Russia’s invasion of Ukraine has sent gas prices to unprecedented highs. These price spikes spilled over to the electricity sector due to the marginal pricing mechanism – which mandates that the highest cleared bid sets the price in each market session.
The reform proposals that are discussed range from the expansion of market-based instruments to a
complete abolishment of marginal pricing, replacing it with pricing based on average production costs. We
take up the ongoing discussion to explore possible market architectures.
Therefore, we outline the main market design elements:
- Reduce windfall profits in crisis situations through the expansion of two-sided CfDs for producers of
low-carbon electricity
- Redesigning auctions to drive the transformation towards carbon neutrality: a stronger reliance on
auctions requires a better process to select projects.
We conclude that a reform is more promising than setting up a completely new market architecture, as there
are already in the current system instruments to achieve price resilience and a fast response in energy crises.