What happened to EUs target model for the electricity market?

While the ‘target model’ served as an informal template for EUs electricity market reform in the 3rd energy package, it is not mentioned in the Clean Energy Package. Does this mean that the target model is abandoned, and with it, the energy only principle it builds upon? A new REMAP policy brief sheds light on this issue.

What happened to EUs target model for the electricity market?

The overarching issue of the internal electricity market is to create a pan-European market where integration of power markets ensures efficient use of energy resources across the EU/EEA area. Trade in electricity requires that a number of market design elements are standardized, including when trade takes place, where trades are made and settled, and what products can be exchanged.

Prior to the third energy package (adopted in 2009), deregulation of European electricity markets had resulted in substantial variety in national designs. A common market-design was necessary to cater for efficient cross-border trade on a European scale, and reforms to this effect was the main aim of the third package. A ‘target model’ based on three main elements guided the reforms: 1) The main reference prices are set in competitive wholesale marked (day-ahead), 2) trade is determined according to day-ahead prices, and 3) gaps between day-ahead and real-time operation are managed in intraday and balancing markets. Consequently, generators’ revenues depended primarily on energy supplied in the day-ahead market.

The market reforms in the Clean Energy package (CEP, adopted in 2016) focused on the creation of a level playing field for renewable generation. This was partly a response to market distortions created by subsidies to and priority dispatch of renewable generation, and partly to the need to adapt the market design to the intermittent and less predictable generation from renewables. Moreover, several EU Member States had introduced various capacity remuneration schemes to keep existing, conventional power generation available due to security of supply concerns, in addition to the energy remuneration from the markets. Capacity remuneration schemes include backup capacity (strategic reserves) and capacity payments to reliable capacity availability, paid in addition to the revenues from the wholesale and balancing markets.

The issue discussed in the policy brief is whether the market design provisions in CEP represent a breach with the target model and the energy-only principle. Does the CEP market design reform represent the beginning of the end for the target model and the energy-only principle? Or is capacity remuneration a necessary and natural adaptation of the target model to the electricity system of the future?

The REMAP research project (Reform of EU Internal Energy Market Policies: Implications for the Norwegian Energy Policy Strategy) seeks to explain changes in market design by examining market developments and policy processes in the implementation phase of the Third Package. The project aims to describe, identify, and explain deviations from the target model, focusing on the policy framework for generation from renewable sources (RES), policies and regulations applying to interconnectors and trade, capacity remuneration schemes, and bidding zones and congestion management.

The project is funded by the Research Council of Norway and industry partners, and carried out jointly by THEMA, Fridtjof Nansen Institute, and international researchers.

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