Enabling the Green Transition: A Market Design Reform Proposal for the European Electricity System

Abstract

The focus of this thesis is to determine a market design reform that can facilitate the green transition of the European electricity market. European policymakers are challenged by increasing variable renewable generation, the threat of climate change, and market disruptions caused by external shocks. An extensive literature review as well as expert interviews are conducted.
This thesis outlines a series of policy recommendations to reform the European electricity market design. The suggestions emphasize the importance of capacity remuneration mechanisms, such as capacity auctions and strategic reserves, along with the integration of carbon pricing in the form of an emissions trading system. They also highlight the significance of demand-side integration, transparency, and European-wide harmonization for political acceptance and investor confidence. This thesis advises against a further division of bidding zones. It proposes implementing flow-based market coupling for the entire market area to account for transit flows. Market-based redispatch should be employed as an efficient approach to incorporating demand-side flexibilities and enhancing cross-border redispatch. Lastly, this thesis proposes the use of sufficiently high price caps as a temporary policy tool during external shocks.
The thesis concludes by stressing the need for effective communication, collaboration, and the deployment of emerging technologies such as storage, power-to-X, and demand-side technologies to accelerate the green transition. A comprehensive policy framework that supports the transition to a greener electricity system and the suggested changes in market design are crucial steps towards more sustainability and independence.