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Efficient forward trade fosters innovation, investment, and resiliency

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  • Cramton, Peter
  • Ockenfels, Axel

Abstract

We propose a forward energy market design for Germany's electricity sector as an alternative to traditional capacity mechanisms. Drawing on two decades of U.S. experience, we point out the disadvantages of centralized capacity auctions and decentralized capacity obligations. Our forward energy market design enables transparent trading of granular energy products up to 48 months in advance through hourly batch auctions. In this design, load-serving entities have purchase obligations that increase from 0% to 100% of the realized load as the delivery date approaches. Unlike traditional capacity markets, which perpetuate spot market inefficiencies, our mechanism strengthens price signals, improves risk management, and enhances system resilience by providing efficient price discovery and clear investment signals. It also offers a robust, no-regret pathway to fostering innovation and demand flexibility, which are crucial for the energy transition.

Suggested Citation

  • Cramton, Peter & Ockenfels, Axel, 2025. "Efficient forward trade fosters innovation, investment, and resiliency," European Economic Review, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125002089
    DOI: 10.1016/j.euroecorev.2025.105158
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    References listed on IDEAS

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    1. Alvin E. Roth, 2009. "What Have We Learned from Market Design?," Innovation Policy and the Economy, University of Chicago Press, vol. 9(1), pages 79-112.
    2. Peter Cramton, 2022. "Fostering Resiliency with Good Market Design: Lessons from Texas," ECONtribute Discussion Papers Series 145, University of Bonn and University of Cologne, Germany.
    3. Peter Cramton, 2017. "Electricity market design," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 33(4), pages 589-612.
    4. Dobos, Teodora & Bichler, Martin & Knörr, Johannes, 2025. "Challenges in finding stable price zones in European electricity markets: Aiming to square the circle?," Applied Energy, Elsevier, vol. 382(C).
    5. Teodora Dobos & Martin Bichler & Johannes Knorr, 2024. "Challenges in Finding Stable Price Zones in European Electricity Markets: Aiming to Square the Circle?," Papers 2404.06489, arXiv.org, revised Jan 2025.
    6. Yan Chen & Peter Cramton & John A. List & Axel Ockenfels, 2021. "Market Design, Human Behavior, and Management," Management Science, INFORMS, vol. 67(9), pages 5317-5348, September.
    7. Aagaard,Todd S. & Kleit,Andrew N., 2022. "Electricity Capacity Markets," Cambridge Books, Cambridge University Press, number 9781108747424, Enero-Abr.
    8. Peter Cramton & Axel Ockenfels, 2012. "Economics and Design of Capacity Markets for the Power Sector," Papers of Peter Cramton 12cocap, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
    9. Llorente-Saguer, Aniol & Sheremeta, Roman M. & Szech, Nora, 2023. "Designing contests between heterogeneous contestants: An experimental study of tie-breaks and bid-caps in all-pay auctions," European Economic Review, Elsevier, vol. 154(C).
    10. Aagaard,Todd S. & Kleit,Andrew N., 2022. "Electricity Capacity Markets," Cambridge Books, Cambridge University Press, number 9781108489652, Enero-Abr.
    11. repec:aen:eeepjl:2_2_a02 is not listed on IDEAS
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