likely diminish
overall liquidity. Actors in smaller markets would no longer be able to use today’s zone-to-zone LTTRs
to access the liquid zonal forward market. Overall liquidity is likely to diminish, as financial actors might
retreat. As a result, market actors are worse off across the bord, and the opposite of the intended
increased liquidity is achieved.
PE 740.094 42
Technically difficult. The proposal leaves many complex technical questions open. For example, it is
unclear how a methodology could look like to determine how many LTTRs per border should be issued,
given that there is no physical underpinning of the individual “borders” to the regional virtual hub and
the finally available capacity depends on outcomes of the flow-based algorithm. A relevant question is
also the geographical grouping of countries into regions, as ending up in a too small or illiquid hub
could mean a country would be worse off in a virtual hub setting compared to the current approach of
zone-to-zone LTTRs. In our view, these technical questions will determine if trading hubs succeed or
fail.
Legislative positions. Contentious issues in the discussions have been the question whether there
should first be an impact assessment before a decision is made on whether to pursue the approach of
virtual hubs. The Commission’s proposal foresees direct implementation, the Council General
Approach (REV4) foresees an impact assessment with subsequent implementation while ITRE’s
position suggests an impact assessment with a subsequent decision. Another issue on which the text
versions differ is the responsible institution. While the Commission’s proposal delegates the task of
setting up virtual hubs to ENTSO-E, the Council’s General Approach (REV4) foresees an implementing
act by the Commission.
Box 1: The importance of forward markets
Forward markets. Financial forward and futures contracts have been a core feature of electricity
markets for many years. Utilities use them on large scale to hedge price risks. Financial forwards are
in a sense Contracts for Differences for a specified amount of energy during a specified settlement
period which are voluntarily concluded between market parties. Generators hedge their price risk
by entering short positions (“selling forward”) and demand entities by entering long positions
(“buying forward”). In a narrow definition, the term “forwards” refers to products traded decentrally
“over-the-counter”, while “futures” refers to the exchange-traded equivalents, which are traded e.g.
on the European Energy Exchange EEX or the Intercontinental Commodity Exchange ICE. The term
“forward markets” includes both such forwards and futures.
Asset-independence. A fundamental advantage of forwards/futures compared with conventional
CfDs or as-produced PPAs is that they are always asset-independent: payments are due regardless
of any individual asset’s production. In other words, they are financial derivatives. Asset-
independence has the crucial advantage that – while fulfilling the purpose of providing long-term
financial stability for both counterparties – they do not distort investment and operation decisions.
Both counterparties are hedged financially while continuing to react to the power market’s short-
term scarcity as they remain exposed to spot price incentives. This is more important than ever in a
system composed on the one hand of variable renewables which create many new short-term
dynamics factoring into price patterns and on the other hand of new types of assets (from battery
storages to heat pumps) which may both benefit from and mitigate such price volatility.
Products. Forwards and futures are mostly traded in baseload or futures products with delivery
periods of years, quarters, months, or days. Yearly forwards and futures are the most important
product for hedging 1-3 years in advance. As delivery approaches, parties often re-hedge in more
granular products. Baseload is the financial equivalent to a continuous electricity delivery over the
whole period while peak-load is for weekdays from 8 to 20h. Peak-load hours were historically the
most expensive hours of the day, although that is changing with increasing generation shares
coming from solar PV.
Liquidity and horizon. In most markets, futures/forwards are only traded for a relatively short time
horizon of up to 3 years, and even these relatively short maturities are often rather illiquid in smaller
43 PE 740.094
Member States, hampering reliable price discovery and efficient trade. The most liquid forward
market in the EU is the German forward market. Due to its high liquidity, also market parties from
smaller Member States use the German market for proxy hedging.
Proxy hedging. Firms wanting to hedge their demand or supply portfolio often hedge using
products that closely resemble but are not equal to the risk they wish to hedge. For example, a
Belgian demand entity might hedge using a combination of the more liquid German and French
power futures, which are highly correlated to the Belgian power price. For longer time horizons, even
cross-commodity proxy hedges are common. That means for years in which power prices are not
available on liquid forward markets, the electricity price risk is hedged through fossil gas futures,
which are more widely available for longer maturities. However, such geographical or commodity
proxy hedges come with a basis risk. A Belgian demand entity that has hedged on the German and
French markets faces the risk that the Belgian price could deviate significantly from the German and
French prices at the time of delivery, e.g., due to domestic Belgian factors. For countries with little
interconnection to bidding zones with liquid forward markets, this risk can be significant.
Status quo: LTTRs. To enable market parties to hedge such cross-border basis risk, TSOs issue long-
term transmission rights (LTTRs) according to the original version of Article 9 of the Electricity Market
Regulation. In a recent policy paper, ACER (2023) concluded that current LTTRs suffer from a number
of flaws. One category of problems concerns implementation aspects: First, LTTRs are often only
available for maturities of up to 1 year. Second, their financial nature as non-firm and of being
options, rather than obligations, hampers their suitability to cover the basis risk from cross-border
forward hedging. Both of these issues could be changed in a rather no-regret evolutionary fashion.
A second, broader issue concerns the question of liquidity and the suboptimal availability of
forwards and futures in smaller Member States. This is what the Commission aims to address by
switching the overall format of LTTRs from zone-to-zone to zone-to-hub format, and thereby
incentivising (but not mandating) the setup of hub futures, i.e., futures products that use a reference
hub price as underlying.
3.2. Protecting consumers from future energy crises

Protecting consumers from the effects of an electricity price crisis like the 2021/22 crisis has been, of
course, the trigger and main reason to conduct an electricity market reform in the first place. The
proposal aims at this objective through a host of different measures and mechanisms:
• Fostering long-term contracts between producers and consumers (PPAs) that shield
consumers from the consequences of spikes in spot prices (see section 3.1.2).
• Promoting long-term two-sided contracts between producers and governments (CfDs) that
generate public income during price spikes that can be used to compensate power consumers.
• Obliging retail suppliers to engage in long-term power procurement.
• Entitling small-scale consumers to fixed-price retail contracts.
• Allowing Member States to cap retail prices in case a price crisis is declared.
These measures regulate different aspects of long-term contractual relationships. Figure 9 maps the
different type of long-term contracts that can contribute to shielding consumers from electricity price
spikes. Some of the proposals depend on each other for effectiveness, for example:
• CfDs will only help during a price crisis if the revenues are distributed properly.
PE 740.094 44
• Forcing utilities to engage in long-term procurement will only help if also retail tariffs have a
longer duration.
Other proposals compete against each other, such as:
• Generators can hedge each unit of output only once, either through a PPA or a CfD, which
implies that expanding on CfDs will necessarily crowd out PPAs.
• Announcing retail price caps will diminish the incentive of electricity consumers to hedge
against price risk and hence reduce the demand for long-term contracts such as PPAs.
In our view, the proposal fails to develop a consistent, robust system to protect consumers against
future energy crisis. It is possible for Member States to use these design elements to build a market
system that protects consumers, but it is equally possible for them to implement these elements in a
way that fails to protect but causes significant harm to the functioning of the power market.
Figure 9: Contractual relationships that can mitigate small-scale consumer exposure to price
crisis through either utilities or the state as intermediaries between them and generators
Source: Neon.
3.2.1. Use of CfD revenues (Regulation article 19b(3))

In times of high electricity prices, CfDs generate revenue for the government due to the implicit
clawback function of CfDs. What governments should be allowed to do with these revenues was a
contentious issue in discussions. The Commission proposal contains a provision to distribute revenues
to all final consumers proportionally to their consumption.
Revenues are the exception. Historically, CfD schemes more frequently generated costs rather than
revenues for ratepayers. This changed during the energy crisis when power prices skyrocketed. In the
next decade, given Member States’ substantial renewable energy targets, most quantitative scenarios
of future power prices suggest that power prices will fall below strike prices most of the time, so that
often CfDs will again require, rather than provide, public revenues. It seems likely that many of the CfDs
signed today will incur a net cost to the public budget over the course of the contract lifetime.
Therefore, while it is important to clarify what happens to revenues, it seems equally important to
clarify how costs are financed, and to be realistic about the (limited) likely volume of revenues.
Legislative positions. Provisions differ across the versions of the respective legislative text. The
Commission proposal contains a provision to distribute revenues to all final consumers proportionally
45 PE 740.094
to their consumption. ITRE on the other hand opted for more specifically defined target groups from
energy poor consumers to industries engaged in decarbonisation and at risk of carbon leakage. The
Council General Approach (REV4) opts for allowing a departure from proportional distribution for
households while keeping the proportionality requirement for undertakings. Both ITRE’s position and
the Council General Approach (REV4) call for the possibility to save revenues for later low-price times
when CfDs require funding, which in our view is a sensible no-regret improvement of the initial text.
Distribution & efficiency. Rules on CfD revenues concern distributional as well as allocative
(efficiency) questions. The distributional questions play out between ensuring a level playing field
across the EU vs. supporting specific customer groups most in need of energy price support. The
efficiency questions centre around incentives for flexibility, situational energy saving and hedging.
Recipient options. CfD revenues could be used in different ways: they could be distributed to all
electricity consumers (i.e. reduce electricity prices across the board), used to fund grids, or be
channelled to specific recipients (such as energy-poor households or electricity-intensive industry).
Alternatively, they could be saved to pay for future CfD costs once power prices fall. From an economic
perspective, the latter comes with the benefit of reducing distortive taxation during low-price periods
and thereby increasing welfare.
Efficient price signals. Electricity prices are a signal of scarcity or abundance in electricity markets on
a fine-grained time resolution. Thereby, they are necessary for consumers to make efficient choices on
electricity consumption and its timing. For example, hourly electricity prices can incentivise charging
an electric vehicle when renewable electricity is abundant, or they could incentivise slightly reducing
the temperature within buildings during periods of exceptionally low renewable supply and high
prices. If CfD revenues were to be distributed in a way that would undermine such price signals,
desirable load flexibility would be inhibited. Both shifting load in time as well as saving energy during
high price times could be affected. The Commission’s proposal addresses the issue by asking for CfDs
to keep load shifting incentives alive. However, while incentives to shift load across time can be
preserved even when revenues are proportionally distributed, energy saving incentives are no longer
efficient. Distributing revenues proportionally alters the level of prices, which results in inefficiently low
incentives for energy saving during prolonged periods of high prices. This would have been
undesirable for a situation such as the 2022 energy crisis.
Lump sum. To avoid deteriorating energy saving incentives during high price crises, an alternative is
to distribute money as lump sums, i.e. as payments to consumers that are not dependent on their
current consumption. Thereby, prices can remain high (which induces saving incentives) while
consumers are directly supported financially. Lump sums can either be a fixed sum per household or
customer or be calculated based on other fixed variables. Both the Council General Approach (REV4),
as well as ITRE’s position allow for lump sum payments, while the Commission’s initial proposal
excludes them due to the proportionality approach (fixed amount per MWh consumed).
3.2.2. Hedging obligation (Directive Art. 18a)

In Article 18a of the Directive, the proposal also contains provisions for supplier risk management. More
concretely, the proposal demands that NRAs ensure suppliers put in place appropriate hedging
strategies to limit the risk arising from wholesale price changes.
Supplier hedging. For electricity suppliers, the appropriate hedging strategy depends on the maturity
of the contracts they sign with end consumers. If downstream consumer contracts are longer term (i.e.
one or two years contract duration) it is often in the supplier’s best interest to also sign upstream hedge
contracts hedging the obligations the supplier has towards its customers. Once a supplier enters
PE 740.094 46
similarly sized contracts both upstream and downstream, its value at risk is low and profits become
largely independent of power prices.
Over-hedging increases risks. Any further and longer hedge, above the existing downstream
commitments towards customers, can increase, rather than decrease the supplier’s risk. This can be
shown by an example. If a supplier hedges more than what it owes its customers at a time of high
prices, then if prices decrease later, it needs to cover the losses somehow, which is difficult given
competitive pressures from cheaper market prices, potentially endangering the firm.
Gaming the system. However, given the relative ease of setting up electricity supply companies,
absent prudential regulation there can be various profitable business models of reaping extra profits
from gaming the system. One such strategy is to intentionally plan with bankruptcy: set up a retail
supplier, sign longer term contracts with customers but refrain from hedging on the upstream side.
Such a supplier will make significant profits if prices fall as it benefits from cheaper upstream purchases
while the initial higher downstream rates remain locked-in. If prices rise, it will become bankrupt and
default on its obligations. If setting up and liquidating the company is not too expensive, this could be
a profitable strategy. In economics jargon, such a strategy is called “moral hazard”. A different strategy
could involve hedging as usual, but once prices rise the company would get rid of existing customers
by pushing them out, either by cancelation of contracts or through suggestive communication
strategies. Then the company could sell its hedged volumes to the spot market at high prices, avoiding
supplying customers more cheaply. In both cases, bankruptcy and contract cancellation, consumers
would fall back to alternative or default suppliers. If default supplier prices are regulated and do not
reflect current market prices, a flood of additional customers could in turn undermine the solvency of
the default supplier. These are classical issues of consumer protection that justify a need for prudential
regulation to prevent them.
Goals. The goal of hedging obligations should therefore be to prevent suppliers from signing longer-
term supply contracts with customers while not being adequately hedged itself. In other words, the
goal is to avoid moral hazard. While fostering demand for long-term low-carbon power purchase
agreements might also be seen as a goal that can be fostered by supplier obligations, there are many
reasons why this is likely to be the wrong vehicle for such purposes. We explain in the following.
Pricing is based on opportunity costs. It is important to understand that retail pricing strategies
depend mostly on competitive dynamics and opportunity costs, not on an individual supplier’s cost
structure. Therefore, even if a supplier owns upstream hedged volumes signed a long time ago when
prices were cheap, it will offer the higher current, competitive price level to new consumers – with at
best minimal discounts. This is because the supplier faces the opportunity cost of selling on the spot
market rather than selling cheaply to customers. Therefore, customers often do not benefit when
suppliers have hedged cheaply.
Specific PPA obligation. The proposed Article 18a also contains provisions to enable Member States,
under certain conditions, to mandate that a certain share of retail hedging obligations must be
procured from renewable PPAs. The intention seems to be to drive investment into renewables.
However, absent regulation limiting this to asset-based PPAs entirely for new-built renewables, this is
unlikely to have any material effect. This is because renewable PPAs could come from existing plants
and be provided in any shape including those matching conventional forwards or futures by for
example large incumbent utilities which also have renewables in their portfolio, so they can offer such
products. Also, such obligations run the risk of forcing suppliers to over-hedge, which would increase
rather than decrease their risk of defaulting.
47 PE 740.094
Legislative positions. There are few differences between the institutions’ drafts. While the
Commission only asks the regulatory authorities to “ensure” that suppliers implement appropriate
hedging strategies, ITRE’s position asks for a regularly repeated stress test. Both provisions are likely to
be implemented quite similarly. A fundamentally new proposal by ITRE is to require Member States to
take “measures to ensure liquidity in hedging markets”, including “to avoid the lack of level playing
field”. This could imply that governments could mandate dominant suppliers to act as market makers
in otherwise illiquid forward markets, significantly broadening the scope of the proposed article.
Recommendation. We recommend strictly limiting supplier hedging obligations to match the
maturities of their obligations towards customers to prevent the obligation from increasing, rather
than decreasing the risk of supplier defaults. The obligation should also be targeted on preventing
fraudulent practices of suppliers to make risky bets on price movements and go bankrupt or alienate
customers in case the bet goes wrong. An obligation to sign long-term PPAs seems inadequate as it
would increase supplier risks. If the idea is to increase renewable investments, other instruments, such
as CfDs, are preferable.
3.2.3. Fixed-price vs. smart retail tariffs (Directive Art. 11)

Fixed-price tariffs. In Article 11 of the Directive, the Commission proposed requiring suppliers to offer
fixed-price, fixed-term contracts. This proposal seems quite uncontroversial, with the Council and ITRE
suggesting just rather technical changes.
Types of retail contracts. While there is a large variety of retail electricity contracts, two archetypes
exist:
• A fixed price contract that guarantees a constant ct/kWh price for one or two years.
• A real-time pricing tariff that passes through hour-by-hour spot prices (plus grid fees and taxes).
All other contracts (shorter duration, monthly average prices, etc.) can be thought of as being
somewhere in the middle between these extremes.
Pro / con. Both contracts have advantages and disadvantages. Fixed price contracts protect consumers
from wholesale price spikes (for the duration of the contract), but because they mute the spot price
signal, they do not provide efficient incentives for saving energy in times of crises and no incentive for
demand-side flexibility e.g., load shifting by charging EVs when renewable energy is abundant and
power prices are low. They can also be slightly more expensive on average as they require hedging of
price risks on the utility side. Real-time pricing tariffs on the other hand provide efficient incentives for
energy saving and flexibility. They can also be combined with dynamic grid fees, enabling smart
heating and charging when distribution grids are uncongested. However, when wholesale prices spike,
consumers remain unprotected, which was not only evident during the European energy crisis of
2021/22 but also during the Texas cold spell of early 2021 12.
Demand response. Decarbonisation requires large-scale expansion of wind and solar energy as well
as the electrification of heating and transport. Both space heating and battery-electric cars have
significant embedded flexibility potential, i.e., one can easily shift electricity consumption by a few
hours back or forth without impacting consumers’ convenience. If this demand-side flexibility potential
remains unexploited, the need for large-scale batteries, electrolysers, hydrogen-fired plants,
transmission and distribution networks is greatly inflated. In fact, a net-zero power system without
12 A historical winter event in Texas that caused several coal and gas power plants to trip, leading to a severe shortage of electricity in the
system with large-scale brownouts and power prices of 9000 USD/MWh for multiple days.
PE 740.094 48
demand-side flexibility is hard to imagine. Granular price signals that convey abundance or scarcity of
electricity generation and networks are a precondition for consumers (or aggregators and algorithms
acting on their behalf) to exploit their flexibility.
Dual objective. Thus, retail tariff design must try to accommodate two objectives: providing
protection against electricity cost shocks while continuing to pass on the efficient short-term price
signal. Ideally, retail tariffs should be both an insurance against high prices and flexibility incentives.
What seems to be a hard trade-off, fortunately isn’t one.
Real-time-price with price insurance. There exist retail tariffs that combine flexibility incentives with
price insurance (Borenstein, 2021). Such a tariff has a long duration of one or multiple years. It specifies
(a) an annual volume, (b) an hour-by-hour consumption profile such as a standard load profile and (c)
a price. If households consume exactly the amount along the pre-agreed pattern, they pay exactly the
agreed-upon price – regardless of price movements on the wholesale market. In other words, they are
insured against price spikes.
Example. If the annual consumption is 3000 kWh and the price 20 ct/kWh, households will pay EUR
600 annually, whatever wholesale price movements may occur. If households deviate from the pattern,
these differences (+/-) are settled with the hour-by-hour spot prices. For example, if they avoid charging
their EV during the evening peak, they get the full spot price of that hour (say, 40 ct/kWh) credited. For
charging the vehicle at a windy night, they only pay the low spot price of that moment (say, 5 ct/kWh).
If a Texas-type of energy crisis hits and spot prices spike at 1000 ct/kWh, even small energy savings will
be financially extremely attractive. As a result, consumers can actually benefit financially from price
spikes.
Interpretation. In other words, while households are insured against the effect of price spikes on their
bills and know exactly what they will pay, they still have the full benefits of saving energy when it
matters. Essentially, while consumers have high certainty about the size of their electricity bill, efficient
price signals prevail at the margin. American energy economist Severin Borenstein (2021) put forward
a similar idea after the 2021 Texas energy crisis and similar contracts are common practice for larger
consumers. Effectively, a smart retail tariff would apply the logic of forward hedging to retail customers.
Conclusion. In our view, moving back to fixed-price retail tariffs represents a lost opportunity and
makes the transition towards low-carbon energy systems slower and more costly. A requirement to
introduce retail tariffs that combine proper incentives with price insurance would be a preferred
option.
3.2.4. Electricity price crisis (Directive Art. 66a)

