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The electricity market design has reached its marginal utility
December 20, 2024 |
Power supply |
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Dirk Specht's article entitled "The electricity market design has reached its marginal utility" critically analyses the functioning and current challenges of the European electricity market design. The key findings are summarised here:
Criticism of the current electricity market design
- The electricity market design is based on a naive model: the current electricity market operates with a "market clearing price" or "merit order " system based on a simple supply and demand concept. However, this model is too simplified and ignores the complex game-theoretic dynamics that actually take place in the market. It has been criticized that this model does not work in reality and leads to inefficient prices.
- False assumptions about supply and demand: It is often wrongly assumed that prices are determined by a "fair" interaction between supply and demand. In fact, the electricity market is characterized by massive overcapacity, but this does not lead to permanently lower prices. The problem is not scarcity, but the way the market is organized.
- Merit order is a market regulation, not a description: The merit order, in which the most expensive provider sets the price, is not a natural market fact, but a specific European market regulation. In other markets, the cheaper providers would prevail.
- The role of large suppliers: A few large players dominate the market and have an information advantage. They can design their supply strategies to drive up prices, especially in situations where they are not substitutable.
- Game-theoretic behavior: Price formation on the electricity exchange is a game-theoretic process in which suppliers do not necessarily base their prices on marginal costs, but also on the expected market development. This behavior often leads to implicit action in which prices rise.
- Misincentives and "shadow economy": The stock market has lost its steering effect and there is a "shadow economy" through subsidies to compensate for the misincentives of the stock market. The current situation is inefficient and not productive.
- Battery storage is not used optimally: Battery storage is currently mainly used for price difference models and not for grid stabilization. This leads to a suboptimal use of the storage and can lead to self-cannibalizing business models.
effects and consequences
- Gas price crisis as a trigger: The gas crisis has made the deficiencies of the electricity market design particularly clear, as it has affected electricity prices even though production costs have not increased to the same extent.
- Prices above production costs: Electricity prices are often significantly higher than the actual production costs, which indicates that the market is no longer working efficiently.
- No transformation dynamics: The current market design has not generated the expected dynamics in the transformation to renewable energies.
solutions
- Supply market instead of spot market: One possible solution would be to abandon the spot market as the leading instrument and instead create a supply market with power supply agreements (PPAs).
- Atomization of the supplier structure: Another option would be to further atomize the supplier structure and create different market segments for the current market, a reserve market and a storage market. It should be legally separated so that the same players cannot operate in all these markets at the same time.
- More competition: It is necessary to create sufficient competition among suppliers and buyers.
- Adaptation to technical developments : Integration of modern storage technologies into grid stabilization.
- Promoting an economically optimal use of resources.
Conclusion
The current electricity market design has reached its limits and leads to inefficient prices and misincentives. A fundamental reform is needed to achieve the goals of the energy transition. The system should be developed from a simple market based on supply and demand to a system that adequately takes into account the complexity and specificity of energy production and supply. A fundamental reform is needed to achieve the goals of the energy transition, to ensure security of supply and at the same time enable fair prices for consumers. The discussion should focus on new market models that create both long-term planning security and ensure short-term flexibility.
Der Artikel von Dirk Specht mit dem Titel „Das Strommarktdesign hat seinen Grenznutzen erreicht“ analysiert kritisch die Funktionsweise und die aktuellen Heraus
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