This briefing paper sets out a framework for aligning consumers‘ and climate objectives in Europe’s electricity markets. Measures that reduce impacts on consumers now without helping decarbonise the system are detrimental to consumers’ long-term interests. Similarly, idealised models for decarbonised electricity markets that do not manage impacts on consumers will never be realised due to political pressures.
The electricity market reform is a hot political topic due to the cost-of-living crisis. In this context, it is important to highlight that European electricity markets can and should align consumer and climate interests. The briefing proposes a framework to make it possible:
- A distinction between core market design elements that match demand and supply and non-core, temporary elements that affect investment or affordability.
- A mechanism or process to continuously update and evolve the core market design to account for technological advances and reap the benefits of digitalisation.
- Principles that ensure that non-core market elements do not distort the demand and supply balance in the core market by changing incentives for efficiency and demand-side response.
There are also questions over the consistency of the current market design with a decarbonised system which will involve a high proportion of variable renewable electricity.
The preferred electricity market model to align climate and consumers’ interests will vary over time and from place to place. However, a new dynamic approach to market design is necessary to take advantage of opportunities from emerging digital technologies and artificial intelligence to engage consumers at local levels. The EU will need to ensure its Member States follow shared principles to maintain the speed towards decarbonisation. It also needs to retain a coherent EU-wide market and ensure consumer consent.