Analysis of the European Electricity Market Design reform and potential implications for market players

Abstract

The volatile electricity during the energy crisis and the increasing share of renewable energy plants in Europe has led to increased concerns about functioning of the current electricity market design from member states and political institutions. Therefore, several member states have proposed concrete changes of the market design and increased the political pressure which subsequently led to the publication of legislative proposal on the electricity market design reform by the European Commission in March 2023. This thesis provides an overview of the member states proposals as well as the strengths and weaknesses of the mechanisms suggested in the legislative proposal.Additionally, the impact of the most relevant mechanisms on the businessmodel of typical market players i.e., a utility company, wind generator and retail company are analyzed and compared with the likelihood of implementation. The results show that structural changes of the market design such as a deviation from the Merit Order logic and pay-as-clear pricing have a high impact on the revenue streams of market players depending on their generation portfolio. However, their implementation remains highly unlikely. On the contrary, the integration of additional mechanisms into the current market logic such as PPAs, CfDs and capacity mechanisms are highly likely to be implemented and have to some extent equally strong impacts on the businessmodels of the market participants. Yet, the exact design of the mechanisms remains unclear since they first need to be agreed upon and implemented by memberstates. However, initial recommendations on the portfolio and business strategies are made for each market player. Finally, limitations of the study and shortcomings in the existing research are pointed out.