Thread by @janrosenow

Marginal pricing in electricity markets has been subject of much debate lately.

How can we shield consumers from surges in energy prices whilst preserving the market’s essential functions?

We @RegAssistProj have a proposal: a price shock absorber. 🧵

raponline.org/knowledge-cent…

1/ The EU is planning an "emergency intervention" in electricity markets to reduce prices. National governments have announced similar initiatives too.

politico.eu/article/pressu…

2/ Policy interventions want to correct the effects of marginal pricing which means the clearing price is set by the most expensive generator.

@LionHirth @thehertieschool has an excellent thread on marginal pricing for those unfamiliar with the term.

https://twitter.com/LionHirth/status/1563381122146668549?s=20&t=LkuECSlRZ2isGljORhWtdg

3/ The current market design has been built over decades. Reforming it takes time, is complex and should not be done in a rush with potential unintended consequences as German energy expert @CKemfert points out.

https://twitter.com/CKemfert/status/1564141836817649670?s=20&t=Dpuo8mp2nBQAZSMlZcAZtw

4/ Our shock absorber is modelled on “circuit breaker” mechanisms that have been in place for some time in other markets to prevent run-away scarcity pricing from harming consumers. Cumulative pricing threshold inAustralia and the peaker net margin in the ERCOT are examples.

5/ Importantly, it leaves electricity market fundamentals in place to deliver energy efficiency, beneficial demand flexibility and a ‘normal’ level of expected inframarginal rent to compensate investors for the value of their investments.

6/ Mechanism trigger: price shock above useful market function

Next: cap clearing price for gas-based generation

Non-gas resources (RES, nuclear, DSF) continue bidding at marginal cost & are dispatched in merit order.

IF gas is needed: cost recovery on load-weighted basis

7/ We compare the price shock absorber proposal with other policy options. None of them are perfect (including our proposal) but blunt price cap and pay-as-bid score particularly poorly.

8/ Proposals for splitting the market into a green power pool and fossil generators have been made too, most recently by @MLiebreich but also @MichaelGrubb9. Those ideas deserve a closer look but would take time to be implemented.

https://twitter.com/MLiebreich/status/1560358919784075264?s=20&t=6aCHPrxUB30jpmn3fYbdJg

9/ @eu_acer have proposed a "temporary relief valve" in April very similar to our shock absorber: normal market clearing, regular price signals, up to the point where sustained high prices have reached the mechanism’s pre-defined threshold.

acer.europa.eu/Official_docum…

10/ Almost daily governments announce that they want to decouple gas from electricity prices. Latest example is Austria. Any reform needs to be carefully considered to avoid unintended consequences. Our shock absorber provides short-term relief. euractiv.com/section/energy…

11/ German government also looking at options to ease price pressure. @JakobSchlandt @SueEhlerding

zeit.de/politik/deutsc…