Europe has faced – and still faces – an unprecedented energy crisis that has translated into record-high gas and electricity prices (Figures 1a and 1b), propagating through the entire European economy. The rise in energy costs has been the main driver of inflation, with the EU average reaching 11.5% in October 2022 (Figure 2), pushing the ECB to increase interest rates. Inflation, coupled with the hike in interest rates, has reduced European households’ disposable income and purchasing power, put the competitiveness of European industry at risk, and forced governments to implement – subject to their asymmetric fiscal capabilities – costly support mechanisms to mitigate some of the economic and social consequences of the energy crisis.

These events have put electricity market design under the spotlight. The question is not only how to avoid the energy crisis from repeating itself in the future, but also how to promote low-carbon investments at the scale and speed necessary to decarbonize our economies while preserving security of supply. Following the words of the President of the European Commission, Ursula von der Leyen, in her State of the European Union speech (“we will do a deep and comprehensive reform of the electricity market”), the shared view now is that these endeavours call for electricity market reform. The question is: in which direction?

In this context, the European Commission launched a public consultation on an electricity market reform and has announced that a proposed reform will be disclosed on 16 March 2023.

As European economists, we would like to share our views regarding key issues in the debate – space and time limitations prevent us from offering a broader discussion on all matters