Background. The proposed new Article 66a of the Electricity Directive specifies under which
conditions an electricity price crisis is announced and allows Member States to cap retail electricity
prices during such crises. Other mechanisms, such as the introduction of a peak shaving product, might
be linked to the crisis conditions (see 3.3.1). In contrast, allowing Member States to cap revenues during
an electricity prices crisis, which had been proposed during the Council and Parliament negotiations,
is not included in the Commission proposal, in ITRE’s position, or the Council General Approach (REV4).
Trigger. An energy price crisis is triggered if three conditions are met: an increase in wholesale prices
of 150% compared to the past five years, an increase in retail prices by 70%, and a negative effect on
the economy. ITRE has proposed to additionally require wholesale prices to exceed 180 €/MWh (which
is likely to be the case anyway under such price increases) and the Council considers excluding the year
2022 from the calculation of the five-year-average, which significantly lowers the bar for a crisis to be
announced. ITRE has also suggested to lower the bar for retail prices increases from 70% to 60%.
49 PE 740.094
Problems. These conditions have three independent problems:

• First, they are quite ambiguous. There is not “the” one wholesale price, but a plethora of prices
that emerge from forwards, futures, day-ahead, intraday, and balancing markets. It is unclear
which of them are referred to. Prices must be “expected” to remain high for some time, but it is
not clear whose expectations are referred to (one option could be forward markets, but liquid
forward markets do not exist in all bidding zones). Also, the five-year average could be
calculated in different ways, e.g. the last five completed calendar years, or a moving average of
5x365 days – with substantially different outcomes. In the case of the retail price increase, it is
not even clear what time period serves as the point of comparison. Also, retail prices differ
greatly between consumers of different sizes and segments (households vs. businesses), and it
is not clear which segments are referred to. All this produces significant uncertainty, potentially
misaligned expectations, and leeway in announcing a crisis.
• Second, the required duration of elevated prices is very short and does not account for
seasonality. The Commission suggests six months, ITRE and the Council just three. Power prices
exhibit significant seasonality, such that a cold winter could already exhibit price movements
as indicated. However, it seems unreasonable to trigger an energy price crisis if it is clearly
temporary in nature.
• Finally, and more fundamentally, the overall market reform follows the idea of keeping short-
term price signals intact while isolating consumers from the adverse consequence of price
spikes through long-term contracts (PPAs, CfDs). If that is successful, spiking wholesale prices
do not constitute a “crisis”, because no one is hurt. In other words, the first trigger criterion is
inconsistent with the principal direction of reform. An increase in retail prices, if well defined,
seems to be a more appropriate trigger than wholesale prices.
Consequences. Once a crisis has been declared, Member States may cap retail prices or otherwise
intervene in retail electricity markets for residential consumers and small businesses. While the
intervention shall be restricted to 70% of last year’s consumption to maintain energy savings
incentives, there is no limit to the price cap, i.e., Member States could set prices at any level.
Interventions in wholesale markets are not foreseen. Economically, retail price interventions are far less
problematic than wholesale price interventions because they do not distort the decisions of
generators, storage operators and cross-border trading. However, they are not without side effects.
Even if designed carefully, they do mitigate the incentive to conserve energy. Applied to firms which
produce tradable goods, they also distort the internal market, because businesses in some Member
States benefit from capped prices while others may not. This is particularly relevant if the electricity-
intensive industry is to be included, as ITRE’s position suggests. Finally, the announcement of retail
price interventions in case of a price increase will, of course, reduce the incentive to hedge against such
prices. This, too, is particularly relevant for the energy-intensive industry. Put simply, why should these
firms spend money and time to engage in long-term PPAs and forward contracts if they know that if
prices go up, the government will cap their expenses? In other words, Art. 66a is likely to crowd out the
very long-term contracts the overall reform is trying to promote.
Regulatory uncertainty. On the other hand, one might argue that in a sufficiently severe crisis, ad-hoc
regulatory interventions will emerge anyway. It might be better to clarify conditions and nature of
interventions ahead of time instead leaving it to stakeholders to speculate over which situations will
result in member states or the European Commission to intervene into markets. A well-defined
backstop might hence reduce uncertainty, rather than increase it.
PE 740.094 50
3.3. Demand-side flexibility

A third area of proposed changes is the promotion of demand-side flexibility. This includes two specific
mechanisms: the peak shaving product and flexibility support schemes.
3.3.1. Peak shaving product (Regulation Art. 7a)

Background. The proposed new Article 7a of the Electricity Regulation allows Member States to let
TSOs procure a new “peak shaving product”. This connects to the political discussion around peak
shaving that emerged in late 2022 as a response to the electricity crisis. It also traces back to an ACER
working group on demand side flexibility. It is not clear to us, however, if Member States couldn’t
introduce such a product already under current European legislation: for example, Austria introduced
a “demand-side-response product” in late 2022 that resembles the proposal closely.
Variants. The Commission proposal, ITRE’s position and the Council General Approach (REV4) differ in
a number of aspects, e.g., if only transmission or also distribution system operators can procure the
product, whether it can be procured always or only during an electricity price crisis according to Art.
66a, whether a prior ACER assessment is required, and whether Member States must first request such
a product. While these aspects are of great practical matter, they do not affect the fundamental
economic mechanisms of the proposal, which we will focus on in the following.
Mechanisms. The peak shaving product is a new service that system operators can procure from
consumers. It is procured a few days before delivery and then activated before, within or after the day-
ahead market (Commission, Council and ITRE disagree on this crucial point). When activated,
consumers must reduce their consumption below a baseline, for which they are financially
remunerated.
Goals. From a scientific perspective, regulatory proposals should have a clear objective, which allows
an appropriate design. Surprisingly, this is not the case with the peak shaving product. Regarding the
problem the proposal is trying to solve, Commission, ITRE and Council give starkly different answers:
• The Commission proposal suggests the product shall contribute to “an efficient integration of
electricity generated from renewable energy sources in the system”, as well as to “reliability”
and to “grid stability”. Accordingly, activation is planned after the day-ahead auction.
• The Council states the main objective is “lowering wholesale electricity prices”. Accordingly,
activation is foreseen to happen before or integrated into the day-ahead auction.
• ITRE’s position, too, understands the instrument should “achieve a reduction of electricity
demand and price”, but still foresees activation after the day-ahead auction.
These two justifications – peak shaving for reliability or for lower prices – are radically different, hence
we discuss them separately in turn.
Shaving for reliability. If the objective of the product is to contribute to system and grid reliability,
one should note that for the many individual aspects of stability and reliability, established markets,
mechanisms and system services are already in place:
• Reducing demand in times of scarcity is incentivised through the day-ahead market.
• Reducing demand on short notice during an unexpected shortage or contingency is achieved
through the intraday market and / or the imbalance settlement mechanism.
• Procuring firm capacity for demand reduction on short notice can be attracted through
balancing reserve auctions.
51 PE 740.094
• Network congestion management is achieved through redispatch, curtailment, and markets

for local flexibility.
• Voltage support is regulated in the network codes or procured via market-based mechanisms.
Design principles. Not only do established markets exist that allow system operators to procure the
services they need, but those markets also articulate system needs much more precisely than the
proposed peak shaving product – “reducing demand in peak hours” is not generally the right answer
to any specific power system problem. In addition, if one were to introduce a new procurement
mechanism, it should generally be technology-neutral. This is because it is not only consumers who
can deliver such services, but also conventional and renewable generators as well as storage operators,
often also across-borders. Hence any procurement mechanism should be open to all these potential
resources in a non-discriminatory manner. In the case of a peak shaving product, it is unclear to us why
consumers should be allowed to deliver such a service, but not other resources.
Shaving for lower prices. If the peak shaving product is primarily about reducing spot prices, it makes
sense to activate it before or as part of the day-ahead auction. Effectively, this would mean system
operators buy energy from consumers at a high price and sell it to the spot market at a lower price. In
economics jargon, such activity is called “price discrimination”. As a consequence, the spot price is
depressed below the counterfactual case of a market clearing without prior peak shaving. However,
this is problematic for four reasons: costs, static inefficiency, diminished investment incentives, and
inconsistency with the overall electricity market reform approach.
1. Costs. When system operators buy electricity from consumers at a high price to sell it at a lower
price on the day-ahead market, they incur a loss. The size of this cost depends on the volume,
the price elasticity of demand, and possible imperfections such as non-competitive bidding
and baseline manipulations. This loss would probably be recovered through grid fees,
increasing the price of electricity for all consumers.
2. Static inefficiency. By lowering the spot price, the mechanism crowds out electricity suppliers
that would have been willing to sell at the higher undistorted price, but not at the depressed
price. Figure 10 illustrates this: At the reduced spot price, sellers with high ask prices, such as
battery operators, expensive diesel plants, (future) hydrogen-fired power plants, but also
imports would be suppressed. This is economically inefficient and welfare-reducing since the
economy would have benefitted from the additional power supply. In addition, any market-
driven demand response is crowded out, too.
PE 740.094 52
Figure 10: The supply-depressing effect of peak shaving (illustration)
Source: Neon.
Note: Buying consumers off at a higher price, to reduce the spot price, crowds out supply as well as lower-cost demand
response (DR).
3. Investment incentives. A third problem is the impact on investment. With the announcement
of a mechanism intended to depress peak prices, it becomes less attractive to invest in said
peak-load technologies. This makes future scarcity more likely and increases the pressure to
implement capacity mechanisms.
4. Inconsistency. Finally, the idea of depressing spot prices is at odds with the overall direction
of the reform proposal, which centres around the idea of leaving spot price signals intact while
protecting consumers through long-term contracts and hedging arrangements such as PPAs
and CfDs (see also section 3.2).
Baseline. No matter whether the objective of the peak shaving product is reliability or depressing spot
prices, it requires defining a baseline (“reduction below what?”). Defining a robust baseline is a
fundamental challenge of any mechanism that rewards a reduction. If the baseline is the schedule the
consumer had submitted, there is an incentive to inflate the schedule to maximize the reduction
reported to the system operator – without actually having to diminish the physical consumption of
electricity. By doing so, peak load shaving providers might ultimately be able to consume, after the
reduction ordered by the system operator, the originally wished amount, while still being paid for their
demand “reduction”. This way, consumers can extract windfall profits and while it looks like a demand
reduction has been achieved, the physical reality of the power system is not altered by the introduction
of the peak shaving product. The situation becomes even worse if consumers inflate schedules but are,
contrary to their expectation, not activated, in which case they actually increase physical consumption
during times of scarcity, inflating power prices and further stressing the system. Since participants of
the scheme have an inherent incentive to manipulate the baseline, ideally it should be set on objective
criteria by the system operator. However, it is not clear how this can be done since consumption plans
53 PE 740.094
are inherently private information of consumers. The legislative proposal does not provide any
guidance on the baseline methodology, leaving it entirely to TSOs.
Figure 11: Manipulating the baseline to maximize payout (illustration)
Source: Neon.
Note: In the case displayed here, a consumer had planned to reduce consumption in the high-price afternoon hours.
However, to benefit from the peak shaving product, they report a constant schedule. After being activated, the
consumer follows exactly the planned consumption pattern – but earns a windfall from the mechanism.
Evaluation. We fear that participating consumers will often find ways to manipulate the baseline,
extracting windfall from all other electricity consumers. Using the peak load shaving product to depress
spot prices is, in our view, not a good idea. Protecting consumers is better archived by the various
measures discussed in section 3.2. The peak shaving product can contribute to system stability and
reliability, if it is designed carefully such that overlap with existing markets and system services is
avoided. To add value, the peak shaving product should specifically address small-scale assets which
are currently excluded from the established markets, either because they are too small, do not have
smart meters, or because they do not fulfil other criteria. If it was designed as an emergency mechanism
however, one could relax metering, information technology and other requirements for the peak
shaving product compared to balancing responsibility and other system services.
3.3.2. Flexibility target and support scheme (Regulation Art. 19c-f)

