The Competition Authority examined the structure of the European electricity market and possibilities for changing the organisation of the market using Estonia as an example

The purpose of the analysis was to provide an overview of the organisation of the European electricity market by using Estonia as an example, the regulations and requirements regarding the market, and the flexibility granted to member states in terms of market organisation. An overview of electricity trading on the wholesale market, bilateral trade and market supervision was prepared. The analysis discussed the possibility and different ways of price regulation and, as a comparison, the organisation of the electricity market using various examples outside of Europe, and the support measures adopted by European countries1 in the winter period of 2021–2022 to combat skyrocketing energy prices. An answer was sought to the question of whether it is possible/necessary to change the organisation of the electricity market in some part in order to alleviate the high prices that have arisen, and how much flexibility is left to the member states in this regard.

The organisation of the wholesale electricity market is regulated by EU legislation, but much is also within the competence of the member states. For example, the structure of the power exchange, the rules for trading on the exchange, including price limits, are set by European regulation and would require a common understanding and approval of changes throughout Europe. However, while many member states have more bilateral contracts, trading on the exchange is more common in Estonia. According to the estimation of the authority, the best solution must be determined by market conditions, and if there is more demand for bilateral contracts in the future, the distribution of interstate transmission capacities should also be shaped accordingly.

It is also questionable whether major changes in market organisation would be beneficial or harmful in the long term. Since the electricity market in the European Union is fundamentally open, the best solution must be developed under market conditions and it is up to the market participants to decide whether to trade on the exchange or conclude bilateral contracts. Rather, the government should work to ensure that the market operates within the existing rules. This means that the country would have a sufficient amount of cross-border connections, that the growth of new production capacities would be encouraged, that there would not be excessive obstacles in the planning procedures of new production capacities and connections to the network, and that market participants would be able to mitigate their price risks on a market basis.

As one measure, member states can distinguish unprotected consumers from the rest. This can be useful for consumers in limiting the effects of high electricity prices, as it is possible to create the necessary support measures more easily and quickly. Member states are allowed to implement price regulation for household and small consumers. In the case of electricity consumers, Estonia has not yet used this option in its legislation, and we have not defined what constitutes an unprotected consumer. It is also possible to create an opportunity for household consumers and micro undertakings to use a package with a regulated price. However, in such a case, the accompanying long-term market effects must also be thoroughly examined, and there are many ways to create a mechanism where it must be ensured that the accompanying market effects on electricity sellers and producers are uniform and minimised as much as possible. In addition, consumers can be temporarily supported by government measures, as many countries, including Estonia, did in 2021–2022, for example. In the context of soaring energy prices, such temporary assistance is certainly the quickest solution.

In the long term, we have to think about solutions that will ensure the development of the market and help to mitigate risks in the future. Such solutions are, for example, increasing energy efficiency, increasing consumer awareness of energy saving, promoting consumption management, a flexible electricity system, an investment environment for new production units etc. The market organisation of the European Union is extremely liberal compared to the rest of the world, while the rest of the OECD countries have much more conservative models. At the same time, the organisation of the current European electricity market has been functioning for too short a time (the first market openings took place in Europe about 20 years ago, in Estonia from 2010 to 2013) to draw comprehensive conclusions on whether such a market organisation still ensures the availability of sufficient investments and can be sustainable without regulatory intervention. In many ways, it can be assumed that in the long term it is necessary to promote products for long-term financial risk mitigation, including long-term bilateral trade, in order to ensure the financial security necessary for investments to enter the market.

In addition, ACER came out with its analysis of alternative market models in April 2022. Its purpose was to analyse whether it would be reasonable to change the current market organisation, for example to establish permanent price ceilings for specific technologies etc.

In autumn 2022 the Competition Authority approved financial instrument methodologies that help electricity sellers to mitigate price risks. These methodologies have also been approved by Latvian and Finnish regulators, and in this regard, Elering and Fingrid (a Finnish transmission network operator) can start offering long-term transmission rights (financial instruments) on the border between Estonia and Finland. Long-term transmission rights on the border between Estonia and Finland are very important as they help electricity sellers to mitigate price risks and have a positive effect on the price area of the Estonian electricity market.

euroopa_elektriturg_29.03.2022_.pdf (