The long term central buyer model a solution to strengthen low carbon transition and to protect consumers while keeping efficient spot markets

Authors

Dominique Finon, Etienne Beeker

Abstract

This paper proposes an alternative to the current market design based on hourly prices
aligned with marginal costs and on which retail prices are built. It is based on a public
entity which is the counterpart in long term financial contracts (contracts for differences or
CfDs) signed up with to share risks in new and existing assets of low carbon technologies
(renewables [RES], nuclear), in parallel with the development of private long term contracts
(PPA) between private agents . Besides this function of central contractor, the public entity is
also a central purchasing agency: it buys their corresponding energy production on the spot
market.
So the central buyer is in a position to sell wholesale electricity from low carbon generators
to competing suppliers at prices mainly based on long-term costs (represented by CfD’s strike
prices). CfDs have the virtue to erase the rents of infra-marginal producers (namely RES and
nuclear) in periods of fossil price spike. Suppliers will pass long term costs through retail
prices they offer to each type of customers along their load profiles. This new organizational
model of electricity market not only meets the need to rapidly invest in capital-intensive
technologies for low-carbon transition to net-zero, but also consumers’ need for protection
against price risks and excessive dependence on highly volatile gas market.
A variant is presented in appendix, in which the agency is only a central contractor with low
carbon generators and does not directly cover the price risk for the suppliers. It might be
more conducive to compromise.