Assessment in short. The Commission’s proposal introduces assessments, targets and support
mechanisms for flexibility into the EU electricity market design. It thereby creates new special markets
that target storage and demand assets specifically, and thereby positively price-discriminates these
assets against other types of flexibility. This deviates from the previous focus for short-term markets on
non-discrimination and strong unified price signals and thereby likely to decreases overall market
efficiency. In our view, a better way to address the current lack of demand-sided flexibility is by
addressing the main barrier: capacity charges in grid tariffs, as we explain in Box 2. In this section, we
first outline the nature of flexibility in power markets, describe how all power markets are implicitly
flexibility markets, and then describe and asses the reform proposal in more detail.
Definition. Flexibility is an umbrella term used for a wide range of power system characteristics. The
definition in the Commission proposal is very broad and defines it as “the ability of an electricity system
to adjust to the variability of generation and consumption patterns and grid availability, across relevant
market timeframes.” This definition applies to very different capabilities of power system assets,
PE 740.094 54
including firm capacity, the ability to ramp fast, to operate in accordance with demand, or to be located
at system-serving locations. In essence, flexibility means the consideration of the rest of the power
system in the operation and investment of assets, sometimes also referred to as system-friendliness.
This can be illustrated by a thought experiment: What would the components of the power system
look like if they were optimised exclusively for themselves? In this scenario, thermal power plants
would run at a constant base load and be located where their fuel supply is available with little
transport costs, such as at coastal sites, peak load gas power plants would not exist at all. Wind and
solar plants would be designed and built where their electricity generation costs are lowest. Consumers
would use electricity where and when they want it; night storage heaters would never have been
invented; storage and grids would not exist at all. Supply and demand would not match, neither in time
nor in place (except by coincidence). All measures that bridge this gap between generation and
consumption - grids, storage, but also adjustments of generation or consumption - can be understood
as flexibility.
The need for flexibility. The need for flexibility has been inherent to power systems. It is not a new
phenomenon, and neither is it limited to renewables. In general, every asset in the system has flexibility
requirements but is also capable of providing flexibility. However, systems differ in the type, the
amount, and the cost of flexibility provision. A renewable-based power system obviously needs
different complementary technologies than a fossil-based one.
Every electricity market is a flexibility market. Every electricity market (spot, intraday, balancing
energy, etc.) balances supply and demand and is thus a market for both energy and for flexibility.
Flexibility requirements are built into the terms and conditions for participating in electricity markets.
Examples are the obligation to submit quarter-hourly schedules for all balancing responsible parties
and the requirements on reaction time for balancing reserves. Conversely, it is difficult to imagine an
electricity market that is not simultaneously also a market for flexibility: it would consist of the pure
transaction of MWh, without delivery location, product definition, or time profile. Of course, such a
market does not exist.
Flexibility needs are reflected in market prices. Flexibility needs are expressed through market
prices, e.g., via price differences between different hours of high and low residual load on the day-
ahead market, via price movements for the same hour on the intraday market, or via the levels of the
capacity payment and the energy payment on the market for balancing reserves. A flexible asset, say,
a battery, may react to these prices signals by adjusting its production schedule. In doing so, it profits
from these price signals while simultaneously satisfying the system’s needs for flexibility. These profit
opportunities provide appropriate investment incentives for flexibility, e.g., prices on the Frequency
containment reserve (FCR) market motivated battery operators to enter this market at scale in recent
years.
Specific needs for flexibility. The term flexibility is probably best understood as an abstract,
multidimensional concept that cannot be measured in MW or MWh. Therefore, a general "merit order
of flexibility" cannot be established. Individual aspects of flexibility can be defined and, if needed,
traded or procured on markets. One example are the markets for balancing reserves, where the
demand of the power system for short-term power increase or decrease, differentiated by lead time, is
defined, dimensioned, and procured. Assessing unspecified flexibility needs and setting national
flexibility objectives, on the other hand, is difficult to reconcile with the differentiated flexibility needs
of the electricity system.
Flexibility is embedded in electricity products. Designing markets to account for the need for
flexibility requires defining products, market segments and system services such that they reflect the
physical requirements of the power grid. As the power system transforms, it may be useful to adjust
55 PE 740.094
market segments repeatedly to reflect changing flexibility needs or new technological opportunities.
Examples of past interventions in this regard include the introduction of quarter-hourly market time
units, the gradual shifting of the gate closure time closer to delivery, or the adjustment of control
reserve prequalification conditions to allow for battery participation in the 2010s, the introduction of
real time pricing electricity tariffs for residential customers in recent years, or possibly the procurement
of instantaneous reserve sometime in the 2020s.
Flexibility is not technology specific. Most aspects of flexibility can be provided by various types of
assets and technologies: Conventional and renewable generators, storage, industrial and small
consumers, or through import and export. It is often the interplay of different technologies that
represents the most efficient delivery of a specific flexibility need. A restriction of flexibility incentives
to specific assets is usually not efficient. However, to date, a focus of flexibility provision has been on
electricity generators. Thus, focusing the discussion on demand and storage seems reasonable, since
there are also some specific barriers, such as power-based network charges (see Box 2).
Assessment of flexibility needs and introduction of national flexibility objectives. The
Commission proposal includes an obligation for NRAs to compile bi-annual assessments of flexibility
needs at the Member States level. ITRE suggests complementing these assessments with a Union-wide
assessment by ACER. TSOs and DSOs, are obliged to provide the required data, coordinated by their
sector associations ENTSO-E and the EU DSO entity. The national flexibility assessments are to be
analysed by ACER (Commission Proposal) as well as the European Scientific Advisory Board on Climate
Change (ITRE amendment). Based on these reports, Member States shall define national objectives for
demand response and energy storage. These in turn are to be assessed by the Commission in a report
to the Parliament and the Council, which ITRE suggests accompanying by a Union strategy on demand
response and energy storage. Drafting these reports, their evaluations and the resulting strategies will
introduce a substantial administrative burden and costs at these institutions.
Flexibility comes at a cost. Providing flexibility generally comes with (opportunity) costs: Batteries
have high investment costs, industrial facilities engaging in demand response must interrupt their
production, flexible power plants have fuel and emissions costs. For this reason, it is not efficient to
satisfy every flexibility need e.g., it is currently not viable to store excess wind generation when
electricity is cheap and to discharge when prices are higher. Often, it is economically efficient to curtail
wind generation and to accept price differences across hours.
Flexibility support schemes. Equally, subsidising certain flexibility providers, as the reform proposes
to allow Member States to do, is economically inefficient, as it reduces incentives for other market
participants to operate in a system friendly manner. To the degree that the subsidy will distort the
market, causing additional investments into demand response and energy storage, it will bring down
price spreads on spot markets or capacity prices in balancing reserve markets that otherwise would
have incentivised market-based investments. Hence, if Member States implement support schemes for
demand response and energy storage, it is paramount not to introduce additional distortions, i.e., not
to interfere with the market-based dispatch decisions of the subsidised assets.
Reducing barriers instead. Rather than introducing new special markets for flexibility, in our view the
main barriers to demand-sided flexibility should be tackled. The elephant in the room is grid tariffs,
which are likely to be the number one reason why many consumers, including industrial electricity
users, shy away from making their demand more flexible. We present this argument in more detail in
Box 2. Power-based network tariffs (individual peak capacity charges) are a major barrier for demand
response. We recommend introducing and enhancing explicit time-variable network tariffs. If that was
done, explicit markets for demand flexibility would likely not be necessary. Instead, all types of
PE 740.094 56
flexibility would be adequately incentivised through the existing day-ahead, intraday, and balancing
markets.
Box 2: Network tariffs as a flexibility barrier
Introduction. One core aspect of the Commission’s proposal for the new electricity directive is the
support of demand-side flexibility. The proposal for the directive includes various support schemes
for flexibility. Yet, a major barrier for untapping flexibility potentials on the demand side remains
unmentioned. The elephant in the room are network tariffs. Current network tariff methodologies
aim at reducing the stress on distribution and transmission networks by flattening the consumption
profiles of all consumers. We argue in this info box that this strongly impedes the flexibilisation of
electricity consumers and storage to serve system needs.
Background. In most Member States, the network tariffs for consumers of electricity consist of an
energy-based component and a power-based component. In its report on electricity transmission
and distribution tariff methodologies in Europe, ACER encourages a move towards more power-
based distribution tariffs (ACER 2022). ACER argues that power-based charges best reflect the
resulting cost of the network because they (somewhat) correlate with the peak network demand.
The introduction of power-based network tariffs for households is also often advocated for in the
context of solar self-generation and grid-friendly charging of electric vehicles.
Argument. In this info box, we discuss the economic incentives resulting from such power-based
network charges. We highlight three relevant aspects of this tariff design, which we deem missing in
the current debate on demand side flexibility. First, power-based tariffs are implicit time-variable
network tariffs. Second, power-based tariffs imply tremendously high costs of additional
consumption in particular hours and therefore restrict demand response. Third, power-based tariffs
rest upon the individual consumption profile, while they should be based on the network load to
provide economically reasonable incentives.
Time-variable charges. Power-based tariffs (sometimes also called peak capacity charges) imply
that the cost of consuming an additional ("marginal") megawatt hour varies within the year. More
precisely, there are two price tiers: If electricity is consumed below the individual peak load, only the
energy-component is due. If electricity consumption is already at peak load, an increase in
consumption leads to an additional payment for the power component. In other words, the marginal
network tariffs are much higher in these hours. Power-based charges are thus implicit time-variable
network charges.
Example. The following case study illustrates this. We use the network charges at the medium
voltage level in Berlin in 2022 as an example. They consisted of an energy component of 26 €/MWh
and a power component of around 60,000 €/MW. Assume a consumer with a constant peak load
between 9 a.m. to 5 p.m. every day of the year. If consumption increases outside these peak hours,
only the energy component must be paid. However, if daily consumption increases within these
hours of peak demand, a higher payment for the power component is also due. An increase in
consumption by one MW in all 2,920 peak hours of the example results in an effective network
charge of around EUR 46 per MWh of additional consumption. 13 Hence, a new night shift implies
network charges of 26 €/MWh whereas a day shift would cost 46 €/MWh (Figure 12, left). Due to the
power-component, the effective network charge fluctuates over the course of the day.
13 The power component of EUR 60,000 per MW is spread over 8 x 365 = 2920 hours, which corresponds to around EUR 20 per MWh.
57 PE 740.094
Incentives for flexibility. The differences in effective network charges become absurd if the
increase in peak demand is not spread across multiple hours but occurs in a few hours only, e.g., to
provide flexibility in the form of a short-term increase in consumption. If one additional MWh is
consumed in just a single quarter of an hour, the peak demand would rise by four megawatts. In
Berlin's medium voltage, the effective network charge would then be 240,000 €/MWh – which is
almost ten thousand times more than the energy-based component of the charge (Figure 12, right).
Even if the additional MWh is spread out over 100 hours at 10 kWh each, the cost per additional MWh
is still EUR 600, i.e., 20 times more than the energy component. This example shows that it is
practically never worthwhile for consumers with a power-based network charge to increase
electricity consumption above peak consumption. The resulting increase in network charges will not
be compensated for by any other financial incentives from the power market or an additional market
for flexibility. Hence a power-based network charge strongly impedes the provision of flexibility.
Individual load. The problem with the power component (individual peak capacity charge) of the
network charges is that it is based on individual consumption. It is the individual peak load, and not
system peak load, that defines the hours when an increase in electricity consumption leads to an
additional power payment and higher network charges. This implies that the highest charge may
occur at different moments in time for all consumers, which is problematic for two main reasons.
First, this approach does not guarantee that all consumers have an incentive to reduce consumption
when the network is at full capacity because the high charge will only apply for those consumers
which are at their individual demand peak. The second problem, which is even worse for the
provision of flexibility, is that consumers are also disincentivised to increase their consumption when
the network is not stressed. Think of a sunny Sunday in summer: even though abundant local solar
generation meets little demand, consumers are strongly disincentivised to raise consumption above
their individual peak load. This prevents the deployment of new electricity demand such as power-
to-heat and imposes a strong barrier for the flexibilisation of existing processes.
Figure 12: Effective network charges for an increase in consumption in i) all hours of
individual peak load (left) and ii) one single quarter of an hour (right)
Source: Neon.
PE 740.094 58
Electricity market analogy. The approach of individual and independent peak charges
diametrically contradicts the economic logic of price formation based on the overall demand in a
market, such as the wholesale electricity market. On the power exchange, the equilibrium price is
determined by aggregate demand, not individual demand. If the logic of network charges was
applied to the power exchange, all consumers would pay an individual price. The individual
electricity price would always be high when the specific consumer consumes a lot of electricity, even
when a lot of wind and solar power are available. Conversely, the individual electricity price would
be low when the individual consumption is low, even in a dramatic shortage situation. This shows
the ridiculousness of the principle of individual prices.
Network load. According to economic logic, network charges should depend on the total network
load, i.e., the joint consumption of all customers, and not the individual consumption profile of
individual customers. At every moment, all consumers in one network area should pay the same
charge for an increase in consumption because they all have the same effect on the network.
Summary. We showed that the power-based component in the network tariff leads to different
costs for additional electricity consumption over time. However, this provides several undesirable
incentives:
• It systematically promotes an inflexible design of assets and processes, i.e., a flat
consumption profile.
• The resulting profile of individual network charges is not directly related to the network load.
Even in an oversupplied grid, additional consumption may be massively penalised
financially.
• Network charges based on individual peak load lead to bizarrely high marginal costs if power
consumption is only increased in a few hours. This prevents industrial flexibility, such as
using electricity in the event of negative wholesale electricity prices or grid bottlenecks.
Recommendation. Power-based network tariffs (individual peak capacity charges) are therefore a
major barrier for demand response and storage. Instead of moving to more power-based tariffs, we
recommend introducing and enhancing explicit time-variable network tariffs. Yet, the leeway of
national governments is limited in this regard since the tariff methodology is under the NRA’s
jurisdiction. To incentivise demand response and storage, EU legislation should recommend or even
prescribe time-variant distribution network tariffs.
3.4. Other topics

3.4.1. Energy sharing (Regulation Art. 15a)
Definition. The term “Energy Sharing” refers to self-consumption by active consumers of renewable
electricity generated or stored by themselves or other active consumers either at their premises or by
a facility they own, lease or rent.
Potential benefits. The arguments usually brought forward in favour of the energy sharing concept
include the following:
• The opportunity to consume energy from local renewable plants would contribute to the
increased acceptance of such plants in people’s neighbourhoods by adding to local value
creation, thereby also mobilising additional local financial capital for the energy transition.
59 PE 740.094
• Participation in energy sharing communities would hedge consumers against high prices as in
the 2022 energy crisis as it allows them to diversify where they buy their electricity and provides
them with direct access to cheap renewable energy.
• Energy sharing would provide an incentive to synchronize local demand with local generation,
i.e., to shift demand over time between hours of low and high renewable generation, thereby
reducing curtailment of renewable energy as well as the need for grid expansion.
The first point is rather uncontroversial, but the other two merit some discussion. Understanding to
what degree energy sharing communities can deliver on these promises, it is necessary to analyse how
they may affect the temporal characteristic of electricity demand via the incentives they provide to
consumers.
Incomplete substitution. Due to the limited potential of other renewable technologies, energy
generated in energy sharing arrangements will mostly come from PV installations, and potentially
some from wind. Both of these are intermittent in their availability. Depending on the ratio of
generation capacity and participating consumers in each energy sharing community, the energy
generated by the community may only sometimes or actually never suffice to satisfy the demand of
the community, i.e., there will be some residual demand. Energy sharing is therefore an incomplete
substitute for conventional retail supply.
Retail supplier as a fallback. To ensure customers have access to electricity whenever they need it,
the proposal includes provisions to guarantees customers access to conventional retail supply and
specifies that the energy procured via energy sharing be netted from their retail bill. In economic terms,
the residual supply by the retail supplier can be regarded as an unlimited call option, which the
customer can always fall back on in case energy sharing doesn’t suffice to cover its demand fully in any
given time period. Unless energy sharing communities build substantial storage facilities along with
sufficient PV and wind plants, their customers will still require a conventional retail supplier in order to
maintain reliable 24/7 access to electricity.
Requirements of smart metering devices. At the same time, participating consumers will require a
smart metering device that registers their hourly electricity consumption in order to track how much
of their consumption coincided with energy generated by their energy sharing community. The reform
proposal recognizes the need for smart metering and for a residual retail supplier by stating that “active
customers participating in energy sharing […] are entitled to have the shared electricity injected into
the grid deducted from their total metered consumption within a time interval no longer than the
imbalance settlement period.”
A parallel market. Since members of energy sharing communities will simultaneously stay customers
of conventional retailers, energy sharing arrangements in their economic essence constitute a parallel
retail market, allowing eligible customers to choose whether to source electricity from one or the other
for each moment in time. However, at times when not enough electricity is generated by the jointly
operated plants (i.e., at night in case of PV installations) consumers revert to their traditional retailer. In
the following, we assume that consumers aim to maximize the share of their electricity consumption
that comes from energy sharing, either because of more affordable prices or because of a preference
for energy sharing over their conventional retail tariff such that price differences between the two
markets do not affect their behaviour, even when energy sharing is more expensive.
Load defection. Energy sharing is a form of load defection. Load defection can already be observed
today for owners of rooftop PV installations (prosumers), who have an incentive to substitute away
from grid-sourced electricity to the self-generated electricity in order to avoid paying grid fees, other
levies and taxes that commonly take the form of a surcharge per kWh sourced via the grid. While
PE 740.094 60
previously owning a rooftop or other suitable site on which to install a renewable power plant was a
prerequisite for engaging in load defection, energy sharing greatly increases the number of potential
participants. Load defection poses a problem for grid operators and the state because it means that
fewer kWh are being consumed on which taxes, fees and charges can be levied. This problem will likely
not affect energy sharing, as the proposed directive text specifies that energy sharing be “without
prejudice to applicable non-discriminatory taxes, levies and cost-reflective network charges”. This is an
important provision that greatly limits the potential for welfare-reducing and opportunistic energy
sharing, because it means that energy sharing cannot be used to avoid taxes and levies.
Adverse selection. However, load defection by prosumers is problematic for a second, lesser-known
reason that fully comes to bear in the case of energy sharing too: in procurement, retailers face
wholesale prices which vary at least hourly, reflecting the time-varying degree of the scarcity of
electricity. With increasing shares of renewable energy, wholesale prices are driven more and more by
renewable availability, with the lowest prices regularly occurring at times of high renewable
generation. However, many European retail customers have fixed-rate tariffs with a time-invariant rate
per kWh which is adjusted only annually, reflecting the consumption-weighted average of (expected)
wholesale procurement costs. Load defection by prosumers happens disproportionately often when
wholesale prices are low, increasing the average price their retailers must pay for procuring the
electricity. In competitive retail markets, fixed retail rates calculated for traditional consumers are
therefore too low to be viable for supplying prosumers and members of energy sharing communities.
To prevent losses, retailers then have to increase their rates for all customers, further strengthening the
incentive for load defection in a case of adverse selection.
Time-of-use pricing as a remedy. In order to allow retailers to maintain a sustainable business model
while avoiding rising prices for their traditional customers, they must be allowed to charge prosumers
and members of energy sharing communities higher rates than their traditional customers.
Alternatively, (dynamic) time-of-use pricing could be mandatory for these customers, allowing retailers
to pass on hourly wholesale prices. Retailers should be allowed to prevent access to some fixed tariffs
for customers who engage in energy sharing, because if they were not allowed to prevent them from
signing such tariffs, they could not reasonably offer them at all in the presence of the load-defection
incentives described above.
Energy sharing as a hedge. For the same reason that intermittent renewable generation marketed via
energy sharing is an incomplete substitute for traditional retail supply, it is also an inadequate hedge
against high retail prices. Since the highest power prices systematically occur in times of little or no
renewable generation, energy sharing cannot shield customers from them.
Incentivising flexibility. One of the arguments put forward in favour of energy sharing is that it can
help integrating high shares of renewable electricity into the system by incentivising consumers to tap
into their flexibility potential and to synchronise electricity demand with (local) renewable generation,
i.e., by shifting part of their consumption to hours of high local renewable availability. This is particularly
relevant for consumers who own a heat pump and/or an electric vehicle. Energy sharing can indeed
provide these incentives, but no more than, for example, dynamic retail electricity tariffs could, which
take the whole system perspective into account. Furthermore, energy sharing can also lead to
outcomes that are suboptimal or even detrimental from a system perspective, as we show in the
following.
Demand flexibility is not always necessary. First of all, it has to be noted that synchronising local
consumption with local production is not necessarily useful from a system perspective. At all times
when the grid is not actually congested, energy sharing participants who adjust their consumption to
the production profile of local renewables are not providing any service to the system.
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Geographic delineation. Second, the usefulness of demand flexibility depends strongly on the
location of the flexible consumers vis-à-vis that of renewable generators and the network topology. In
times of network congestion, a necessary condition is that both consumers and generators are located
on the same side of the bottleneck. The reform proposal however includes no requirements in this
regard. ITRE’s position is more specific, limiting energy sharing to “within the same bidding zone or a
more limited geographical area determined by Member States”. Bidding zones however can be very
large, with grid congestion regularly appearing within them, e.g., in Germany. Consequently, this
criterion can be too wide to usefully align consumption with renewable generation from a grid
congestion perspective. Many position papers on energy sharing suggest an even more limited
geographical scope at the municipality level, e.g., BBEn (2021). However, this increases the downside
risks of inefficient dispatch from optimising locally, rather than with a system perspective. Our proposal
is to delineate the geographical scope for energy sharing along regions where grid congestion
frequently occurs or can be expected.
Detrimental incentives. In the worst-case scenario, their behaviour may even be detrimental to the
system. For example, this could be the case if they align their consumption with the PV generation of
their energy sharing community instead of the wind generation coming from local commercial wind
farms, since PV and wind generation are typically negatively correlated. If customers charge their cars
on a sunny afternoon, their batteries might already be fully charged during windy nights. Assuming
there was no congestion in the grid during the sunny day, but there is in the windy night and the energy
sharing community is located on the same side of the grid bottleneck as the wind farm, the flexibility
potential of the customers is lost. If the wind farm than needs to be regulated down and to be replaced
by a fossil fuel plant on the other side of the bottleneck (redispatch), energy sharing might even
increase the carbon output of electricity compared to a regime where customers charge their cars
randomly.
Optimising the wrong system. The fundamental problem is that energy sharing only incentivises
(some) consumers to align their consumption with those (local) renewable generators that happen to
supply their energy sharing community, when from a system perspective, it is the sum of local
renewable generation, netted with all of local demand, that matters. While the current market setup
with large bidding zones and mostly time invariant consumer prices often fails to pass on economically
efficient incentives to final consumers, it is not clear whether energy sharing communities provide an
improvement in this regard.
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ASSESSING THE CURRENT MARKET DESIGN

KEY FINDINGS
While a wealth of research has focussed on the physical generation and demand of electricity, wide
public understanding of the accompanying financial flows is generally poorer. The Dispatch and
Contracts (DISC) model is a framework which layers contractual agreements and financial flows
between agents on top of a representation of the physical electricity system. Application of the
model allows for investigation of electricity market reform components.
The DISC model is applied to different contractual scenarios under both ‘normal’ and ‘crisis’
conditions in the electricity market. Contractual scenarios with differing shares of contracts for
difference and power purchase agreements are investigated.
Key results show that Contracts for Difference do provide a hedge for consumers, insulating them
against price spikes, and that the nature of the long-term contract has implications for the
distributional outcomes, and finally, that renewables can dampen consumer costs during crisis
conditions.
4.1. Model overview

4.1.1. Motivation
In recent years, a lot of modelling research has focused on the generation and supply sides of the
electricity system. Researchers have considered essential questions for the future of electricity, such as
whether power grids can be operated with 100% renewables, whether a rapid phase-out of fossil-fuel
is possible, how grids might incorporate electric vehicles, or how the regional impacts of the energy
transition might be distributed (Zappa et al, 2019; Kefford et al, 2018; Li et al, 2020; Sasse & Trutnevyte,
2020).
Much of this modelling work sought to represent the essential qualities of the techno-economic system;
the flexibility and efficiency of different power plants, the transmission capacity of different
configurations of power lines, the patterns of consumption and supply. However, in Europe, a complex
financial system – the internal electricity market – is layered on top of the physical infrastructure of the
electricity system. Understanding the dynamics of the electricity market is necessary for identifying the
impacts of any market reform, as well as which agents will be impacted by a power system that is
undergoing fundamental transformations. Electricity markets are characterised by an intricate
arrangement of contracts between generation companies, electricity retailers, and end consumers, as
well as with state institutions. These contracts can have a range of timeframes and can be settled
against prices in multiple markets. The prices in those markets are themselves determined by the
trading behaviour of the same agents which sign the contracts. The ultimate market outcomes are
flows of money between market agents (typically from consumers to generators), mediated by the
contractual arrangements and intermediate institutions such as market operators and trading houses.
A common understanding of the dynamics of such contracts and their underlying markets is generally
lacking, owing to the complexity of the system and the poor transparency of the contract details and
market outcomes.
Improving the common understanding of the financial flows in electricity markets is essential for
assessing the potential consequences of electricity market reform. To this aim, we have developed a
basic model framework which represents financial flows as a result of a contractual arrangements
between market agents, layered on top of a representation of the physical electricity system which
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dispatches generators to meet electricity demand. We have called our framework the Dispatch and
Contracts (DISC) model.
Our aspiration is that this framework will prove to be straightforward and highly intuitive, thereby
improving the understanding of financial flows in electricity markets and providing useful insights for
the policy debate on electricity market reform. To our knowledge, this is a novel approach that can
meet the needs of this study and serve as a methodological basis for future analysis in this field. In this
section, we will present core structure of the model and apply it to a set of system and market design
scenarios.
4.1.2. Dispatch and Contracts (DISC) Model

