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Do We Have the Right Reasons to Reform Electricity Markets? - Barış Sanlı

A little bit of history saves a lot of trials and words. Therefore, we have to understand how gas generation and the current market model cohabited with each other. After the end of the 1970s, cogeneration with gas turbines has become very popular. This technological innovation has allowed particular consumers to generate their heat and electricity. We can call this the 2nd decentralization wave.

The idea of competitive electricity markets was based on competition based on short-term marginal costs. It has an unintended effect of a “missing money” problem since most competitors may not fully get their capital investments. In a world of oil, coal, and partial nuclear generation in the 1970s, natural gas generation was the clear winner because of its low costs and ease of operation.

The marginal cost model has fostered this relation to new heights. Any electricity system undergoing market transformation began to experience a massive influx of gas generation. The electricity markets became a fertile ground for gas generation. Especially with the gas turbines, ramping up or down was much easier than coal and incumbent generation technologies.

Therefore the current market model is inherently coupled with gas markets. The decoupling of gas from power markets is an attempt to slash the 40 years of the symbiotic relationship between electricity markets and gas. Can it be done? Of course, electricity markets are social constructs. You can always create them with new formulas, rules, or regulations.

Currently, our problem is not in the electricity market. Electricity markets are just reflecting underlying fundamentals. Severing this fundamental relation will practically dismantle the mechanics of power markets. We may have a day ahead market not reflecting marginal gas, renewable, or hydro opportunity costs. From another vantage point, what if gas prices fall suddenly? Then, will there be a reason to talk about problems in the electricity markets?

The European market problem is in the benchmark gas price, namely TTF. Without solving the gas pricing mechanism, reforming on the electricity side will avalanche the difficulties. Electricity markets might work as intended if the gas price was 1/5th of the current value.

That doesn’t mean that there is no need for electricity market reform. But reform has to be done for the right reasons. These reasons are obvious enough for market observers: A valuation mechanism for zero marginal cost resources and flexibility in the market.

Is electricity a homogenous product? I view electricity generation as a bundled service. There is an electron (electric field) generation and a time-shifting ability of this electron generation. So there is a commodity and stock service bundled as generation services. A coal/gas generation is electron plus stock so it can be time-shifted within certain limits. Renewable electricity is just an electron generation, with no stock services. Therefore, the underlying market should value time-shifting abilities better.

Is it the right time for an electricity market reform? I believe not. We are in the midst of an energy crisis. The root cause of this crisis is gas prices. If we cannot address that problem correctly, electricity markets may be broken for some time.