Acer Report, the European Agency for the Cooperation of Energy Regulators, on electricity market design, requested by the EU Commission in October 2021, essentially rejects the idea of capping electricity prices.

Although the current circumstances of the electricity system are adrift, Acer believes that the difficulties experienced in recent months are not due to the market structure.

The document mentions benefits for European consumers estimated at around €34 billion per year, thanks to the efforts made over the last ten years to integrate national electricity markets and thus enable greater cross-border trade in energy, which in turn has increased security of supply.

The market structure has also favoured the deployment of renewable electricity generation at EU level.

However, it is noted that market design is not designed for the ’emergency’ situation in which EU countries find themselves at the moment.

So, what would be the solution to deal with the current situation?

Acer is convinced that the best way forward is to further increase the level of integration of the electricity market, focusing on the electrification of final consumption, the installation of renewable sources and technologies to increase the flexibility of the system (such as storage), aimed at managing the intermittent production of wind farms and photovoltaic plants.

Here are the main recommendations and proposals contained in the report:

  • optimise the functioning of markets in the short term by implementing the measures already agreed at EU level: reach 70% of inter-zonal capacity in 2025, implement flow-based market coupling as soon as possible, integrate national balancing markets;
  • drive the energy transition with efficient long-term markets, e.g. by improving access to PPAs for smaller players, through public guarantees to reduce risks and aggregation platforms for buyers and suppliers; market liquidity could be stimulated to help independent companies and traders compete with large established companies (through tenders, mandatory measures or economic incentives);
  • increase the flexibility of the electricity system, preserving freely determined and competitive price signals;
  • protecting consumers from excessive price volatility, striking a balance between ensuring the financial responsibility of retail energy suppliers for the benefit of consumer confidence and market stability, and keeping the market open to new suppliers to reduce costs;
  • addressing non-market barriers and policy obstacles: Member States should consider a greater coordination of approaches and plans for large-scale generation and deployment of network infrastructure;
  • prepare for future high energy prices in ‘peacetime’ by cautiously considering the need to change the functioning of the market.

In essence, any intervention should seek to address the ‘root causes’ of the problem, i.e. high gas prices, rather than its symptoms (electricity price hikes).

Therefore, it would be appropriate to pursue measures that accelerate the reduction of gas demand (efficiency, fuel-switching), and to implement additional efforts that can put downward pressure on gas prices (search for new supplies), while maintaining prices that still guarantee the necessary LNG deliveries.