Figure 13: DISC Schematic
Source: Bruegel.
DISC is based on two core aspects: the dispatch of electricity generators to meet the demand for
electricity and the contracts between market agents that determine financial flows. Given that the real-
world electricity market financial flows directly relate to the underlying physical system that balances
the supply and demand of electricity, DISC replicates this relationship. The model consists of two
modules: dispatch and contracts.
c. Dispatch
DISC applies a framework of economic dispatch to determine the outputs of generation types in each
period. In each period of a dispatch modelling run, DISC determines the outputs of each generation
type required to meet a fixed demand by minimising the cost of supplying electricity. Such a framework
makes a number of assumptions:
• Efficient operation of the electricity system. It is assumed that the operators of the electricity
system perfectly dispatch the available generation to meet demand, using the cheapest
available resources. For sake of simplicity, we abstract from the fact that the design of different
electricity markets and contracts itself affects the dispatch decisions of generators. Such an
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assumption can also be interpreted as representing the wholesale electricity market as a

perfectly competitive auction in which generation types bid their marginal costs 14.
• Renewable resources always run. As wind, sun and perception cannot be controlled 15, DISC
assumes that all available renewable output is utilised. This is largely consistent with the
efficient operation assumption as renewable generators have lower costs than other
generation types.
Given that renewable resources are always used, the model minimises the cost of meeting the residual
demand, defined as the difference between the demand and the output of the non-dispatchable
renewables (solar, wind and run-of-river hydroelectric). With this approach, the outputs of the
dispatchable plants 16 are determined in each time period as well as the marginal price, defined as the
marginal cost of the most expensive generation type needed to meet the demand.
Each run of the dispatch module also takes a set of input data:
• Installed capacity by generation type in each country.
• Hourly demand profile for each country.
• Hourly renewable generation profiles for each country.
• Commodity prices, including gas, coal, diesel, lignite, nuclear fuel and ETS allowance.
• Technical specifications by generation type, including electrical efficiency, emissions factors,
and annual availability.
The value of these inputs can be adjusted as necessary, depending on the needs of the analysis.
Naturally, the choice of this inputs affects the outputs of the dispatch module. The specific numeric
values of each input used in the scenario analysis for this study are provided in annex B. In each run,
the dispatch module produces a dataset with the following variables:
• Hourly marginal price.
• Hourly outputs by generation type.
• Hourly emissions.
The dispatch framework describes above is not unique to DISC and has been applied in many previous
modelling studies, aiming to determine the optimal power generation mix for a given country or region
under a set of assumptions and constraints, such as the introduction of a new technology type
(Göransson and Johnsson, 2009; Li et al, 2019). Figure 14 is a visualisation of the dispatch optimisation
carried out by DISC over a 24-hour period in Germany.
14 Thereby many real-world complications such as ramping and transmission constraints are deliberately excluded.
15 Curtailment, when a renewable generation is reduced below what it could have otherwise produced, occurs when the infeed of power
from renewable generators is reduced, usually to manage stress on the grid.
16 Any type of generation that can be used to generate power on command, e.g. thermal power plants.
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Figure 14: Example of DISC Dispatch
Source: Bruegel.
The dispatch can be interpreted as follows. Renewable output dominates the generation mix on this
day. Pumped storage is at the bottom of the chart in dark blue and provides power during daytime
hours. During nighttime hours, pumped storage is drawing energy from the grid, therefore generation
from other sources starts from below zero in those hours. The intermittent renewables (run-of-river
hydropower, solar, onshore wind and offshore wind) are in blue, as well as the output from reservoir-
based hydropower. The baseload output of run-of-river hydropower can be seen on the bottom of the
chart, with a consistent level throughout the period. Solar output is next, increasing from zero in the
early morning to a maximum around midday then decreasing in the afternoon. The solar output pushes
out the more expensive closed-cycle gas turbines (CCGTs) at its peak. Then, in the afternoon, as solar
output drops off, CCGTs and even less efficient open-cycle gas turbines (OCGTs) come online to balance
the system and meet the evening demand. These are broadly realistic results which can be expected
from a standard economic dispatch framework calibrated to real-world data. DISC optimises such a
dispatch for every hour of one year for Germany, France, Italy, Spain and Poland.
The DISC dispatch formulation makes a number of abstractions from the real-world electricity dispatch.
For example, generator start-up and ramping costs are not included. Therefore, some generation types
(such as nuclear and lignite) operate more flexibly than would be observed in reality. And hydro-dams
and pumped storage follow an overly simplistic heuristic in our simplified model. Moreover, fuel and
emission cost are assumed to be exogenous. Hence our dispatch model does not allow for a precise
projection of outputs and prices, we believe it is sufficient for the envisaged stylised analysis.
d. Contracts
The novel aspect of DISC is the modelling of a set of financial contracts layered on top of the dispatch
module. As discussed in section 2, key aims of electricity market design are to achieve a fair distribution
of the costs and benefits of the electricity system while continuing to stimulate the appropriate
investments in and achieve efficient operation of the same system. Contractual arrangements between
market agents can determine whether these delicately balanced aims are realised or not. Contracts for
Difference, Power Purchase Agreements and Futures all facilitate some form of long-term hedging
between generator and consumers, thereby affecting financial flows and consequently the
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distributional outcomes and the investment incentives, but their design varies widely according to the
agents involved, the mechanism for price setting, and the period of the contract. Such discrepancies
are represented in the model.
The contract module in DISC assumes key characteristics of different contract types and uses the
dispatch determined before to determine the according financial flows. The final generator profits and
consumer costs therefore depend on the marginal prices and generation outputs from the dispatch
module and the contract specifications provided to the contracts module.
For a given dispatch and contract scenario, DISC computes the following key variables of interest.
Wholesale electricity prices
The hourly marginal prices produced by the dispatch module represent the day-ahead spot market
prices. They can be compared across scenario to explore how different dispatch conditions drive
changes in the electricity price, and what the consequence is for generator profits and consumer costs.
Revenues and profits by generation type and utility
The annual revenues and profit for each generation type are produced by the contracts module. These
values depend on the volume and price of the generation type contracts as well as on their hourly
outputs and the associated marginal electricity price. DISC can also map these profits onto specific
electricity companies, based on a dataset developed internally at Bruegel which quantifies the share of
each generation type in each country owned by major utilities.
Cost by consumer type
Consumers are disaggregated into industry, SMEs and households, each of which consumer a fixed
share of hourly load, based on data from Eurostat. Similarly, to the revenues and profits, the costs paid
by consumer types for this electricity depend on their consumption (which in turn depends on the
load), the marginal electricity price, and on the volume and price of the contracts signed by the
consumers.
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Figure 15: Example of annual revenues by contract type for different technologies
Source: Bruegel.
Note: This is an example for a specific market situation (energy crisis) and contractual portfolio (blend) in a specific country
(Germany).
Figure 15 illustrates some of the outputs that the contracts module in DISC is capable of producing.
The annual revenues by generation in Germany under crisis dispatch conditions (see section 4.2) are
illustrated. Each stack shows the revenue by of a specific generation type. The different bars depict the
revenue earned from a specific contract source. The scenario in question combines energy crisis
dispatch conditions with a blend of contractual arrangements including CfDs, PPAs and futures.
Renewables have signed a significant share of their output volumes to CfDs, while all generation types
have signed futures contracts. Two thirds of the futures contracts (t-3 and t-2) have been signed at
prices lower than the average marginal price in the crisis year implying that producers pay to
consumers. Furthermore, a small amount of renewable volumes are signed to PPAs of various design.
In this scenario, lignite generation earns a large amount of revenue from the wholesale market, but its
position on futures contracts meant that it also had to pay significant monies to its counterparts.
Similarly, in this scenario, renewables had to pay out on their CfD contracts, although they earned
significant revenue from the wholesale market as well as some small revenues from PPAs.
Further details on the structure of DISC can be found in the Technical Annex A, including the software
tools utilised, the step by step logic, and the format and sources of the input data.
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4.2. Scenario analysis

4.2.1. Scenario design
In the research for this study, we applied the DISC model in a number of scenarios to explore the
dynamics between the underlying physical electricity system and the financial flows between market
agents. Each specific scenario is determined as a combination between a dispatch scenario and a
contracts scenario. The dispatch scenarios in DISC explore different conditions which are exogenous to
the electricity market design in the short-run, such as commodity prices, electricity demand, and
generation availability, and their effect on balancing electricity supply and demand. The contract
scenarios allow DISC to represent how different market designs might affect the financial flows for a
given dispatch scenario. Each ‘model run’ is a combination between a dispatch scenario and a contract
scenario. For example, in one model run, DISC combines energy crisis dispatch conditions with a
scenario in which no long-term contracts are in place. The scenarios are each calibrated to five major
EU economies represented in the model: Germany, France, Italy, Spain and Poland.
a. Dispatch Scenarios
Installed capacity by generation type (e.g., solar, wind, coal, etc.) is sourced from ENTSO-E for the year
2022. The specific capacities for each of the five countries are listed in Table 7 of the Technical Annex.
Scenario D1 – ‘Normal Conditions’
The first scenario aims to replicate typical dispatch conditions. The installed capacity of each generation
type in the five countries is at the level of 2022. The assumed commodity prices are listed in Table 1,
reflecting typical pre-crisis price levels. These prices are assumed to be the same for every country,
except for Poland, whose coal price is half of that paid in the other countries. Poland has indigenous
sources of coal and therefore it is assumed the commodity can be supplied to Polish coal-fired power
plants at a discount compared to other European countries.
Table 1: Scenario D1 Commodity Prices
Commodity Price Unit
Lignite 5 [€/MWh]
Nuclear Fuel 5 [€/MWh]
Gas 15 [€/MWh]
Diesel Oil 35 [€/MWh]
Coal 40 [€/tonne]
ETS Price 80 [€/tonne]
Source: Bruegel assumptions based on European Commission electricity market reports
The hourly electricity load (or demand), and the solar, onshore wind and offshore wind generation
output is based on ENTSO-E data for 2022. The availability of conventional power plants, such as
nuclear, hydroelectric reservoirs, and thermal plants are assumed to be at a typical level (80% for
nuclear, for example).
Scenario D2 – ‘Crisis Conditions’
The second scenario aims to represent dispatch conditions similar to those which occurred during the
energy crisis in 2022: increased commodity prices and low availability of some conventional power
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plants. The installed capacity is the same as in Scenario 1. The commodity prices for Scenario 2 are listed
in Table 2, matching levels seen during the energy crisis. Notably, the gas price has increased almost
ten-fold and the coal price has increased five-fold. These prices are assumed to be the same for every
country, with same exception for Poland as in Scenario 1.
Table 2: Scenario D2 Commodity Prices
Lignite 5 [€/MWh]
Gas 150 [€/MWh]
Coal 200 [€/tonne]
Source: Bruegel assumptions based on European Commission electricity market reports.
The hourly electricity load (or demand), and the solar, onshore wind and offshore wind generation
output are the same as assumed in Scenario 1. This is based on the rationale that renewable output did
not change as a consequence of the energy crisis. While demand did drop in response to high prices,
this was an endogenous response, and as we input demand exogenously, we prefer to leave it the same
as other scenarios to aid the comparison of results.
The availability of conventional power plants is key difference in this scenario. Nuclear and
hydroelectric plants are assumed to be only 50% available, reflecting the outages in France and the
drought in the summer of 2022.
b. Contract Scenarios
In the contract scenarios, different assumptions are made about the volume and price of contract types.
There are three contract options adjusted in each scenario, reflecting the main types of long-term
contracts under consideration in the electricity market reform proposed by the European Commission
and amended by the European Parliament. Futures are also included in the generators profit functions,
but their volume remains constant and the price only varies between dispatch scenario.
Contracts for Difference (CfDs)
As described in section 3, CfDs are a financial contract between the state and an electricity producer,
typically renewables, meaning that they do not require the physical delivery of electricity. Contract
scenarios in DISC specify the volume and strike price of CfDs signed between different generation types
and different consumer types. In the real world electricity markets, the counterparty for a CfD is a state
agency, often the national regulatory authority. The costs of paying for these CfDs are recovered from
retail electricity consumers via a renewable levy.
Within DISC, CfDs are therefore modelled as a financial contract between a renewable generation type
(Solar, Onshore Wind or Offshore Wind) and both SMEs and Households, from whom the costs of
paying for this contract are recovered through a levy on their final annual electricity bill. As CfDs are a
financial contract, the generators that hold them sell their power on the wholesale market (or through
a PPA), but the design of the contract means that for the specified volume they receive a guaranteed
price.
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Power Purchase Agreements (PPAs) – Fixed Volume

PPAs are a physical contract between generators and large industrial consumers which require the
physical delivery of electricity. In the DISC framework, this means that any power sold through a PPA is
not sold on the wholesale market. In the case that a generator produces more electricity than is
specified in the volume of the PPA, the surplus power can be sold on the wholesale market at the
marginal price. In the case that there is a deficit of electricity produced, the generator must make up
the difference by purchasing power from the wholesale market at the marginal price. PPAs are signed
between generators and Industry and SME consumers but are not signed with households. Fixed
Volume PPAs specify the same volume of electricity to be delivered in every hour.
Power Purchase Agreements (PPAs) – Variable Volume
Variable Volume PPAs are similar in design to their Fixed Volume counterparts in that they require the
physical delivery of electricity and any surplus traded on the wholesale market. The generators and
consumers involved in the contracts are also the same. However, the volume of electricity required to
be delivered in each hour is specified as a share of the output of the generator. In this way, the volume
varies, and there are also never situations in which the generator must purchase power from the
wholesale market to fulfil the contract terms, as it contracted volume is always a fraction of its output.
Futures
Futures contract are a financial contract similar in nature to a fixed volume PPA, although in the real
world of trading futures contracts have a much shorter duration than PPAs (e.g. up to five years
compared to up to 20 years). In this scenario specification, the volume of futures remains constant in
each contract scenario. In terms of the price of futures contracts, 20% of these futures are modelled to
represent those signed three years ahead of delivery of electricity (t-3), another 20% representing t-2,
and a final 20% representing t-1. The prices of futures contracts depend on the dispatch scenario used
in the modelling. In the normal dispatch scenario, futures prices are revenue neutral, exactly matching
the average price for the scenario. In the crisis scenario, to reflect the price shock that hit real-world
markets, futures t-3 prices are based on the mean marginal price of the normal dispatch scenario.
Futures t-2 prices are the midpoint between the normal mean marginal price and the crisis marginal
price, while futures t-1 prices are at the mean marginal price level seen in the crisis scenario.
Scenario CA – ‘Mixed Contracts’
Table 3: Scenario CA – Contract Volumes
Contract Volume
CfD 60% of total output
PPA - Fixed 5% of total output
PPA - Variable 3% of hourly output
Futures (Renewables) 20% of total output
Futures (Dispatchable) 60% of total output
Source: Bruegel assumptions.
The first contract scenario aims to represent the Mixed Contracts in long-term contracts between
generators and consumers. It is important to note that data on the exact volumes of renewable
electricity production signed to long-term contracts, either CfDs or PPAs, is hard to come by. Therefore,
71 PE 740.094
the volumes in this scenario are based on the assumptions of the authors. CfDs strike prices in the
scenarios are reflective of the values published by state agencies, listed Annex B.
Intermittent renewable generators (Solar, Onshore Wind, Offshore Wind) each have 60% of their annual
output covered by CfDs. 5% of output is sold on Fixed Volume PPAs, with this 5% split at a 70:30 ratio
between Industry and SMEs. Finally, renewable generators also sign variable PPAs for 3% of their
output, entirely with Industry. Renewable generators have 20% of their volumes signed to futures. Non-
intermittent renewable generators have 60% of their output for the year covered by futures.
Scenario CB – ‘Wholesale Only’
Table 4: Scenario CB – Contract Volumes
Contract Volume
CfD 0%
PPA - Fixed 0%
PPA - Variable 0%
The second contract scenario models a situation in which no long-term contracts are signed and all
power is traded on the wholesale market, apart from the same futures coverage as in the Mixed
Contracts scenario (CA). Every generator receives the marginal price for their production and every
consumer must pay the marginal price for their consumption. As with the remaining contract scenarios,
this is intended to represent a ‘corner’ scenario, designed to exaggerate the impacts of a particular
contract type.
Scenario CC – ‘Contracts for Difference’
Table 5: Scenario CC – Contract Volumes
Contract Volume
CfD 80%
PPA - Fixed 0%
PPA - Variable 0%
The third contract scenario explores the implications of remunerating renewable generation almost
entirely through CfDs. 80% of renewable output is covered by CfDs. No PPAs are signed in this scenario.
The futures specification remains the same as in other scenarios. This scenario seeks to represent in the
extreme the role of CfDs in financing renewables.
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Scenario CD – ‘PPAs’
Table 6: Scenario CD – Contract Volumes
Contract Volume
CfD 0%
PPA - Fixed 50% of total output
PPA - Variable 20% of hourly output
The fourth contract scenario looks at an extreme alternative approach in which there are no CfDs and
renewable generators sign a significant share of output to PPAs. 50% of renewable output is sold on
Fixed Volume PPAs, with the same 70:30 ratio between Industry and SMEs as in Scenario A. 15% of
output is sold on Variable Volume PPAs, entirely with Industry. Again, the futures contract prices and
volumes are specified consistent with other scenarios.
4.2.2. Model results

The results of the scenario analyses carried out for this study are presented in this section. The model
outputs are assessed with regard to the criteria of Fairness, Optimal Investment and Optimal Operation
set out in section 2. The criteria are employed in the following way when assessing the scenario results.
Fairness
In each scenario, the prices paid by consumers, the total cost of each consumer type, and the total
profits of each generation type/company are compared.
Scenarios in which consumers pay a share of the cost that is proportional to their consumption are
considered fair from the standpoint of the distribution of costs. Scenarios in which generators earn
large profits while consumers pay large costs (relative to other scenarios) are considered unfair.
Optimal Investment
To identify whether a scenario delivers sufficient signals for optimal investment, the returns of
generation companies are considered.
Optimal Operation
The DISC modelling framework assumes optimal operation from the outset. It is assumed that contract
designs do not have an impact on the balancing on power system supply and demand. However, as
discussed in section 3, this is not the case in the real electricity markets. Therefore, when assessing each
scenario result, considerations are made regarding the issues set out in section 3 on the design of long-
term contracts and other instruments.
The dispatch and contracts scenarios described in the previous section are used to explore a series of
policy-relevant market design hypotheses, categorised on the generator and consumer side. The aim
is to quantify the effects of different market instruments under different scenarios in terms of their
impact on generator revenues and profits and consumer costs. Every combination of dispatch and
contracts scenarios was explored. However, in the following section, details and figures that are
relevant for the market design hypothesis in question are presented. The hypotheses are divided
73 PE 740.094
between the generator side and consumer side. A detailed set of summary results for each dispatch
and contract scenario combination is provided in Annex B.
a. Generators
Higher renewable shares reduce consumer prices
Investment in renewables and other clean electricity technologies is needed not only to decarbonise
the electricity system but also to shield consumers from volatility on international commodity markets
that drive the cost of thermal electricity generation. Using the DISC framework to illustrate the benefits
of such investment in renewables, Figure 16 plots the share of renewable output (defined as solar,
wind, hydropower, geothermal and biomass) with the average consumer cost per MWh, for both the
normal dispatch scenario and the crisis dispatch scenario.
Figure 16: Consumer costs and share of renewable electricity
Source: Bruegel.
In the normal dispatch scenario (blue dots) a negative correlation is seen between increasing
renewables and consumer prices. France is an outlier because its nuclear capacity, while not considered
in the renewables share, helps to keep prices low in the normal scenario. In the crisis scenario (red dots),
the same correlation between increasing renewable share and lower consumer costs maintains. Here,
with the low nuclear output specified in the crisis scenario increasing consumer costs in France, we see
that the costs for consumers drastically increase. For Italy, which is highly dependent on combined
cycle gas turbines for electricity generation, costs also jump massively. Germany and Spain, both with
high levels of renewable, are relatively protected from the massive cost increases. In the case of Poland,
which is mainly reliant on coal generation, the scenario inputs keep Polish coal prices at half the level
of other countries, meaning they also see less of a cost impact than in France or Italy. Nevertheless,
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costs are still higher than in either Germany or Spain. The policy implication is straightforward:
increasing investment signals for renewables helps to protect consumers from price volatility, thereby
also delivering fairer outcomes.
In terms of generator earnings, the picture is not so straightforward. Figure 17 shows the same chart as
before but with generator contribution margins 17 per MWh on the y axis in place of consumer costs.
No strong correlation is seen. Generator earnings depends not only on the renewable share but on the
wider generation mix. For example, in the case of France, while many nuclear generators are on outage
in the crisis scenario, the remaining nuclear plants earn a large windfall from the high electricity prices,
as their costs do not increase. In Poland and Italy, while consumer costs do go up significantly,
generator earnings do not increase at the same rate, as the costs of those generators (mainly coal and
gas, respectively) have also increased in the crisis scenario.
Figure 17: Generator contribution margins and share of renewable electricity
Source: Bruegel.
Firm earnings are impacted by contract design

