A new policy brief, The Market Design Initiative and Path Dependency, highlights the importance of placing the European Commission’s Market Design Initiative within the context of delivering 2030 climate and energy policy objectives.

“Meeting climate and energy targets for 2030 will require an increased share of renewable electricity, and an associated increase in flexible system resources, at a scale and pace that simply cannot be achieved without retiring a large volume of existing, high-carbon, inflexible generation,” said Michael Hogan, RAP senior advisor and co-author of the report. “While improvements to the market design can certainly play an important role in facilitating this transition, market design alone cannot drive the investments and disinvestments that will be needed in that timeframe.”

The authors stress that market conditions, including the fact that many of the oldest legacy power plants have low production costs and are mostly or entirely depreciated, will delay the critical shift to low-carbon and flexible resources. In order to make way for the resources needed to meet climate and energy targets, the authors recommend developing a strategy for smart and managed retirement of old, high-carbon, and inflexible plants. This strategy would align the evolution of the legacy portfolio with energy and climate goals, restore financial health to the remaining plants that is needed to keep the lights on, and strengthen demand for new, clean, and more flexible resources.

Despite clear evidence of an oversupply of firm capacity, Member States continue to insist that needed investments in new capacity are not being made due to flawed market design, resulting in a patchwork of national market interventions. Here, the authors recommend taking a truly regional approach to resource adequacy, which will unlock the cost savings potential of the internal energy market by expanding the portfolio of options for delivering a reliable supply of electricity. If, on that basis, intervention in support of investment is still considered necessary, such intervention should be designed to facilitate rather than impede the transition.

“Even if we conclude that some form of capacity mechanism is required to support adequate levels of investment,” Mr. Hogan reiterated, “the form of mechanism we choose must not perpetuate and promote investment in generation that is wholly inconsistent with achieving established policy goals.”

Finally, the authors highlight the need for targeted renewable support schemes to drive investment in new, low-carbon resources. Market-driven investments in new renewable resources are not likely to emerge until the price of carbon in the EU emissions trading system reaches 60 EUR/t CO2, and such prices are not projected to occur before 2040. As a result, additional support measures will be needed to meet 2030 climate and energy goals, independent of whatever changes might usefully be made to the market design.

“The market design communication, with its focus on whether and how to intervene to support investment in needed capacity, will not and should not be expected to address all of the barriers to meeting Europe’s 2030 climate and energy goals. Instead, a suite of market design improvements and complementary policies is needed,” Mr. Hogan concluded.

The Regulatory Assistance Project, in collaboration with the Institute for Sustainable Development and International Relations (IDDRI), ClientEarth, E3G, and Agora Energiewende produced The Market Design Initiative and Path Dependency. Matthias Buck and Christian Redl of Agora Energiewende coauthored the paper with Michael Hogan.

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