Workshop on long-term contracting in electricity markets: how to insure investments for supply security and climate policy?

Abstract

Presentation
Decarbonizing the European electricity industry while maintaining security of supply, will require significant investment in both clean generation technologies and fossil-fuel peak equipment. But the theory for electricity market liberalization developed in the early 1980s is rooted on marginal cost pricing, a market paradigm which worked well to induce competition between technologies with significant variables costs, such as gas fired plants. It does not help to secure investment in large CAPEX equipment as they are in the whole set of RES-E and low carbon technologies. Long-term contracts and vertical integration are the most convenient way to maintain incentives to invest in all the technology mix by helping risk management and risk sharing.

But conventional wisdom in electricity restructuring requires limitations of long term contracts and vertical integration between generators, retailers and large consumers, for allowing entries and development of effective competition on wholesale and retail markets. Attachment to these principles was particularly reflected in the competition principles of the European Commission and some regulation authorities. Economic theory of industrial organisation which formerly points restrictions of competition by CLTs affords new insights on the limitation of entries in generation. In fact it could appear easier if entrants could be helped by long term forward contracts, which would make market more contestable. Moreover some academic works suggest that antitrust regulators could consider introducing forward contracts as a means to reduce market power exercise on oligopolistic markets. So under some change in competition policy principles, future reforms of European electricity markets will therefore need to explore alternative models of competition allowing investment in the technology mix.

The workshop will deal with this need of long term contracts on which consensus is evolving. Market design issues as well as competition issues will be raised in theoretical way and above all particular in an empirical way by referring to concrete experiences.

Presentation 1: Inge BERNAERTS, Head of Wholesale Markets Unit (DG Energy), “In the line of the forthcoming Communication: How can we provide certainty to investors and stimulate investment in low carbon technologies?”
Présentation

Presentation 2: David NEWBERY, EPRG, Cambridge University, “Contracting with government to invest in low carbon technologies: How to design the Visible Hand?”
Présentation