IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v149y2025ics0140988325005432.html

Marginal pricing and the energy crisis: Where should we go?

Author

Listed:
  • Abada, Ibrahim
  • Ehrenmann, Andreas
  • Smeers, Yves

Abstract

The fundamental principle of marginal pricing in electricity markets has been challenged following the recent European energy crisis. A main criticism targets the incapacity of current markets to drive investments, as spot prices provide only short-term information about supply, demand, and costs. This paper revisits the seminal work of Boiteux (1960) in the context of the recent energy crisis to discuss the fundamental assumption of adapted capacity, which underpins the equality between long-term and short-term marginal costs in the theory of marginal pricing. We argue that capacity is no longer adapted to current economic conditions in Europe. We then leverage mathematical programming techniques to generalize the results of Boiteux (1960) and propose a market-clearing mechanism that preserves the efficiency of current short-term marginal pricing to drive optimal plant operations while also providing a long-term investment signal when capacities are not necessarily adapted to current economic conditions. Through an analysis of captured margins, our proposal, which differs only marginally from the current market-clearing mechanism, identifies plants that should remain in the current mix and those that are no longer economical. We also discuss possible extensions of our proposal to accommodate capacity markets and price caps. Finally, we implement our models with the French power mix and demonstrate their advantages over the current market-clearing mechanism using a realistic case study.

Suggested Citation

  • Abada, Ibrahim & Ehrenmann, Andreas & Smeers, Yves, 2025. "Marginal pricing and the energy crisis: Where should we go?," Energy Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325005432
    DOI: 10.1016/j.eneco.2025.108716
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988325005432
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2025.108716?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Stevens, Nicolas & Smeers, Yves & Papavasiliou, Anthony, 2024. "Indivisibilities in investment and the role of a capacity market," LIDAM Reprints CORE 3281, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Nicolas Stevens & Yves Smeers & Anthony Papavasiliou, 2024. "Indivisibilities in investment and the role of a capacity market," Journal of Regulatory Economics, Springer, vol. 66(2), pages 238-272, December.
    3. Christos K. Simoglou & Pandelis N. Biskas, 2023. "Capacity Mechanisms in Europe and the US: A Comparative Analysis and a Real-Life Application for Greece," Energies, MDPI, vol. 16(2), pages 1-32, January.
    4. Cramton, Peter & Stoft, Steven, 2005. "A Capacity Market that Makes Sense," The Electricity Journal, Elsevier, vol. 18(7), pages 43-54.
    5. Fabra, Natalia, 2018. "A primer on capacity mechanisms," Energy Economics, Elsevier, vol. 75(C), pages 323-335.
    6. Kozlova, Mariia & Huhta, Kaisa & Lohrmann, Alena, 2023. "The interface between support schemes for renewable energy and security of supply: Reviewing capacity mechanisms and support schemes for renewable energy in Europe," Energy Policy, Elsevier, vol. 181(C).
    7. Fabra, Natalia, 2023. "Reforming European electricity markets: Lessons from the energy crisis," Energy Economics, Elsevier, vol. 126(C).
    8. Dierker, Egbert, 1991. "The Optimality of Boiteux-Ramsey Pricing," Econometrica, Econometric Society, vol. 59(1), pages 99-121, January.
    9. Pär Holmberg & Thomas Tangerås, 2023. "A Survey of Capacity Mechanisms: Lessons for the Swedish Electricity Market," The Energy Journal, , vol. 44(6), pages 275-304, November.
    10. repec:aen:eeepjl:2_2_a02 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Abada, I. & Ehrenmann, A. & Smeers, Y., 2024. "Marginal Pricing and the Energy Crisis: Where Should We Go?," Cambridge Working Papers in Economics 2453, Faculty of Economics, University of Cambridge.
    2. Simshauser, P., 2026. "Coordinating Coal Plant Closures: Transient Strategic Reserves in Transitioning Energy-Only Markets," Cambridge Working Papers in Economics 2627, Faculty of Economics, University of Cambridge.
    3. Simshauser, P., 2025. "Are Gas Turbines 'Bankable' in Transitioning Energy-Only Markets?," Cambridge Working Papers in Economics 2610, Faculty of Economics, University of Cambridge.
    4. Simshauser, Paul, 2025. "Competition vs. coordination: Optimising wind, solar and batteries in renewable energy zones," Energy Economics, Elsevier, vol. 143(C).
    5. Nicolas Stevens & Yves Smeers & Anthony Papavasiliou, 2024. "Indivisibilities in investment and the role of a capacity market," Journal of Regulatory Economics, Springer, vol. 66(2), pages 238-272, December.
    6. Heidarizadeh, Mohammad & Ahmadian, Mohammad, 2019. "Capacity certificate mechanism: A step forward toward a market based generation capacity incentive," Energy, Elsevier, vol. 172(C), pages 45-56.
    7. Abuzayed, A., 2025. "From Model Optimality to Market Reality: Do Electricity Markets Support Renewable Investments?," Cambridge Working Papers in Economics 2558, Faculty of Economics, University of Cambridge.
    8. Stevens, Nicolas & Papavasiliou, Anthony & Smeers, Yves, 2024. "On some advantages of convex hull pricing for the European electricity auction," Energy Economics, Elsevier, vol. 134(C).
    9. Anas Abuzayed, 2025. "From model optimality to market reality: do electricity markets support renewable investments?," Working Papers EPRG2521, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    10. Papavasiliou, Anthony & Cartuyvels, Jacques & Bertrand, Gilles & Marien, Alain, 2023. "Implementation of scarcity pricing without co-optimization in European energy-only balancing markets," Utilities Policy, Elsevier, vol. 81(C).
    11. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2025. "The capacity market debate: What is the underlying market failure?," Utilities Policy, Elsevier, vol. 95(C).
    12. S. Oliveira, Fernando & William-Rioux, Bertrand & Pierru, Axel, 2023. "Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments," Energy Economics, Elsevier, vol. 127(PB).
    13. Lebeau, Alexis & Petitet, Marie & Quemin, Simon & Saguan, Marcelo, 2024. "Long-term issues with the Energy-Only Market design in the context of deep decarbonization," Energy Economics, Elsevier, vol. 132(C).
    14. Fabra, Natalia & Llobet, Gerard, 2025. "Designing contracts for the energy transition," International Journal of Industrial Organization, Elsevier, vol. 102(C).
    15. Sanchez Jimenez, I. & Bruninx, K. & de Vries, L.J., 2025. "Capacity remuneration mechanisms for decarbonized power systems," Applied Energy, Elsevier, vol. 391(C).
    16. Geßner, Daniel, 2024. "Rethinking renewable energy policies for hydrogen: How the intercept of electricity and hydrogen markets can be addressed," W.E.P. - Würzburg Economic Papers 111, University of Würzburg, Department of Economics.
    17. Lukas Block & Bastian Westbrock, 2022. "Capacity investments in a competitive energy market," Working Papers Dissertations 95, Paderborn University, Faculty of Business Administration and Economics.
    18. Bonaldo, Cinzia & Fontini, Fulvio & Moretto, Michele, 2024. "The energy transition and the value of Capacity Remuneration Mechanisms," Energy Economics, Elsevier, vol. 139(C).
    19. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    20. Paul L. Joskow, 2006. "Markets for Power in the United States: An Interim Assessment," The Energy Journal, , vol. 27(1), pages 1-36, January.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325005432. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.