The earnings of electricity generation firms are dependent on long-term contract design, especially in
relation to their volume and price. To illustrate this, the next section uses the scenario analysis results
to explore the relationship between firm contribution margins (revenue minus variable costs) and
contract scenarios.
In the following analyses, a bottom-up dataset of electricity generation capacity ownership by firm in
Germany, France, Italy, Spain and Poland is utilised. This dataset was gathered for this study on the
17 Revenue minus variable costs.
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basis of the publicly available data and provides a general picture of the ownership structure of
European electricity generation. However, due to the fragmented nature of this data, the dataset is
incomplete, and should not be taken as a final description of ownership in the sector. Power plant
ownership is a complex web of partial and joint agreements, often obscured from the public.
Nevertheless, the data used is broadly reflective of the shares of capacity owned by major European
utilities and is indicative of financial flows to certain firms in the modelling scenarios explored herein.
An overview of the dataset is presented in Technical Annex A.
Figure 18 depicts the modelling results in terms of contribution margin per MW of capacity owned for
15 major European utilities in the normal dispatch conditions and across each contract scenario.
Figure 18: Firm contribution margins in normal dispatch across contract scenarios
Source: Bruegel.
Most striking in these results is that firms earn the least revenue in the ‘Wholesale Only’ scenario in
normal dispatch conditions. As long-term contracts prices are typically higher than the average
marginal price in the normal dispatch scenario, both CfDs and PPAs give an uplift to firm earnings,
especially those firms with large shares of renewables (such as Iberdrola). The contribution margins
earned in the mixed scenario are typically in line with the long-term contracts scenarios, and hence are
mostly not visible on the chart. Firms earn slightly more in the Contracts for Difference scenario
compared to PPAs scenario, as firms with high shares of renewables are guaranteed a higher price for
a larger volume of electricity.
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Figure 19: Firm contribution margins in crisis dispatch across contract scenarios
Source: Bruegel.
Figure 19 above shows the same chart as previous but with crisis dispatch conditions instead of the
normal dispatch conditions. The reverse pattern is now seen, in which firms earn the most revenue in
the ‘Wholesale Only’ contract scenario. This is because the price level of long-term contracts are below
the level of the wholesale market price in the crisis conditions.
The main takeaway is that on the generation side there are not significant differences between the
PPAs and CfDs scenarios in terms of revenues in either normal or crisis dispatch conditions. Long-term
contracts hedge generators, giving them an uplift when wholesale prices are low and mitigating
windfall revenues when wholesale prices are high. But, for the same price and volume, generators are
relatively indifferent in terms of earnings regarding whether the contracts are physical or financial in
nature.
Firm earnings are dependent on generation portfolios
In addition to the contract design, another variable that impacts firm earnings between dispatch
conditions is the generation portfolio. The following section explores the contribution margins earned
by firms as a function of their share of different electricity generation categories: renewable (solar,
onshore wind and offshore wind), gas (CCGT and OCGT), and nuclear. The contribution margins are
also compared between normal dispatch conditions and crisis dispatch conditions.
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Figure 20: Firm renewable capacity share and contribution margins per megawatt
Source: Bruegel.
Figure 20 shows the share of renewable generation capacity of the firms in question on the x-axis and
the contribution margins per MW in million € on the y-axis, with the top three firms in terms of
renewable capacity listed. The chart presents both the normal and crisis dispatch conditions and
assumes mixed contracts. Both Iberdrola and Endesa earn significantly more per MW in the crisis
scenario than in the normal scenario. The reason is that even though these firms have most of their
renewable generation signed to long-term, fixed price contracts and therefore the earnings from these
plants do not change, there is still a small amount of merchant renewables who earn a large windfall
from the high prices in the crisis scenario. Furthermore, both Iberdrola and Endesa have a large share
of ‘clean dispatchable’ generation in our modelling specification, which typically has low variable costs
and therefore also earns large revenues from the increased wholesale prices in the crisis scenario.
Naturgy has a large share of renewables, but it also has mostly gas generation, leading to the slight loss
between normal and crisis conditions seen in the modelling results above.
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Figure 21: Firm gas capacity share and contribution margins per megawatt
Source: Bruegel.
The same chart structure is presented in Figure 21 but instead of renewable share, the five firms with
the largest gas share are plotted. The ‘Municipality’ firm refers to mainly to publicly owned gas plants
in Germany. Firstly, in the normal dispatch conditions, the contribution margins earned per MW
increases with the share of gas, meaning that gas is quite lucrative in this scenario. However, in the
crisis conditions, the opposite is true. At the higher three firms, having large gas share lead to less
revenues, and even in the case of ENGIE, direct losses. In the case of Uniper and the municipalities, they
also earn large capacities of coal, which contributed to their losses. The gas and coal driven losses are
due to the fact that these firms are frequently the marginal generator in the crisis scenario, but in the
scenario specification, have hedged a large fraction of their output on forward contracts that are based
on normal dispatch condition prices, while their variable costs have massively increased.
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Figure 22: Firm nuclear capacity share and contribution margins per megawatt
Source: Bruegel.
The final comparison in this section is shown on Figure 22, exploring the relationship between nuclear
generation capacity share and contribution margins per MW. The three largest firms by share of nuclear
capacity are presented. The pattern is clear and consistent. As nuclear is an inframarginal technology
with relatively low variable costs that do not change between normal and crisis scenarios, the firms
that own the nuclear power plants earn large windfalls from the high marginal prices in the crisis
scenario. Furthermore, in the scenario specifications, nuclear power does not have a large amount of
volumes signed to long-term contracts, meaning that it benefits hugely from the increased prices.
b. Consumers
CfDs provide a price hedge for consumers
CfDs have been promoted in the electricity market reform debate as a means not only to attract
investment in renewables but also to protect consumers from price spikes. CfDs are a long-term
contract between generators and states, with the costs recovered from households and businesses
through renewable levies. Therefore, CfDs can be thought of as a long-term futures contract between
household and business consumers and renewable generator (with states acting as a form of
intermediary).
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Figure 23: Contract-for-difference generator revenues between dispatch scenarios across all
countries (DE, FR, IT, ES, PL)
Source: Bruegel.
Figure 23 compares the revenues earned by renewable generators in normal dispatch conditions
(scenario D1) with the revenues earned in crisis dispatch conditions (scenario D2), under Mixed
Contracts contract assumption (scenario CA), summed over all five countries. Under normal conditions,
CfDs provide a top up to renewables, earning significant revenues throughout the year. However,
during crisis conditions when the marginal price is frequently much higher, CfDs require generators to
pay out, becoming a cost (see the red dots above). In these crisis conditions, consumers receive
revenues from the CfDs, assuming the revenues are passed directly to end users.
Figure 24: Contract-for-difference consumer costs between dispatch scenarios
Source: Bruegel.
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Similarly, Figure 24 above shows the costs paid by consumer type between the normal dispatch
scenario (blue dots) and the crisis dispatch scenario (red dots). The state does not recover costs for CfDs
from industrial consumers in our model specification, so the costs remain the same for that consumer
type, but households and businesses receive a large income from CfDs in the crisis scenario (negative
costs are equivalent to income). The DISC framework assumes that these benefits are passed back to
consumers. It is clear that, under the crisis scenario, consumers are hedged against high prices via CfDs.
Figure 25: Total consumer costs with and without contracts-for-difference
Source: Bruegel.
The effects of the price hedge provided by CfDs for consumers is most clearly illustrated in Figure 25.
The scatterplot compares the total costs paid by consumers summed up across all countries in the crisis
dispatch scenario, but with a difference between the amount of long-term contracts (there is no
change in the costs paid by industry as they do not pay the costs of CfDs). The blue dots signify contract
scenario CB – ‘No long-term contracts’, in which there are no long-term contracts signed between
generators and consumers and the only hedging is done on the basis of futures contracts. The red dots
represent contract scenario CC – ‘Contracts-for-difference’, in which 80% of renewable output is
covered by CfDs. Households and business save €20.7bn and €20.1bn respectively from CfDs in this
modelling comparison. For the criteria of fairness, lower prices for consumers during crisis situations is
a better outcome.
CfDs and PPAs lead to different financial flows
CfDs and PPAs both serve a similar purpose in terms of providing a long-term contractual agreement
between generators and consumers that can hedge them against short-term volatility in electricity
markets. However, the nature of the contracts, especially that one is financial (CfDs) and the other
physical (PPAs) as well as the counterparties involved, means that the financial outcomes are markedly
different.
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Figure 26: Renewable generator revenues by contract, in CfDs scenario under normal dispatch
conditions
Source: Bruegel.
Note: PPA-A refers to physical contracts with a fixed price and fixed volume. PPA-B refers to physical contracts with a fixed
price and a variable volume.
Figure 26 above shows the breakdown of revenues earned by renewable generators across all
countries in the normal dispatch scenario, but assuming that 80% of renewable output is signed to
CfDs. Even despite the significant CfD coverage, a majority of revenue for all renewables comes from
the short-term markets. This is because CfDs only play a role when the spot price varies from the
contract strike price (providing a top up to generators when the spot price is a lower and paying out to
consumers when the spot price is higher).
In contrast, Figure 27 below shows the breakdown of renewable generator revenues under the same
dispatch conditions but instead assuming that 70% of output is covered by PPAs, in a variety of designs
and with different counterparties. Most of the revenue now comes from the long-term contracts
because PPAs are modelled here as physical contracts with a fixed price. Assuming the electricity is
delivered, the price is paid. Renewable generators then sell any surplus power (30% over the annual
period in this case) at the wholesale price.
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Figure 27: Renewable generator revenues by contract, in PPAs scenario under normal dispatch
conditions
Source: Bruegel.
Note: PPA-A refers to physical contracts with a fixed price and fixed volume. PPA-B refers to physical contracts with a fixed
price and a variable volume.
The physical nature of PPAs has an impact on the volumes of power traded on different markets. The
first panel in the Figure 28 below compares the percentage of total volume covered by different
contract types between the CfD scenario (CC) and the PPAs scenario (CD). The spread is almost even in
both scenarios, reflecting the scenario design. However, the second panel shows the share of volume
covered by physical contracts. The implication is that physical PPAs reduce the volumes of power
traded on wholesale markets. At small volumes the consequences are likely negligible, but a sizeable
increase in the amount of physical contracts in the European electricity sector could negatively affect
efficiency in short-term markets if liquidity is impacted.
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Figure 28: Share of volumes covered by all contracts between CfDs and PPAs scenarios
Source: Bruegel.
Note: CC: Contracts for Difference scenario. CD: PPAs scenario.
The final consideration between CfDs and PPAs is the impact on consumer costs, which differs due to
the counterparties which usually enter these contracts. In our model specification, the costs of all CfDs
are recovered from households and businesses while PPAs are paid directly by a specific consumer type
for a certain volume. The left panel in Figure 29 shows the CfD scenario (CC), in which households and
businesses must pay the costs of the CfDs as well as their short-term wholesale costs. In the right panel,
the PPAs scenario shows lower costs for households in particular, as they no longer pay the cost of the
CfDs. While businesses (SMEs) do pay a PPA cost in that scenario, this is not additional to their wholesale
costs because the PPAs are a physical contract. Industrial consumers have to pay significantly more in
this scenario, paying for PPAs as well as their share of the wholesale costs. In the CfD scenarios,
industrial consumers must only pay their share of the wholesale costs.
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Figure 29: Consumer costs by contract, in CfD scenario under normal dispatch conditions
Source: Bruegel.
From an investment perspective, the contracts and prices in this scenario do not differ by much.
Renewable generators earn similar revenues as a fixed price is guaranteed for a similar level of output.
In this sense, CfDs and PPAs are substitutable for generators, as they are interested in balancing their
risk-return trade-off by securing long-term contracts at a sufficient price and volume. However, from a
fairness point of view, there are different considerations between CfDs and PPAs. Crucially, the costs of
PPAs are paid directly by the counterparty, while the costs of CfDs are socialised through the state and
recovered via taxes and levies. As illustrated in Figure 29, this implies that households and businesses
could pay a disproportionate share of generation costs if CfDs were to become even more widespread
as renewable penetration increases.
Futures and PPAs are not directly substitutable
To explore the extent to which futures and PPAs are substitutable, two special versions of the contracts
scenarios introduced in section 4.2.1 are compared.
Scenario CD.1 takes the PPAs scenario but assumes that, for the renewable generation types, the
futures prices are set at the same level as the PPA prices. Furthermore, it is assumed that only fixed
volume PPA contracts are signed. All other aspects of the scenario remain the same. Scenario CD.2
assumes that all of the PPAs volumes are instead signed to futures contracts, at the same price as in
CD.1. It is assumed that the contract price for each generation type is above the all-country mean
marginal price for the annual period. Simply put, the differences in revenue and cost outcomes are
compared between a scenario in which volumes are signed to both PPAs and futures and a scenario in
which all volumes are signed to futures.
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Figure 30: All country total renewable generation revenues comparing PPAs vs Futures
Source: Bruegel.
Figure 30 above shows that having the PPAs volume move to futures has no impact on generator
revenues in this model specification (there is no change such that the red dots completely overlap with
the blue dots underneath), assuming that the prices for both contracts are at the same level. Generators
are hedged at the same price for the same volumes, therefore revenue outcomes are identical. The
main difference in this comparison is the distribution of the cost of paying the contracts, seen on Figure
31 below, similar to when looking at CfDs and PPA, In the scenario which mixes the contracts (D1_CD.1),
industry, the primary counterparty to PPAs in the model specification, must pay significantly more than
in the alternative scenario with only futures. This is because with PPAs, industry must pay the entire
cost of the specified volume directly, while under the futures specification in the model, these costs are
spread amongst all consumers pro-rata on their consumption. Conversely, households (who hold no
PPAs) pay more when there are only futures. There is very little impact on the costs of SMEs (the change
is so small that it does not appear on the graph). SMEs had a small about of their consumption signed
to PPAs and swapping this for futures has only a minor effect.
Figure 31: All country total costs comparing PPAs vs Futures
Source: Bruegel.
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The change in the distribution of costs is further illustrated by Figure 32 below. The left panel shows
the breakdown if the same volume of electricity is covered by a mix of PPAs and futures while the right
panel shows the scenario with only futures. The difference in cost structure for consumers is stark. The
physical nature of PPAs combined with the fact that the costs are paid by a single counterparty means
that industry and SMEs pay a significant share of costs on their PPAs. Futures are paid by all consumes
proportional to their consumption, like the wholesale costs, meaning a more even distribution in
futures only scenario. It should be noted that these results are highly dependent on the price level of
the relevant contracts. Should PPAs be signed at a lower price, the costs paid by industrial consumers
would of course be much lower.
Figure 32: Consumer cost breakdown with PPAs vs. Futures
Source: Bruegel.
From a fairness perspective, the futures only scenario with a more even distribution of costs has its
merits. However, there are other considerations when comparing PPAs and futures. Futures contracts
are typically signed only up to five years before delivery, while PPAs can be up to 20 years. While
industry pays more in the left panel (the scenario with a mix of contracts) they are securing a fixed price
and quantity for a long period of time. On the other side of such a contract, from an investment
standpoint, the renewable generators have secured low-risk revenue, reducing cost of capital. While
futures appear fairer in DISC as formulated here, their prices are more unstable and reflective of short
term price volatility.
4.2.3. Discussion
Higher renewable shares reduce consumer prices
The illustrations provided by DISC demonstrates that one imperative for electricity market reform
should be increasing investment in renewables, as higher renewables share reduce consumer prices
and ensure that the electricity system is more resilient to commodity price shocks. The earnings of
electricity utilities with increasing renewables depends much more on the portfolio of the specific firm
and on the specificities of contract design.
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Firm earnings are impacted by contract design

Comparing the contribution margins of electricity utilities across the scenarios shows that firms benefit
from long-term contracts in low marginal price scenarios but conversely do not receive large windfalls
in high price scenarios. However, the type of long-term contract is relevant indifferent to the
generation side.
Firm earnings are dependent on generation portfolios
The scenario analysis, using data on generation ownership, showed that firms with large gas shares do
not benefit from crisis conditions. In contrast, firms with a generation portfolio that includes
inframarginal technologies like renewables and nuclear actually do better in the high price conditions.
This highlights the importance of the specific portfolio owned by firms in terms of assessing the
beneficiaries of market design changes.
CfDs provide an effective price hedge for consumers
DISC quantifies the hypothesis that CfDs are a means to protect consumers against high and volatile
prices, provided the price level of the CfDs themselves is not too high. The latter point is especially
relevant. Given the volatility seen during the energy crisis of 2022, project developers and utilities
might see a higher cost for hedging and bid into auctions for CfDs at higher prices than before the
crisis. In a situation that governments have signed large volumes of CfDs at higher than efficient prices,
while increasing deployment of renewables dampens short-term power prices, consumers that must
pay the costs of those CfDs would be hedged, but at too high a level. Therefore, while the price hedging
mechanism of CfDs can work and revenues to the state from such contracts should be directly returned
to consumers, it is essential that state-support auctions are carried out competitively to ensure that as
best possible, long-term prices efficiently distribute risk for both counterparties.
Long-term contracts are not substitutable regarding distributional effects
Through the scenario analysis using the DISC model, we have demonstrated that while some contracts
might be substitutable on the generator side in the short-run, they have significantly different
consequences for financial flows and the distributional impacts on consumers. What is most important
for determining these outcomes is the nature of the contract (whether it is physical or financial) and
whether its costs are paid directly by one consumer or socially distributed across a group of consumers
(or all consumers).
Renewables dampen consumer prices – but the impact on profits is mixed
By comparing consumer costs between ‘normal’ and ‘crisis’ scenarios, we have illustrated using DISC
that having more renewables in the electricity system can reduce consumer prices, especially in the
context of a supply shock like that which occurred in 2022. Consumers in countries with more
renewables were better insulated against price increases in our modelling results. However, the impact
on generator profits in the modelling results was mixed, with the outcomes more dependent on the
broader generation mix than purely on renewables. In terms of achieving the dual goals of protecting
consumers and stimulating investment, increasing renewables can achieve the former, but electricity
market design will need to be cleverly implemented to simultaneously achieve the latter.
Areas for future research
Any future discussion on changes to market instruments requires analysis on how electricity system
cost is distributed depending on the contracts market actor engage in. Our simplified approach does
abstract from several elements/interactions that characterise the electricity industry. Some elements
that we believe would be worth investigating to provide more robust policy advice are:
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• The impacts of fixed retail prices for different consumer types (industrial and vulnerable).
• Investigating final profits of generation types and companies including capital costs, involving
to capacity payments.
• Exploring the role of demand-side response to high prices and its consequences for financial
flows.
• Broader dispatch scenario assessment looking at periods with low demand to understand
effects on financial flows.
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EXCURSE: LACK OF AN IMPACT ASSESSMENT

