Position paper on reform of the electricity market design

Framework and challenges for the Austrian electricity market

Austria’s energy and climate policies include some ambitious targets. One of the most important is the aim of generating 100% of the country’s electricity balance from renewable sources from 2030 onwards. This will require an increase of 27 TWh in annual renewable energy (RES) output by 2030, of which 11 TWh will be accounted for by photovoltaic, 10 TWh by wind, 5 TWh by hydro and 1 TWh by biomass. A stable and predictable investment environment is a vital condition for this expansion.

In Austria, hydropower will play an important part in the transformation of the energy system, alongside wind and PV. Hydro currently accounts for more than half of total electricity production. Run-of-river stations capable of generating baseload power will make a significant contribution to achieving the targeted expansion in RES output, while Austria’s pumped storage power plants – which have significant capacity as well as potential for expansion – could serve as “green batteries”, providing short-term and medium-term flexibility that allows for the optimal integration of wind and PV into the energy system.

The role of “green batteries” is not limited to Austria; it should be seen in a cross-border context. In turn, this underlines the importance of the Austrian electricity market’s integration with neighbouring countries. The separation of the joint bidding zone with Germany in October 2018 was a major setback in terms of integration, which resulted primarily in a lack of liquidity in the Austrian forward market. Any adjustments in Europe’s electricity market design must also address the idea of integration between national markets and provide a stable framework to support the achievement of ambitious energy and climate policy goals.
 

In principle, we welcome the proposals on energy market design, but improvements are still needed

Oesterreichs Energie welcomes the European Commission's proposal for targeted adjustments in the electricity market design, with a view to achieving climate neutrality while at the same time safeguarding both security of supply and affordability for consumers. Rejecting the significant interventions originally envisaged in proven pricing and market mechanisms is the correct approach, because all proposed reforms must take one key point into account: high electricity prices are not due to failings in the internal electricity market. The – in some cases – inordinate increases in wholesale prices were caused by the energy supply shortage resulting from Russia’s decision to freeze gas supplies. A clear distinction should be made between approaches aimed at stabilising prices and those intended to protect security of supply. Therefore, it is correct that the Commission's proposal does not interfere with the pricing mechanism for supply and demand. This will ensure that market participants remain confident as regards the efficiency of the market, which will ultimately benefit final customers.

However, improvements to some of the proposals are still required so that the Commission’s three stated aims – more renewables, greater consumer protection and enhanced competitiveness – are achieved in full.
 

Market mechanism – retain the merit order and avoid adjustments to the pricing mechanism

Pricing on the day-ahead market based on a merit order with a pay-as-clear model ensures optimum use of available power station capacity, and is the standard model for pricing homogeneous commodities (including electricity). This limits the strategic incentives for increasing bids and sends accurate scarcity pricing signals to market participants, leading either to adjustments in demand by end consumers and/or to signals for investment in new capacity. For inframarginal technologies, it is possible to cover historical and/or future investment costs, which ensures a willingness to invest.

Optimum use of available generating capacity prevents market distortions. It also ensures that as many renewable generating stations as possible actually produce electricity, and minimises CO2 emissions. The EMD proposal will leave the pricing mechanism in short-term markets unchanged. This makes sense, because the current day-ahead flow-based market coupling mechanism was the result of close, years-long cooperation between all market participants and it has proved its worth. Potential entry barriers for market participants, e.g. demand response, should be removed in order to increase liquidity in short-term markets. In addition, gate closure times for intraday trading (Article 8 of the Regulation on the internal market for electricity) should be as close to real time as possible. From 2028 onwards, cross-zonal intraday trading will close 30 minutes before the start of the respective market time unit at the earliest. The strengths of this measure lie in the increased possibilities for balancing cross-zonal electricity shortages and surpluses, and in the improved integration of variable renewable energy generators across bidding zones. Oesterreichs Energie welcomes this measure, but believes that implementation before 1 January 2028 would be desirable. However, we take a critical view of the proposal for a mandatory reduction in the minimum bid to 100 kW or less. This decision should be left to the nominated electricity market operators (NEMOs).