The return of long-term contracts in electricity markets: implications for competition policy

Authors

Fabien Roques & Guillaume Duquesne

Abstract

In the early years of liberalisation, many regulatory and competition authorities considered that longterm contracts for the supply of electricity should be restricted because of their potential to prevent the development of effective competition. However, the electricity industry context has evolved in recent years, both in terms of market structure, technologies cost structure, and policy objectives. For instance, longterm contracts can generate efficiencies by fostering an efficient allocation of risks thereby supporting investments in capital-intensive clean technologies,
electrification. This paper analyses these evolutions and their implications for the need to revisit the historical approach adopted by the European Commission to assess the potential competitive effects of long-term contracts in the electricity industry. We conclude that the change in context justifies a change of appreciation of long-term contracts, as the pro-competitive effects are more likely to outweigh their potential negative effects on competition in many cases. Whilst the existing framework and the balancing test of the pro- and anticompetitive effects of long-term contracts remain fit for purpose, we argue that the lack of specific guidance on the specific types of efficiencies in particular that may be taken into account may cause uncertainty for the market participants regarding the appreciation by competition authorities of the long-term contracts that are likely to multiply in future years.