KEY FINDINGS
The European Commission has not provided an impact assessment of the reform of the electricity
market design, citing ‘urgency’ as a mitigating factor. There are four reasons why this is problematic.
The first is a matter of principle, a substantial reform of a very complex system should not be left
only to politics. The second is to provide a reference point for discussion, and facilitate easier
conversation between different stakeholders with vastly different interests. The third reason is the
absence fails to provide guidance to investors. Finally, the complexity of the market necessitates a
systematic view which details how any decision has far-reaching implications. An impact
assessment would be the tool for addressing these four factors.
The 2023 Commission proposal to reform the electricity market was not backed up by an impact
assessment. It was only underpinned by a public consultation and a staff working document (European
Commission, 2023c). Given the desired impact of the reform this approach carries substantial risk.
Formally, “an impact assessment is a process comprising a structured analysis of policy problems and
corresponding policy responses. It develops policy objectives and alternative policy options and
assesses their impacts. It also considers subsidiarity, proportionality of options and how to monitor and
evaluate the policy in the future” (European Commission, 2023d). In practice the resulting impact
assessment report is an often quite substantial document laying out the objectives of a reform and how
the Commission proposal expects to achieve those – and arguing why alternative approaches are
deemed less suitable. The 2016 impact assessment to the clean energy package electricity market
reform contained almost 1,000 pages.
Since 2002 the European Commission committed itself to provide impact assessments for all initiatives
with significant impacts (European Commission, 2012). The corresponding system has been refined
over the years, notably with the 2015 « Better Regulation Package» under the Junker Commission that
sets out a common framework for the policy cycle in which impact assessments are a key instrument.
Hence, the European Commission (2023) states « An impact assessment is required when 1) a policy
proposal is likely to lead to significant economic, environmental, or social impacts or entails significant
spending and 2) the Commission has a choice between alternative policy options (‘room for
manoeuvre’) » (European Commission, 2023d). Only in specific cases the Commission can deviate from
this normal route. “Where an impact assessment is required in principle, but this is not possible and a
derogation is granted, an analytical document in the form of a staff working document presenting the
evidence behind the proposal and cost estimates should be prepared within three months of the
initiative’s adoption. »
The Commission is quite clear that it sees the impact assessment not only as a formality, but an
important process to underpin the legitimacy of a proposal that has significant impact on its citizens
(#ref). This is the case for an electricity market reform that is supposed to « significantly improve the
structure and functioning of the European electricity market » (European Commission, 2023b). But with
the argument of « urgency » an impact assessment has been circumvented, we see four reasons why
this is problematic.
Better Regulation Principles
The first is a matter of principle. Performing a substantial reform of a very complex, hard-won system
like the internal electricity market should only be left to political brinkmanship if the course and cure
of the policy problem are crystal clear. Especially the EU political system put a lot of emphasis on
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objective analysis and clearly spelled out arguments on core principles (proportionality, subsidiarity,
fairness, …) to obtain sufficient legitimacy for its regulatory activity.
A relatively short working document with no modelling of the main tools (e.g., the new rules on
contracts between market participants in Art. 19) is no substitute for an impact assessment and a public
consultation on such a complex matter that runs for less than a month (23 January 2023 to 13 February
2023) does not allow to really elicit the understanding needed to properly assess the implications of
the reform.
Reference point for discussion
Impact assessments serve as a reference point in discussions on complex policy matters. And the
electricity market is a prime example for such a complex system in which hundreds of millions of
consumers, thousands of generators, hundreds of network operators and traders and dozens of
national governments, regulators and transmission system operators interact based on a set of rules
that have gradually developed over three decades. Each of the stakeholders sees different issues and
they need to be able to talk to each other when discussing policy – and here a proper impact
assessment can make a big difference as a reference point for the discussion.
This is not only important for broader stakeholders, but also for the EU’s co-legislators: the European
Council and the European Parliament. Their view on Commission proposals is often informed and
formulated in distinguishing from the Commissions arguments. For example, the European
Parliament’s Directorate for Impact Assessment typically assesses the European Commission’s
document to inform the Parliaments view.
The current Commission proposal did show that there is not even a joint problem definition. When
discussing the 2022 energy crisis, the justifications mainly focused on the lack of Russian gas – while in
the same year electricity supply suffered also a massive shortfall of nuclear generation capacities and
hydropower production. Including those in the analysis and discussions might have led to different
policies being considered appropriate.
A well-structured discussion of trade-offs is needed to find good solutions.
Guidance for investors and national implementation
Electricity markets are no perfect clockworks that run along the mechanical rules given by the
European legislator. Their working is dependent on interpretation and expectations of stakeholders.
Those interpretations and expectations need to be well aligned between stakeholders, to get to a well-
functioning system. And here an impact assessment that clearly lines out how rules are supposed to
work can help a lot. It can give guidance to investors that certain elements in the legislation are “bugs”
that might be ironed out in later reforms, while other elements are desired “features” that investors can
rely on also in the future. And it might help member states to see the bigger picture when implanting
the reforms domestically – better allowing to reap synergies of the internal market.
Systemic view
As we have tried to show in this report, changing individual elements in the electricity market drives
complex effects along the whole system. For example, rules on capacity markets might spill over into
prices in wholesale markets in neighbouring countries – affecting investment and dispatch. Reforms
that pull on several levers at the same time – as the Commission proposal does – will have hard to
intuitively grasp implications – that will also differ between actors.
Hence an impact assessment that provides some sensible quantification of the systemic effects would
provide a lot of value for the current and future policy debates.
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Allows to ex post assess regulatory success.

By lining out the expected impacts of a reform an impact assessment is crucial for assessing ex post if
the underlying assumptions where correct and help to better understand where further adjustments
are needed to get to desired results. As electricity markets will remain “living systems” this cycle of ex
ante and ex post assessments will not only help to continuously improve the system, but also give
stakeholders visibility on potential future reform steps.
Conclusion
The main argument for having a comprehensive impact assessment is providing more regulatory
consistency and hence giving more credible signals for stakeholders. This will help to reduce capital
cost – the main component of energy system cost.
While it is too late for a proper impact assessment on the Commission proposal, the next electricity
market reform will come. And as impact assessments are not written out of nowhere, it is crucial that
the tools needed to produce policy-relevant, high-quality impact assessments are set up now.
The necessary data-collection and setting up of proper market-modelling tools cannot start early
enough – also allowing for some peer review and stakeholder discussions on the methodologies used.
Possibly, a dedicated institution – such as a European Energy Information Administration – and the
need to produce regular benchmarking reports can help to provide the analytical tools for a
comprehensive electricity market reform that underpins the full decarbonisation of Europe’s electricity
system (one intermediate step here might be a new green paper that reassesses the options for a
fundamental reconfiguration of competences in the electricity system in order to enable the necessary
investments at acceptable cost).
• Risks associated with proposing a consequential reform without impact assessment.
o Need for substantive analysis to underpin reform of electricity markets.
• Good international practice on impact assessment, including past European benchmarking
reports.
• Commercial and private data to be synthesised and anonymised to allow for appropriate
assessment of market performance.
• Data that should be continuously available evaluating and publicly discussing the performance
of electricity markets.
o Share of revenue coming from different markets to generator types.
o Retail prices including final consumer bill breakdown across all EU countries.
o Congestion revenue on publicly owned interconnectors.
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RECOMMENDATIONS
6.1. Overview of assessments
6.1.1. Performance of the current market design against criteria
The current market design fares rather well in terms of operating the existing system efficiently. The
2022 energy crisis demonstrated that short-term price signals help to pull in all resources available to
the market in one country to cover shortfalls – even if they appear in other countries. The absence of
any major load-shedding event in a year that saw Germany losing most of its gas supplies and France
losing half of its nuclear generation is evidence to this functionality. There, however, remains some
room for improvement when it comes to the assets exposed to market prices. Countries politically
phasing out major generators or consumers not being able to save and resell valuable electricity to the
market are some examples.
In terms of fairness, the current market design unexpectedly led to substantial shifts in wealth between
stakeholders. The picture was, however, fragmented as some consumer groups that were well hedged
managed to benefit from the crisis, while others were exposed with their entire consumption to
exploding prices. The same was true for generators. A little-observed winner were transmission system
operators. So overall, consumers and producers were not prevented from insuring against substantial
price shifts – but many stakeholders only did this to a limited degree.
The biggest problem the crisis exposed was in terms of investment. The electricity market design (and
the substantial policy interventions that are happening in the sector) in the past decades did not deliver
a well-diversified, secure, low-cost and low-carbon power system. There was too little generation
capacity, too little interconnection, too little maintenance and a too high reliance on individual fuel
supplies.
6.1.2. Assessment of market instruments and design details

The Commission proposal does not specify a completely new market design but mainly regulates into
existing market instruments. Thereby the details of the proposed intervention are of crucial
importance.
The success of the approach to make CfDs into the main tool for support will strongly depend on their
design and on keeping a European dimension to markets.
Hedging obligations can be a useful tool to prevent moral hazard, but they need to be tailored to the
specific situation in electricity markets.
An intervention framework for price crisis is an ambiguous tool. On the one hand it creates uncertainty
to market actors by threatening state interventions, on the other hand it reduces said uncertainty by
spelling out trigger conditions and consequences. Hence, such a tool needs to properly balance
conditions and consequences in a way that reduces and not increases uncertainty for market
participants.
An additional product for peak shaving in our view only increases uncertainty and is unnecessary.
Energy sharing can be a passable tool to increase acceptance and deployment of renewables up to a
certain level. But it runs a high risk of socialising cost and privatising benefits.
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6.1.3. Results of quantitative modelling

The main result of our quantitative modelling is that assessing market instruments is different from
assessing cost-optimal power systems, and such modelling is urgently needed to properly underpin
complex market design reforms. Individual instruments cannot be assessed in isolation, as the cash
flows from one instrument for, both, consumers and producers, are linked to the cash-flows from all
other instruments. Hence, strengthening one tool, or preventing another tool, set in motion a chain of
reactions that affect prices for all other instruments and might create unexpected winners and losers.
Our stylised model provided some support for four hypothesis:
• Higher renewable shares can reduces consumer prices.
• Firm earnings are impacted by contract design.
• Firm earnings are dependent on generation portfolios.
• CfDs can provide a price hedge for consumers.
• CfDs and PPAs lead to different financial flows.
• Futures and PPAs are not directly substitutable.
A trivial but crucial message is, that revenues used to pay for operation and investments will, whatever
the contractual arrangements are, ultimately need to be expenses of one consumer group, or another,
unless the taxpayer jumps in.
6.2. Concluding recommendations

6.2.1. Specific recommendations
In Chapter 3, we develop several specific recommendations for the ongoing electricity market design
reform. We recommend keeping the focus of reform on long-term markets, retaining the well-working
European electricity short-term markets. This also means that any long-term contracts and markets
should be designed so that they keep the incentives for market participants to operate efficiently in
short-term markets. More concretely, this overarching recommendation manifests in three core
recommendations.
First, customers should be protected from price crises using instruments that leave short-term price
incentives in place. We show that for retail markets, this means future retail tariffs should not be fixed-
price contracts, but instead insure the electricity bill (through what is called hedging in other market
segments) while leaving short-term incentives working. Retaining flexibility incentives for the demand
side is central, because in a decarbonised power system the generation side will be largely weather-
dependent and integration costs can be drastically lowered by making the demand side, especially
electric vehicles, and heat pumps, more flexible. Longer-term retail contracts can also remove the need
for discrete price intervention mechanisms which are problematic as they destroy market confidence
and should only be used as a last resort.
Second, long-term contracts for low-carbon generation should also be designed in a way to preserve
short-term incentives. If Contracts for Differences are designed poorly, they remove incentives for
generators to produce high-value electricity and to design plants system-friendly and efficiently. Thus,
thorough design requirements for CfDs are a must. The same is true for government supported power
purchase agreements. Intervening in the design of existing forward markets through the setup of
virtual forward hubs should be done with care and a prior impact assessment seems warranted given
the large uncertainties surrounding the potential effects of the measure.
95 PE 740.094
Third, the introduction of many specific and unclearly defined submarkets for flexibility should be
avoided. Regrettably, the current reform includes several such examples, from peak-shaving products
to flexibility targets and procurement mechanisms. The existing multitude of well-working short-term
power markets in Europe – from day-ahead to intraday to balancing markets – provide the
economically right incentives not only for generation but also for demand and storage entities to use
their flexibility potential efficiently. There is no clear-cut economic case for adding extra markets and
subsidies.
6.2.2. Priorities for reform

The here-discussed electricity market reform of 2023 will not be the last major adjustment to European
electricity market design. A first finding from our analysis is, that important data to evaluate the
workings of the existing market design are not available, and that a robust model to ex ante analyse
impacts of market design choices does not exist. Constantly experimenting with individual design
elements to figure out a functioning market design will not convince investors to deploy hundreds of
billions of Euros into power generating, storing, transporting and consuming assets. Hence, the
knowledge infrastructure needed to underpin a major revision of the operation-system of Europe’s
electricity system should be set up quickly. Some meaningful aggregate data on contracts, prices and
financial flows need to be collected to ex post evaluate the current market design. A stylised model to
discuss market design choices needs to be made available as a reference for discussions on future
reforms. The Commission needs to prepare a substantial stock-take of the implications of the current
market design and options to reform it – maybe inspired by the UK Review of Electricity Market
Arrangements (REMA) discussion.
A second near-term priority would be to maximise transmission capacities, both, physically and
operationally. Making this a priority will imply significantly lower energy cost in Europe in the short,
and more importantly in the longer term. Allowing a relative decline in cross-border capacities by
contrast will put the internal electricity market into question and make decarbonisation national
systems much more expensive. A crucial step here would be to have a more regional or Europe-wide
optimisation of dispatch (and grid investments) as well as more local signals that reflect locational
demand-supply imbalances.
An arising priority pertains to the demand side. Emerging discussions on price freezes for specific
consumer groups (most notably the energy-intensive industry in Germany) entail a significant risk for
the electricity market. If the volume, timing and location of electricity consumption is overruled by
national governments there might not only be inefficient subsidy races and corresponding challenges
to the cross-border flows, but also inefficient investment decisions that imply higher energy system
cost in the future.
Rather than introducing additional flexibility markets, future reform should also address existing
flexibility barriers, of which one sticks out: network tariffs. Existing network tariff schemes in many
member states prevent the demand side from offering its fully flexibility potential due to inefficient
capacity charges and a lack of dynamic grid tariffs, a blind spot of the 2023 reform proposal.
6.2.3. Future design considerations

The current reform will not resolve the issue of inefficient investment signals. The underlying problem
runs very deep and insufficient revenues for generators in general is not the core problem. The core
issue is that the electricity system is caught between a market that not always delivers the expected
investments and a constant stream of government intervention that overrules market signals. Hence,
we often observe that market-based investment are crowded-out by publicly-backed investments.
PE 740.094 96
Resolving this state-market dichotomy in a governance system that is characterised by a dichotomy

between national sovereignty on the fuel mix and the benefits of a joint European electricity system is
conceptually very difficult. But indirect tools such as higher-quality and more transparent planning
exercises at the national and European level that enforce real coordination can go a long way, in
reducing investors uncertainties.
In physical terms demand response and flexibility will become much more important with higher
shares of renewables. Getting those signals right – tapping also into other countries corresponding
resources – will require market design elements that set proper incentives for investment and
operation.
One area that is worthwhile exploring is experimentation on more local co-optimisation of systems –
even along the value chain. With, on the one hand more local generation and storage of electricity and
on the other hand more integration with heating, transport, hydrogen, data and other systems, it
appears that new solutions might uncover significant efficiency potential.
97 PE 740.094
A. TECHNICAL ANNEX
Set out in the following annex is a detailed description of the DISC model, including the software
employed, the logical structure, the data inputs and sources, the dispatch optimisation, and the
microeconomic formulation of the generator profit functions and consumer cost functions.
Software
DISC is written in Python, a widely-used general purpose programming language. Python has been
used for electricity system modelling in many other instances. For example, Brown et al (2017) used
Python to develop PyPSA, a power system analysis framework that has been applied in many contexts,
including European and global (Horsh et al, 2018; Parzen et al, 2023). Another Python based power
system modelling application is PowerGAMA (Svendsen & Spro, 2016). PowerGAMA is an open source
Python package that can be used for grid and power market analyses.
Within Python, DISC makes use of the ‘Pandas’ package for handling data. The data preprocessing turns
excel and csv files into Pandas dataframes which are then stored in the appropriate format for later
input to the dispatch and contracts modules. ‘Pyomo’, an optimisation package in Python, is used for
the dispatch module to minimise the cost of supplying electricity to meet the demand in every hour
across all five countries. Pyomo is an open-source optimisation language within Python and can be
used for applications ranging from power system optimisation to supply chain analysis. The plotting
package ‘matplotlib’ is employed for producing charts, as is common in Python applications.
Logical Structure
The coding structure of DISC consists of four components. The data preprocessing component takes in
the raw data from the data sources and cleans it to a format that can be input to the dispatch module.
This includes installed capacities, variable costs based on fuel and carbon, availability factors, and
generation ownership. The
The dispatch module uses the following inputs for each of the five countries (Germany, France, Italy,
Spain and Poland):
• Hourly electricity load (MW).
• Hourly solar, onshore wind, offshore wind, hydro run-of-river and hydro pumped storage
electricity generation.
• The hourly available generation of all other generation types (biomass, coal, gas, geothermal,
oil, nuclear, water reservoir hydro, and waste).
• The variable costs of each generation type.
The values of the above data are different across the normal and crisis dispatch scenarios, as set out in
section 4.2.1. With this data, the dispatch module minimises the cost of supplying electricity to meet
the demand and produces the marginal price, in every hour of the year across each of the five countries.
The hourly output of each generation type is determined in this way, as well as their hourly variable
costs.
The contracts module takes in the dispatch results from each scenario (normal and crisis). With the
various assumption about contract volume and price, the hourly marginal price and the hourly outputs
of each generation type, as well as the share of load consumed by each consumer type, the contracts
module can determine the revenues earned by each generation type and the costs paid by each
consumer type. The contracts module then outputs, for each combination of dispatch scenario and
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contract scenario and each country, the revenues from each contract type for each generation type
and the costs from each contract type for each consumer type.
The figures and analysis module uses the results from the dispatch module and the contracts module
and produces the figures used in section 4.2.1
Data Inputs and Sources

