The purpose of the first two release waves energy markets that took place in the early 1990s and 2000s around the world were the privatization of energy industry infrastructure and the improvement of the efficiency of investments and system operation through wholesale energy markets. The emerging third wave of energy market design is currently driven by an environmental agenda to decarbonize electricity generation.

In response to the need to get rid of CO2 emissions, many countries have rushed to develop decarbonization plans by removing fossil fuels from the energy mix and increasing renewable energy production, with subsidies reaching trillions of dollars worldwide. As a result of this desire to get rid of CO2 emissionsinvestment in coal and natural gas power plants has declined sharply in most regions, but unlike investment in renewable energy sources not enough to fill the gap. Strong demand and weak supply fueled the global energy crisis that began to unfold last fall. Gas, coal and oil prices skyrocketed. In addition to climate issues and a looming energy crisis, the war in Ukraine and the instrumentalization of natural gas supplies have further exacerbated the chaotic situation in global energy markets.

The assumption we made a few years ago that we could replace fossil fuels with renewable energy and large batteries with relative ease has turned out to be wrong based on the many studies we’ve done. For many years, based on this research, I have advocated the construction of natural gas-fired power plants as the main hope for the next twenty years or more to provide the system with the flexibility needed to balance the intermittent energy of renewables. Thus, the decarbonization policy should be carried out without delay and at a faster pace, but the West needs to adopt an inclusive all-inclusive technology policy, in which all technologies should be developed in parallel.

In this chaotic energy landscape, the role of wholesale energy markets is more important than ever. The temptation to rush into a major government intervention in the wholesale trade without the participation of serious experts leads to disaster. Current efforts to decouple natural gas prices from electricity prices are in the right direction, but the proposed solutions are counterproductive and have long-term detrimental effects on the energy transition. One such proposal aims to divide the day-ahead market by placing renewables, nuclear and hydropower in one basket, and fossil fuel production, along with pumped storage, in another.

This idea is not new and comes up every time there is a crisis. Supply is completely incompatible with wealth maximization, a very important principle in the structure of the market. Welfare maximization allows energy producers producing energy from sources below marginal cost to cover fixed and affordability costs while providing incentives for investment. The division of markets makes absolutely no economic sense. This will destroy the price signals for demand-side resources and energy efficiency needed to keep the system flexible. In addition, it will reduce the liquidity of the next day’s market. A “distorted DAM price” will also create major discrepancies in the futures markets. We can all imagine the investment and regulatory uncertainty that such a design would create in the EU at a time when the system is in need of massive private investment for the energy transition. Finally, such a design will be a serious test for the EU’s internal electricity market, which, in my opinion, is a fundamental achievement and a great asset for Europe.

There are market methods and rules based on sound economic theories to deal with high prices without destroying the fundamental nature of the market. For example, a time-honored approach is to introduce restrictions on the supply of energy for cleaning RSVs. Producers bidding above the cap will be paid according to the bid and will not be allowed to cap the market price. We call these approaches circuit breakers or soft limiting methods. We have successfully applied such methods in emergency situations in many markets.

Thus, the proposed plan for market segmentation is short-sighted, misguided, counterproductive, and absolutely meaningless from an economic point of view. There are many alternative, well proven emergency approaches that have been implemented internationally that will not disrupt the EU’s internal electricity market.

* Dr. Alexis Papaleksopoulos is President and CEO of ECCO International, Inc., San Francisco, USA, CEO and President of ZOME Energy Networks, Boston, USA, CEO and President of World Energy Consortium, Estonia.