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Reacting to Changing Paradigms: How and Why to Reform Electricity Markets

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  • Karsten Neuhoff
  • Jörn C. Richstein
  • Mats Kröger

Abstract

The energy crisis and the accelerated transition to climate neutrality result in a shift from the traditional energy trilemma to an “energy quartet” across Europe. Firstly, the criteria of affordability, previously focused on short-term price developments, broadens to reliable affordability including in crises. Secondly, clean energy traditionally focused on clean production now extends to clean energy systems with climate neutral provision of flexibility and enhanced energy efficiency. Thirdly, generation adequacy extends to energy system resilience, for example to interruptions of fuel supply. Fourthly, a new objective of reliable speed is emerging, responding to the constrained carbon budget and the need for predictable demand for energy technologies to unlock investments in manufacturing capacity. Synergies can be realized by jointly addressing the energy quartet. First, hedging of both consumers and producers against power costs (but not price) fluctuations by passing on the conditions of contracts for differences to consumers can enhance speed and predictability of renewable investments. Second, nodal pricing allows the demand side to resolve rather than contribute to transmission constraints, enhancing system security and reducing emissions from fossil assets, which are currently dispatched to resolve transmission constraints. Third, a reformed strategic reserve can contribute to reliable affordability and system security.
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Suggested Citation

  • Karsten Neuhoff & Jörn C. Richstein & Mats Kröger, 2023. "Reacting to Changing Paradigms: How and Why to Reform Electricity Markets," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 127, number pbk189.
    • Handle: RePEc:diw:diwpok:pbk189
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    References listed on IDEAS

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    3. Paul Simshauser, 2025. "Are gas turbines 'bankable' in transitioning energy-only markets?," Working Papers EPRG2601, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
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    7. Shen, Weijie & Ding, Hongjian & Zeng, Ming & Zhang, Xiaochun, 2025. "Optimal bidding strategy for integrated energy system participating in spot power market: A Wasserstein metric based DRO method," Energy, Elsevier, vol. 327(C).
    8. Hosseini Dolatabadi, Sayed Hamid & Bhuiyan, Tanveer Hossain & Chen, Yang & Morales, Jose Luis, 2024. "A stochastic game-theoretic optimization approach for managing local electricity markets with electric vehicles and renewable sources," Applied Energy, Elsevier, vol. 368(C).
    9. Zhang, Jian & Huang, Yuming & Liu, Yuanxin & Yang, Na & Yuan, Jiahai, 2025. "Optimizing the strategic reserves of coal-fired power units to balance reliability and cost in China's clean energy transition," Utilities Policy, Elsevier, vol. 96(C).
    10. Esmeralda Colombo, 2025. "The Fifth Freedom: Shaping EU Innovation Policy for Renewable Energy Storage and Decarbonization," Energies, MDPI, vol. 18(13), pages 1-18, July.
    11. Sonnsjö, Hannes, 2024. "What we talk about when we talk about electricity: A thematic analysis of recent political debates on Swedish electricity supply," Energy Policy, Elsevier, vol. 187(C).
    12. J.P. Chaves & R. Cossent & T. Gómez San Román & P. Linares & M. Rivier, 2023. "An assessment of the European electricity market reform options and a pragmatic proposal," Working Papers EPRG2305, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    13. Silke Johanndeiter & Jonas Finke & Justus Heuer, 2025. "Most certainly certain? The Impact of Contract for Difference Design on Renewables' Strike Prices and Electricity Market Risks," Papers 2512.17508, arXiv.org.
    14. Karsten Neuhoff & Fernanda Ballesteros & Mats Kröger & Jörn C. Richstein, 2025. "Contracting Matters: Hedging Producers and Consumers With a Renewable Energy Pool," The Energy Journal, , vol. 46(4), pages 203-225, July.

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