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Fixing Europe’s Power Generation Market

The energy policies of Europe as a whole and of individual countries have created a seriously flawed power market. Well-intentioned initiatives have led to pricing and market distortions that pose significant challenges to industry players and consumers alike. After several years of denial, European power generators have come to understand that these problems aren’t cyclical, and that a few regulatory patches and changes can’t easily fix them. Rather, they are structural. As a result, companies need to rethink their business models and portfolios, work within the dysfunctional system as it is, and be prepared for further regulatory changes. 

One potentially workable model would be de facto reregulation of power generation. In this model, conventional generation would be reregulated, for example, by reintroducing power purchase agreements (PPAs) awarded to power generators by public tendering, by a single buyer, or by instituting broad capacity mechanisms. For renewables, regulation could continue by means of tendering mechanisms (which are equivalent to PPAs): There would be no “market integration.” 

Will the growing share of reregulated capacity end market liberalization? The graph below shows the rising proportion of Germany’s power generation capacity that is reregulated.

Energy & Environment
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