The data inputs, assumptions and their sources are set out in this subsection, grouped by dispatch and
contracts.
Dispatch
The hourly electricity load for each country is sourced from the ENTSO-E transparency platform. In the
cases where the load was too high for the model to solve, the load was reduced (mimicking demand
reduction). Furthermore, missing data points were linearly interpolated.
The hourly generation from solar, onshore wind, offshore wind, hydro run-of-river and hydro pumped
storage is also sourced from the ENTSO-E transparency platform. Any missing data points are also
linearly interpolated.
Installed capacity is further sourced directly from the ENTSO-E transparency platform for the year 2022.
Table 7: Installed Capacity Inputs [MW]
Generation Type DE FR IT ES PL
Biomass 8,332 1,301 1,548 702 647
Fossil Brown 18,544 0 0 0 7,560

coal/Lignite
Fossil Coal- 0 0 2041 0 284
derived gas
Fossil Gas CCGT 18,322 13,074 41,961 29,862 3,807
Fossil Gas OCGT 12,231 0 0 64 0
Fossil Hard coal 18,830 1,816 6,376 4,642 19,073
Fossil Oil 3,966 2,762 1,490 669 393
Geothermal 51 2 869 0 0
Hydro Pumped 9,280 5,050 7,256 0 1,591

Storage
Hydro Run-of- 3,660 11,834 10,507 5,695 321
river and
poundage
Hydro Water 1,397 8,785 4,441 1,155 464
Reservoir
Nuclear 4,056 61,370 5,137 19,187 0
Solar 57,744 13,154 122 7,117 6,664
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Generation Type DE FR IT ES PL
Waste 1,599 947 0 14,640 0
Wind Offshore 7,787 20 10,658 565 0
Wind Onshore 55,289 19,516 1,548 0 7,950
Source: ENTSO-E Transparency Platform.
The available capacity in each hour is determined by scaling the installed capacity by an availability
factor, to reflect outages and typical capacity factors of generation types. The availability factor is
adjusted in the crisis scenario to reflect nuclear outages and drought conditions.
Table 8: Availability factors
Generation Type Availability Factor in Normal Availability Factor in Crisis
Dispatch Dispatch
Biomass 0.9 0.9
Fossil Brown coal/Lignite 0.8 0.8
Fossil Coal-derived gas 0.8 0.8
Fossil Gas CCGT 0.8 0.8
Fossil Gas OCGT 0.8 0.8
Fossil Hard coal 0.8 0.8
Fossil Oil 0.8 0.8
Geothermal 0.9 0.9
Hydro Pumped Storage 0.5 0.5
Hydro Run-of-river and N/A N/A

poundage
Hydro Water Reservoir 0.8 0.5
Nuclear 0.8 0.5
Solar N/A N/A
Waste 0.8 0.8
Wind Offshore N/A N/A
Wind Onshore N/A N/A
The variable cost assumptions of non-thermal generators determined the marginal price if they are the
marginal unit and also affect the contribution margin of those generators.
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Table 9: Generator Cost Assumptions

Generation Type Variable Costs [€/MWh]
Biomass 14
Fossil Brown coal/Lignite Determined by fuel and carbon costs.
Fossil Coal-derived gas Determined by fuel and carbon costs.
Fossil Gas CCGT Determined by fuel and carbon costs.
Fossil Gas OCGT Determined by fuel and carbon costs.
Fossil Hard coal Determined by fuel and carbon costs.
Fossil Oil Determined by fuel and carbon costs.
Geothermal 20
Hydro Pumped Storage 0.5
Hydro Run-of-river and poundage 8
Hydro Water Reservoir 18
Nuclear 15
Solar 4
Waste 10
Wind Offshore 10
Wind Onshore 8
Source: Variable cost assumptions are based on the IEA’s levelised cost of electricity calculator, the National Renewable
Energy Technology Annual Technology Baseline.
The technical assumptions about generator performance determine the marginal cost of thermal
generators. The electrical efficiency is the electricity produced per unit of fuel. The emissions factor is
the tonnes of CO2 emitted per unit of electricity generated. The fuel cost and carbon cost per unit of
electricity generated can be determined for different generator types and, combined, constitute the
marginal cost.
Table 10: Generator Technical Assumptions
Generation Type Electrical Source Emissions Factor Source
Efficiency [tCO2/MWh]
Biomass 0.23 IDEES Database 0.5 Assumption
Fossil Brown 0.39 IDEES Database 1.1 EMBER

coal/Lignite
Fossil Coal-derived 0.38 IDEES Database 0.7 Assumption
gas
Fossil Gas CCGT 0.52 IDEES Database 0.34 EPA
101 PE 740.094
Generation Type Electrical Source Emissions Factor Source

Efficiency [tCO2/MWh]
Fossil Gas OCGT 0.42 IDEES Database 0.52 EPA
Fossil Hard coal 0.42 EMBER 0.83 EMBER
Fossil Oil 0.38 IDEES Database 0.7 Assumption
Geothermal N/A 0
Hydro Pumped N/A 0

Storage
Hydro Run-of-river N/A 0
and poundage
Hydro Water N/A 0
Reservoir
Nuclear N/A 0
Solar N/A 0
Waste N/A 0.5 Assumption
Wind Offshore N/A 0
Wind Onshore N/A 0
Source: Bruegel assumptions or based on listed sources.
Commodity price assumptions, which determine the final variable cost of thermal generators in each
dispatch scenario, are presented in section 4.2.1. The figures are repeated below.
Table 11: Normal Dispatch Scenario Commodity Prices
Lignite 5 [€/MWh]
Gas 15 [€/MWh]
Coal 40 [€/tonne]
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Table 12: Crisis Dispatch Scenario Commodity Prices

Lignite 5 [€/MWh]
Gas 150 [€/MWh]
Coal 200 [€/tonne]
Contracts
The costs paid by consumers are determined by volume of long-term contracts to which they are a
counterparty, the price of those contracts, the cost at the wholesale market, and the consumer
category’s share of the total annual load. The modelling assuming that this share of load is fixed
throughout the year and does not vary by hour. The shares by consumer category for each country are
set out below.
Table 13: Consumer share of load
Country Industry Share SMEs Share Household Share
DE 46% 25% 29%
FR 27% 32% 41%
IT 46% 29% 24%
ES 35% 32% 34%
PL 40% 38% 22%
Source: Eurostat for 2021.
The assumptions for the contract volumes are set out in section 4.2.1. The price assumptions for each
contract type is provided below (prices are constant across scenarios, with the volume determining
whether the contract is active or not). The level of these contracts was selected to ensure that they
would illustrate the difference financial flows from contract types between dispatch scenarios.
Table 14: Contract Price Assumptions
Contract Type Price [€/MWh]
Solar CfD 75
Solar PPA-A 75
Solar PPA-B 75
Onshore Wind CfD 85
103 PE 740.094
Contract Type Price [€/MWh]
Onshore Wind PPA-A 85
Onshore Wind PPA-B 85
Offshore Wind CfD 100
Offshore Wind PPA-A 100
Offshore Wind PPA-B 100
Futures t-1 (Normal) Mean Annual Wholesale Price (Normal Dispatch Scenario)
Futures t-1 (Crisis) Mean Annual Wholesale Price (Crisis Dispatch Scenario)
Futures t-2 (Crisis) Midpoint of Mean Wholesale Price (Normal Dispatch Scenario)
and Mean Wholesale Price (Crisis Dispatch Scenario)
Futures t-3 (Crisis) Mean Annual Wholesale Price (Normal Dispatch Scenario)
The final set of input data relates to the ownership shares of major electricity utilities. As stated in
section 4.2.2, this data is based on bottom-up research by Bruegel and does not represent a final data
product. It is better considered as a set of informed assumptions to illustrate the effects of market
design and dispatch conditions on specific firm earnings. Table 15 below sets out the assumed owned
capacity of the largest 15 electricity utilities by capacity across the five countries in the DISC modelling,
as well as the assumed share of that installed capacity in terms of clean dispatchable (hydropower and
biomass), coal, gas, nuclear, other thermal (waste and oil), and renewables (solar, onshore wind and
offshore wind). The ownership of the remaining installed capacity not accounted for in these figures is
either attributed to small firms or unknown, and in both cases is not used in the model results analysis.
Table 15: Firm ownership assumptions
Firm Total Clean Coal Gas Nuclear Other Renewable
Capacity Dispatchable Thermal
[MW]
EDF 86,544 15% 2% 9% 71% 2% 1%
Iberdrola 30,126 36% 0% 19% 11% 0% 34%
Endesa 22,044 22% 18% 25% 15% 0% 21%
Enel 18,644 42% 25% 33% 0% 0% 0%
RWE 18,393 6% 52% 16% 20% 0% 6%
Municipality 15,901 3% 44% 46% 0% 1% 5%
PGE 15,726 5% 88% 5% 0% 0% 1%
Naturgy 12,500 18% 0% 59% 5% 0% 18%
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Firm Total Clean Coal Gas Nuclear Other Renewable

Capacity Dispatchable Thermal
[MW]
EPH 9,578 2% 62% 36% 0% 0% 0%
A2A 6,934 19% 5% 63% 0% 12% 0%
EnBW 6,530 17% 67% 0% 0% 5% 11%
ENGIE 6,496 23% 0% 77% 0% 0% 0%
Enea 5,903 4% 96% 0% 0% 0% 0%
Uniper 5,595 9% 49% 42% 0% 0% 0%
Vattenfall 4,776 52% 15% 28% 0% 0% 6%
Source: Bruegel internal database on electricity asset ownership.
Dispatch Optimisation
The optimisation done with Pyomo in the dispatch module is described in general terms, as follows.
The objective function can be summarised as:
min 𝐶𝐶�𝑄𝑄𝑔𝑔 � = � 𝑄𝑄𝑔𝑔 × 𝑐𝑐𝑔𝑔
Where,
𝑄𝑄𝑔𝑔 = 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒ℎ 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔
𝑐𝑐𝑔𝑔 = 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒ℎ 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔
The above minimisation is carried out subject to the constraint that generator outputs are between
zero and the maximum possible output in each hour:
0 ≤ 𝑄𝑄𝑔𝑔 ≤ 𝑄𝑄𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔
The constraint that the total generation in each hour is equal to the residual load is also applied:
� 𝑄𝑄𝑔𝑔 = 𝑄𝑄𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
Where,
𝑄𝑄𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 𝑄𝑄𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 − 𝑄𝑄ℎ𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑟𝑟𝑟𝑟𝑟𝑟−𝑜𝑜𝑜𝑜−𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑄𝑄ℎ𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑔𝑔𝑔𝑔 − 𝑄𝑄𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 − 𝑄𝑄𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑜𝑜𝑜𝑜𝑜𝑜 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤
− 𝑄𝑄𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑜𝑜𝑜𝑜𝑜𝑜 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤
105 PE 740.094
Contracts
The hourly profit functions 18 of each generator can be formalised as follows:
𝜋𝜋(𝑄𝑄) =
�𝑄𝑄𝑓𝑓𝑓𝑓𝑓𝑓 � × �𝑝𝑝𝑓𝑓𝑓𝑓𝑓𝑓 − 𝑝𝑝𝑚𝑚 �
+�𝑄𝑄𝑐𝑐𝑐𝑐𝑐𝑐 � × �𝑝𝑝𝑐𝑐𝑐𝑐𝑐𝑐 − 𝑝𝑝𝑚𝑚 �
+�𝑄𝑄𝑝𝑝𝑝𝑝𝑝𝑝 × 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 � + �𝑄𝑄 × 𝑆𝑆𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 × 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 �

+(𝑄𝑄𝑤𝑤 × 𝑝𝑝𝑚𝑚 )
−𝑄𝑄 × 𝑐𝑐𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
Where,
𝑄𝑄𝑓𝑓𝑓𝑓𝑓𝑓 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑓𝑓𝑓𝑓𝑓𝑓 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑄𝑄𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐶𝐶𝐶𝐶𝐶𝐶 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑄𝑄𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑃𝑃𝑃𝑃𝑃𝑃 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝(𝑣𝑣) = (𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣)𝑃𝑃𝑃𝑃𝑃𝑃 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑄𝑄𝑤𝑤 = 𝑊𝑊ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑚𝑚 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑆𝑆𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎 𝑜𝑜𝑜𝑜 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑡𝑡𝑡𝑡 𝑣𝑣𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑃𝑃𝑃𝑃𝑃𝑃
𝑄𝑄 = 𝑄𝑄𝑝𝑝𝑝𝑝𝑝𝑝 + 𝑄𝑄 × 𝑆𝑆𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 + 𝑄𝑄𝑤𝑤 = 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 [𝑀𝑀𝑀𝑀ℎ]
𝑐𝑐𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑐𝑐𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 + 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 [€⁄𝑀𝑀𝑀𝑀ℎ]
The hourly consumer cost functions can be formalised like so:
𝑐𝑐(𝑄𝑄) =
�𝑄𝑄𝑓𝑓𝑓𝑓𝑓𝑓 � × �𝑝𝑝𝑓𝑓𝑓𝑓𝑓𝑓 − 𝑝𝑝𝑚𝑚 �
+�𝑄𝑄𝑐𝑐𝑐𝑐𝑐𝑐 � × �𝑝𝑝𝑐𝑐𝑐𝑐𝑐𝑐 − 𝑝𝑝𝑚𝑚 �
+�𝑄𝑄𝑝𝑝𝑝𝑝𝑝𝑝 × 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 � + �𝑄𝑄 × 𝑆𝑆𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 × 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 �

+(𝑄𝑄𝑤𝑤 × 𝑝𝑝𝑚𝑚 )
Where the quantities apply to the specific consumer type:
𝑄𝑄𝑓𝑓𝑓𝑓𝑓𝑓 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑓𝑓𝑓𝑓𝑓𝑓 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑄𝑄𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐶𝐶𝐶𝐶𝐷𝐷 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑄𝑄𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑃𝑃𝑃𝑃𝑃𝑃 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝(𝑣𝑣) = (𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣)𝑃𝑃𝑃𝑃𝑃𝑃 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑄𝑄𝑤𝑤 = 𝑊𝑊ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 [𝑀𝑀𝑀𝑀ℎ], 𝑝𝑝𝑚𝑚 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑒𝑒 [€⁄𝑀𝑀𝑀𝑀ℎ]
𝑆𝑆𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑡𝑡𝑡𝑡 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑃𝑃𝑃𝑃𝑃𝑃
𝑄𝑄 = 𝑄𝑄𝑝𝑝𝑝𝑝𝑝𝑝 + 𝑄𝑄 × 𝑆𝑆𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 + 𝑄𝑄𝑤𝑤 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 [𝑀𝑀𝑀𝑀ℎ]
18 Technically, this profit function describes the contribution margin of the generation type, as capital costs and other fixed operation and
maintenance costs are not accounted for.
PE 740.094 106
B. COMPLETE SCENARIO RESULTS

The following is a summary of the modelling results of the eight combinations between the two dispatch
scenarios and the four contract scenarios.
Dispatch Scenario 1 – ‘Normal’

Table 16: Normal Dispatch Scenario Results
Country Annual Load Mean SD Marginal Producer Emissions [kt]
[TWh] Marginal Price Price [€/MWh] Variable Costs
[€/MWh] [mln €]
DE 483 79 29 15,174 126
FR 445 21 19 6,239 10
IT 317 63 24 12,676 75
ES 236 23 13 3,077 6
PL 172 96 4 11,990 102
All 1,653 56 18 49,156 319
Source: DISC modelling results.
Dispatch Scenario 2 – ‘Crisis’

Table 17: Crisis Dispatch Scenario Results
Country Annual Load Mean SD Marginal Producer Emissions [kt]
[TWh] Marginal Price Price [€/MWh] Variable Costs
[€/MWh] [mln €]
DE 483 267 124 39,888 200
FR 428 238 181 18,941 29
IT 316 341 62 71,454 89
ES 236 207 141 11,619 16
PL 172 210 25 22,843 130
All 1,635 252 107 164,746 463

Note: The lower load in the crisis scenario is due to adjustments made to the input data to ensure that the load is low
enough in all hours to be met by generation. This can be considered as demand reduction in the crisis scenario.
107 PE 740.094
Dispatch 1 + Contract A: Normal Dispatch Conditions with Mixed Contracts

Table 18: Normal Dispatch Conditions with Mixed Contracts – Generation Results
Generation Futures Futures Volume PPAs PPAs CfD Volume CfD Total Total Total
Type Revenue [MWh] Revenue Volume [MWh] Revenue Revenue Variable Contribution
[mln €] [mln €] [MWh] [mln €] [mln €] Costs Margin
[mln €] [mln €]
Biomass 0 58,981,092 0 0 0 0 6,782 1,376 5,406
Fossil 0 16,581,917 0 0 0 0 3,141 2,786 354

Brown
coal/Lignite
Fossil Coal- 0 1,536,334 0 0 0 0 276 257 19

derived gas
Fossil Gas 0 203,055,376 0 0 0 0 25,484 18,967 6,516

CCGT
Fossil Gas 0 26,989,573 0 0 0 0 4,449 3,478 972

OCGT
Fossil Hard 0 62,386,651 0 0 0 0 10,109 9,894 215

coal
Fossil Oil 0 1,364,469 0 0 0 0 332 307 25
Geothermal 0 4,336,441 0 0 0 0 463 145 318
Hydro 0 0 0 0 0 0 -20 0 -20

Pumped
Storage
Hydro Run- 0 45,427,903 0 0 0 0 3,453 606 2,847

of-river and
poundage
Hydro 0 77,961,561 0 0 0 0 5,573 2,339 3,234

Water
Reservoir
Nuclear 0 241,577,995 0 0 0 0 10,708 6,100 4,608
Solar 0 27,253,587 1,533 20,440,190 81,760,761 1,470 8,568 545 8,023
Waste 0 13,592,684 0 0 0 0 1,168 227 941
Wind 0 4,953,402 372 3,715,052 14,860,207 311 2,194 248 1,946

Offshore
Wind 0 47,037,335 2,999 35,278,001 141,112,004 4,121 16,937 1,881 15,055

Onshore
Sum 0 833,036,322 4,903 59,433,243 237,732,973 5,902 99,615 49,156 50,459
PE 740.094 108
Table 19: Normal Dispatch Conditions with Mixed Contracts – Consumer Results
Consumer Type Futures Cost PPAs Cost CfD Cost Wholesale Total Cost
[mln €] [mln €] [mln €] Cost [mln €] [mln €]
Household 0 0 3,153 26,167 29,319
Industry 0 3,923 0 36,098 40,020
SME 0 981 2,750 26,545 30,275
Sum 0 4,903 5,902 88,810 99,615
Table 20: Normal Dispatch Conditions with Mixed Contracts – Country Results
Country Futures Cost [mln €] PPAs Cost [mln €]
DE 39,716 24,542
FR 12,885 6,646
IT 21,216 8,540
ES 9,530 6,453
PL 16,269 4,279
109 PE 740.094
Dispatch 1 + Contract B: Normal Conditions with Wholesale Only

Table 21: Normal Dispatch Conditions with Wholesale Only – Generation Results
Generation Futures Futures PPAs PPAs CfD CfD Total Total Total
Type Revenue Volume Revenue Volume Volume Revenue Revenue Variable Contribution
[mln €] [MWh] [mln €] [MWh] [MWh] [mln €] [mln €] Costs Margin
[mln €] [mln €]
Biomass 0 58,981,092 0 0 0 0 6,782 1,376 5,406
Fossil 0 16,581,917 0 0 0 0 3,141 2,786 354

Brown
coal/Lignite
Fossil Coal- 0 1,536,334 0 0 0 0 276 257 19

derived gas
Fossil Gas 0 203,055,376 0 0 0 0 25,484 18,967 6,516

CCGT
Fossil Gas 0 26,989,573 0 0 0 0 4,449 3,478 972

OCGT
Fossil Hard 0 62,386,651 0 0 0 0 10,109 9,894 215

coal
Fossil Oil 0 1,364,469 0 0 0 0 332 307 25
Geothermal 0 4,336,441 0 0 0 0 463 145 318
Hydro 0 0 0 0 0 0 -20 0 -20

