In the first of our ECA Insight – deep dive series, Iro Sala and Fred Beelitz look at policy responses to the unprecedented energy price spikes in Europe. We consider both market re-design proposals and support mechanisms, to provide an overview of different approaches in tackling high prices.

Although there are plenty of factors that have resulted in a constrained power market, eg low hydro output, French nuclear shutdowns, the current situation is primarily a gas supply crisis bleeding into the power market. The policy focus should therefore be on addressing gas shortages and rebalancing Europe’s gas supply mix away from Russian gas.

In the power sector, there is a danger of hastily proposed electricity market reforms being mainly targeted at shielding consumers from high prices. These reforms may be detrimental to long-term objectives we want to see, namely providing incentives for much needed investments in low carbon, flexible and reliable supply. Any power market reform proposal should therefore be designed – not just by the guiding principle of affordability – but by considering the incentives it sets for longer term investment requirements.