Pumped
Storage
Hydro Run- 0 45,427,903 0 0 0 0 3,453 606 2,847

of-river and
poundage
Hydro 0 77,961,561 0 0 0 0 5,573 2,339 3,234

Water
Reservoir
Nuclear 0 241,577,995 0 0 0 0 10,708 6,100 4,608
Solar 0 27,253,587 0 0 0 0 6,676 545 6,131
Waste 0 13,592,684 0 0 0 0 1,168 227 941
Wind 0 4,953,402 0 0 0 0 1,797 248 1,549

Offshore
Wind 0 47,037,335 0 0 0 0 11,715 1,881 9,834

Onshore
Sum 0 833,036,322 0 0 0 0 92,104 49,156 42,948
PE 740.094 110
Table 22: Normal Dispatch Conditions with Wholesale Only – Consumer Results
Household 0 0 0 26,095 26,095
Industry 0 0 0 38,822 38,822
SME 0 0 0 27,187 27,187
Sum 0 0 0 92,104 92,104
Table 23: Normal Dispatch Conditions with Wholesale Only – Country Results
DE 38,940 23,766
FR 10,369 4,129
IT 20,673 7,997
ES 5,559 2,482
PL 16,564 4,574
111 PE 740.094
Dispatch 1 + Contract C: Normal Conditions with Contracts for Difference

Table 24: Normal Dispatch Conditions with CfDs – Generation Results
Generation Futures Futures PPAs PPAs CfD Volume CfD Total Total Total
Type Revenue Volume Revenue Volume [MWh] Revenue Revenue Variable Contribution
[mln €] [MWh] [mln €] [MWh] [mln €] [mln €] Costs Margin
[mln €] [mln €]
Biomass 0 58,981,092 0 0 0 0 6,782 1,376 5,406
Fossil 0 16,581,917 0 0 0 0 3,141 2,786 354

Brown
coal/Lignite
Fossil Coal- 0 1,536,334 0 0 0 0 276 257 19

derived gas
Fossil Gas 0 203,055,376 0 0 0 0 25,484 18,967 6,516

CCGT
Fossil Gas 0 26,989,573 0 0 0 0 4,449 3,478 972

OCGT
Fossil Hard 0 62,386,651 0 0 0 0 10,109 9,894 215

coal
Fossil Oil 0 1,364,469 0 0 0 0 332 307 25
Geothermal 0 4,336,441 0 0 0 0 463 145 318
Hydro 0 0 0 0 0 0 -20 0 -20

Pumped
Storage
Hydro Run- 0 45,427,903 0 0 0 0 3,453 606 2,847

of-river and
poundage
Hydro 0 77,961,561 0 0 0 0 5,573 2,339 3,234

Water
Reservoir
Nuclear 0 241,577,995 0 0 0 0 10,708 6,100 4,608
Solar 0 27,253,587 0 0 109,014,348 1,960 8,636 545 8,091
Waste 0 13,592,684 0 0 0 0 1,168 227 941
Wind 0 4,953,402 0 0 19,813,610 415 2,212 248 1,964

Offshore
Wind 0 47,037,335 0 0 188,149,339 5,494 17,210 1,881 15,328

Onshore
Sum 0 833,036,322 0 0 316,977,297 7,870 99,974 49,156 50,818
PE 740.094 112
Table 25: Normal Dispatch Conditions with CfDs – Consumer Results

Household 0 0 4,203 26,095 30,299
Industry 0 0 0 38,822 38,822
SME 0 0 3,666 27,187 30,853
Sum 0 0 7,870 92,104 99,974
Table 26: Normal Dispatch Conditions with CfDs – Country Results

DE 39,653 24,479
FR 13,046 6,806
IT 21,245 8,569
ES 9,783 6,706
PL 16,248 4,258
113 PE 740.094
Dispatch 1 + Contract D: Normal Conditions with PPAs

Table 27: Normal Dispatch Conditions with PPAs – Generation Results
Generation Futures Futures PPAs PPAs Volume CfD CfD Total Total Total
Type Revenue Volume Revenue [MWh] Volume Revenue Revenue Variable Contribution
[mln €] [mln €]
Biomass 0 58,981,092 0 0 0 0 6,782 1,376 5,406
Fossil 0 16,581,917 0 0 0 0 3,141 2,786 354

Brown
coal/Lignite
Fossil Coal- 0 1,536,334 0 0 0 0 276 257 19

derived gas
Fossil Gas 0 203,055,376 0 0 0 0 25,484 18,967 6,516

CCGT
Fossil Gas 0 26,989,573 0 0 0 0 4,449 3,478 972

OCGT
Fossil Hard 0 62,386,651 0 0 0 0 10,109 9,894 215

coal
Fossil Oil 0 1,364,469 0 0 0 0 332 307 25
Geothermal 0 4,336,441 0 0 0 0 463 145 318
Hydro 0 0 0 0 0 0 -20 0 -20

Pumped
Storage
Hydro Run- 0 45,427,903 0 0 0 0 3,453 606 2,847

of-river and
poundage
Hydro 0 77,961,561 0 0 0 0 5,573 2,339 3,234

Water
Reservoir
Nuclear 0 241,577,995 0 0 0 0 10,708 6,100 4,608
Solar 0 27,253,587 7,154 95,387,555 0 0 8,610 545 8,065
Waste 0 13,592,684 0 0 0 0 1,168 227 941
Wind 0 4,953,402 1,734 17,336,909 0 0 2,192 248 1,945

Offshore
Wind 0 47,037,335 13,994 164,630,671 0 0 16,804 1,881 14,923

Onshore
Sum 0 833,036,322 22,881 277,355,135 0 0 99,523 49,156 50,367
PE 740.094 114
Table 28: Normal Dispatch Conditions with PPAs – Consumer Results

Household 0 0 0 26,471 26,471
Industry 0 17,978 0 26,226 44,204
SME 0 4,903 0 23,944 28,847
Sum 0 22,881 0 76,641 99,523
Table 29: Normal Dispatch Conditions with PPAs – Country Results

DE 39,995 24,821
FR 12,737 6,498
IT 21,200 8,524
ES 9,299 6,223
PL 16,292 4,302
115 PE 740.094
Dispatch 2 + Contract A: Crisis Conditions with Mixed Contracts

Table 30: Normal Dispatch Conditions with Mixed Contracts – Generation Results
[mln €] [mln €]
Biomass -5,843 59,054,272 0 0 0 0 20,485 1,378 19,107
Fossil -8,092 98,740,151 0 0 0 0 36,280 16,592 19,688

Brown
coal/Lignite
Fossil Coal- -41 337,868 0 0 0 0 224 255 -31

derived gas
Fossil Gas -24,056 193,130,258 0 0 0 0 91,304 101,606 -10,302

CCGT
Fossil Gas -547 5,838,163 0 0 0 0 3,723 3,880 -156

OCGT
Fossil Hard -3,446 54,869,903 0 0 0 0 18,496 21,188 -2,692

coal
Fossil Oil -2,867 26,515,458 0 0 0 0 12,438 9,453 2,985
Geothermal -594 4,347,315 0 0 0 0 1,854 145 1,709
Hydro 0 0 0 0 0 0 -174 0 -174

Pumped
Storage
Hydro Run- -2,450 21,842,221 0 0 0 0 7,593 291 7,302

of-river and
poundage
Hydro -7,911 77,282,546 0 0 0 0 26,955 2,318 24,637

Water
Reservoir
Nuclear -19,924 187,659,650 0 0 0 0 55,168 4,739 50,429
Solar -2,733 27,253,587 1,533 20,440,190 81,760,761 -14,930 7,368 545 6,823
Waste -1,353 13,593,944 0 0 0 0 4,324 227 4,098
Wind -465 4,953,402 372 3,715,052 14,860,207 -2,477 2,335 248 2,087
Offshore
Wind -4,544 47,037,335 2,999 35,278,001 141,112,004 -23,140 17,826 1,881 15,944
Onshore
Sum -84,867 822,456,074 4,903 59,433,243 237,732,973 -40,547 306,198 164,746 141,452
PE 740.094 116
Table 31: Crisis Dispatch Conditions with Mixed Contracts – Consumer Results
Household -26,633 0 -20,792 136,440 89,014
Industry -32,902 3,923 0 162,131 133,151
SME -25,331 981 -19,756 128,138 84,032
Sum -84,867 4,903 -40,547 426,709 306,198
Table 32: Crisis Dispatch Conditions with Mixed Contracts – Country Results
DE 86,945 47,058
FR 80,427 61,486
IT 77,916 6,462
ES 32,407 20,787
PL 28,502 5,659
117 PE 740.094
Dispatch 2 + Contract B: Crisis Conditions with Wholesale Only

Table 33: Normal Dispatch Conditions with Wholesale Only – Generation Results
Generation Futures Futures PPAs PPAs CfD CfD Total Total Total
Type Revenue Volume Revenue Volume Volume Revenue Revenue Variable Contribution
[mln €] [MWh] [mln €] [MWh] [MWh] [mln €] [mln €] Costs Margin
[mln €] [mln €]
Biomass -5,843 59,054,272 0 0 0 0 20,485 1,378 19,107
Fossil -8,092 98,740,151 0 0 0 0 36,280 16,592 19,688

Brown
coal/Lignite
Fossil Coal- -41 337,868 0 0 0 0 224 255 -31

derived gas
Fossil Gas -24,056 193,130,258 0 0 0 0 91,304 101,606 -10,302

CCGT
Fossil Gas -547 5,838,163 0 0 0 0 3,723 3,880 -156

OCGT
Fossil Hard -3,446 54,869,903 0 0 0 0 18,496 21,188 -2,692

coal
Fossil Oil -2,867 26,515,458 0 0 0 0 12,438 9,453 2,985
Geothermal -594 4,347,315 0 0 0 0 1,854 145 1,709
Hydro 0 0 0 0 0 0 -174 0 -174

Pumped
Storage
Hydro Run- -2,450 21,842,221 0 0 0 0 7,593 291 7,302

of-river and
poundage
Hydro -7,911 77,282,546 0 0 0 0 26,955 2,318 24,637

Water
Reservoir
Nuclear -19,924 187,659,650 0 0 0 0 55,168 4,739 50,429
Solar -2,733 27,253,587 0 0 0 0 25,697 545 25,152
Waste -1,353 13,593,944 0 0 0 0 4,324 227 4,098
Wind -465 4,953,402 0 0 0 0 5,393 248 5,146

Offshore
Wind -4,544 47,037,335 0 0 0 0 46,369 1,881 44,488

Onshore
Sum -84,867 822,456,074 0 0 0 0 356,129 164,746 191,383
PE 740.094 118
Table 34: Crisis Dispatch Conditions with Wholesale Only – Consumer Results
Household -26,633 0 0 136,014 109,380
Industry -32,902 0 0 174,097 141,195
SME -25,331 0 0 130,885 105,554
Sum -84,867 0 0 440,996 356,129
Table 35: Crisis Dispatch Conditions with Wholesale Only – Country Results
DE 111,217 71,330
FR 86,805 67,864
IT 86,251 14,796
ES 40,663 29,043
PL 31,193 8,350
119 PE 740.094
Dispatch 2 + Contract C: Crisis Conditions with Contracts for Difference

Table 36: Normal Dispatch Conditions with CfDs – Generation Results
[mln €] [mln €]
Biomass -5,843 59,054,272 0 0 0 0 20,485 1,378 19,107
Fossil -8,092 98,740,151 0 0 0 0 36,280 16,592 19,688

Brown
coal/Lignite
Fossil Coal- -41 337,868 0 0 0 0 224 255 -31

derived gas
Fossil Gas -24,056 193,130,258 0 0 0 0 91,304 101,606 -10,302

CCGT
Fossil Gas -547 5,838,163 0 0 0 0 3,723 3,880 -156

OCGT
Fossil Hard -3,446 54,869,903 0 0 0 0 18,496 21,188 -2,692

coal
Fossil Oil -2,867 26,515,458 0 0 0 0 12,438 9,453 2,985
Geothermal -594 4,347,315 0 0 0 0 1,854 145 1,709
Hydro 0 0 0 0 0 0 -174 0 -174

Pumped
Storage
Hydro Run- -2,450 21,842,221 0 0 0 0 7,593 291 7,302

of-river and
poundage
Hydro -7,911 77,282,546 0 0 0 0 26,955 2,318 24,637

Water
Reservoir
Nuclear -19,924 187,659,650 0 0 0 0 55,168 4,739 50,429
Solar -2,733 27,253,587 0 0 109,014,348 -19,907 5,790 545 5,245
Waste -1,353 13,593,944 0 0 0 0 4,324 227 4,098
Wind -465 4,953,402 0 0 19,813,610 -3,302 2,091 248 1,844

Offshore
Wind -4,544 47,037,335 0 0 188,149,339 -30,854 15,515 1,881 13,634

Onshore
Sum -84,867 822,456,074 0 0 316,977,297 -54,063 302,066 164,746 137,320
PE 740.094 120
Table 37: Crisis Dispatch Conditions with CfDs – Consumer Results

Household -26,633 0 -27,723 136,014 81,658
Industry -32,902 0 0 174,097 141,195
SME -25,331 0 -26,341 130,885 79,213
Sum -84,867 0 -54,063 440,996 302,066
Table 38: Crisis Dispatch Conditions with CfDs – Country Results

DE 84,810 44,923
FR 79,942 61,001
IT 77,340 5,885
ES 31,657 20,038
PL 28,317 5,473
121 PE 740.094
Dispatch 2 + Contract D: Crisis Conditions with PPAs

Table 39: Normal Dispatch Conditions with PPAs – Generation Results
Generation Futures Futures PPAs PPAs Volume CfD CfD Total Total Total
Type Revenue Volume Revenue [MWh] Volume Revenue Revenue Variable Contribution
[mln €] [mln €]
Biomass -5,843 59,054,272 0 0 0 0 20,485 1,378 19,107
Fossil Brown -8,092 98,740,151 0 0 0 0 36,280 16,592 19,688

coal/Lignite
Fossil Coal- -41 337,868 0 0 0 0 224 255 -31

derived gas
Fossil Gas -24,056 193,130,258 0 0 0 0 91,304 101,606 -10,302
CCGT
Fossil Gas -547 5,838,163 0 0 0 0 3,723 3,880 -156

OCGT
Fossil Hard coal -3,446 54,869,903 0 0 0 0 18,496 21,188 -2,692
Fossil Oil -2,867 26,515,458 0 0 0 0 12,438 9,453 2,985
Geothermal -594 4,347,315 0 0 0 0 1,854 145 1,709
Hydro Pumped 0 0 0 0 0 0 -174 0 -174

Storage
Hydro Run-of- -2,450 21,842,221 0 0 0 0 7,593 291 7,302
river and
poundage
Hydro Water -7,911 77,282,546 0 0 0 0 26,955 2,318 24,637

Reservoir
Nuclear -19,924 187,659,650 0 0 0 0 55,168 4,739 50,429
Solar -2,733 27,253,587 7,154 95,387,555 0 0 9,613 545 9,068
Waste -1,353 13,593,944 0 0 0 0 4,324 227 4,098
Wind Offshore -465 4,953,402 1,734 17,336,909 0 0 2,653 248 2,406
Wind Onshore -4,544 47,037,335 13,994 164,630,671 0 0 20,901 1,881 19,020
Sum -84,867 822,456,074 22,881 277,355,135 0 0 311,837 164,746 147,091
PE 740.094 122
Table 40: Crisis Dispatch Conditions with PPAs – Consumer Results

Household -26,633 0 0 138,235 111,601
Industry -32,902 17,978 0 118,621 103,697
SME -25,331 4,903 0 116,966 96,538
Sum -84,867 22,881 0 373,822 311,837
Table 41: Crisis Dispatch Conditions with PPAs – Country Results

DE 90,050 50,162
FR 81,026 62,085
IT 78,531 7,076
ES 33,530 21,910
PL 28,700 5,857
123 PE 740.094
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PE 740.094 126
The proposed reform of the electricity market design maintains crucial elements of the existing
system to ensure continued efficient operation. The impact that changing the rules on longer-term
contracts will have on consumer prices and investment will depend on the concrete language of
proposed legislation as well as its ultimate implementation. Overall, neither the expected mode of
impact of individual reform elements, let alone their interaction, is clearly spelled out by the
legislators.
This document was provided by the Policy Department for Economic, Scientific and Quality of Life
Policies at the request of the committee on Industry, Research and Energy (ITRE).
PE 740.094
IP/A/ITRE/2023-03
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STUDY

Requested by the ITRE committee

The design of the

Policy Department for Economic, Scientific and Quality of Life Policies

ABOUT THE EDITOR

Manuscript completed: September 2023

This document is available on the internet at:

DISCLAIMER AND COPYRIGHT

3.2.4. Electricity price crisis (Directive Art. 66a) 49

Dispatch 1 + Contract A: Normal Dispatch Conditions with Mixed Contracts 108

CCGT Closed-Cycle Gas Turbine

CfD Contract for Difference

DISC Dispatch and Contracts Model

DSO Distribution System Operator

EEX European Energy Exchange

EMD Electricity Market Design

FCR Frequency Containment Reserve

ICE Intercontinental Commodity Exchange

ITRE Industry, Research and Energy Committee of the European Parliament

LMP Locational Marginal Pricing

LTTR Long-Term Transmission Right

LNG Liquified Natural Gas

NRA National (Energy) Regulatory Authority

OCGT Open-Cycle Gas Turbine

PPA Power Purchasing Agreement

TSO Transmission System Operator

1.1. Background to the study

Source: Bruegel based on Entso-G, Bloomberg and EnergyCharts.

Source: Bruegel based on ENSTO-E and Bloomberg.

2021 H1 2022 H1 % change between 2022 S1 vs. 2021 S2

Source: Bruegel based on EUROSTAT and IEA.

1.2. The current European electricity market design

1.2.1. Legal basis

1.2.2. Agents in the European electricity markets

1.2.3. Overview of the different market timeframes

1.2.4. The role of marginal pricing

1.2.5. Emergency interventions introduced as part of Council Regulation (EU) 2022/1854

1.3. Shortcomings of the current design

1.4. Overview of the European Commission proposal and European

1.4.2. ITRE’s position

MARKET DESIGN CRITERIA

Source: Bruegel based on EUROSTAT.

Note: HH = Households. IND = Industry.

2.2. Optimal Investment

7 Such as different credit risk or load profiles.

2.3. Optimal Operation

8 Electricity demand minus renewables generation.

ASSESSMENT OF MARKET INSTRUMENTS AND DESIGN DETAILS

3.1.1. Contracts for differences (Regulation Art. 19b)

Source: Schlecht et al. (2023).

viable. Providing an incentive to continuously generate electricity would invalidate their

b. CfDs in the reform proposal

3.1.2. Power purchasing agreements (Regulation Art. 19a)

3.1.3. Virtual trading hubs (Regulation Art. 9)

3.2. Protecting consumers from future energy crises

3.2.1. Use of CfD revenues (Regulation article 19b(3))

3.2.2. Hedging obligation (Directive Art. 18a)

3.2.3. Fixed-price vs. smart retail tariffs (Directive Art. 11)

3.2.4. Electricity price crisis (Directive Art. 66a)