Long-term redesigns of Europe’s power market are considered critical to avoiding future price volatility and bolstering investment in new generation capacity.
— Central buyer model. Instead of buyers competing in an open and fluctuating market, a single EU or national regulatory agency would purchase electricity from dispatchable sources at fixed prices under long-term contracts. The agency would then sell this energy to the market at prices that represent an average cost. This model can reduce the effects of price spikes and ensure a direct and consistent supply of power to energy retailers and large customers. — Decoupled day-ahead markets. Because Europe’s electricity prices are closely tied to the cost of natural gas, energy consumers are unable to reap the economic benefits of low-cost renewables. By separating energy resources with zero marginal costs (such as wind and solar) into one market and marginal cost resources (such as coal) into another, grid operators can prioritize the dispatching of renewables, leaving fossil fuel generation to meet residual demand.
when customers most need it, a grid operator provides subsidies to producers based on the forecast cost of keeping power capacity in the market. This ensures a secure power supply and protects consumers from paying for more capacity than necessary.
Although the European power market is experiencing one of its most challenging periods, close collaboration among stakeholders (such as utilities, suppliers, and policy makers) can enable Europe’s green-energy transition to continue while ensuring a stable supply of power. With market uncertainty high, players will need to pay close attention to how they navigate the economics of their investments in wind, solar, and other new generation assets. McKinsey’s work with leading players highlights the importance of building a series of strategic scenarios to model how generation and retail portfolios will evolve under different scenarios. Building optionality in portfolios will be a critical component of thriving in such an unsettled environment.
— Capacity remuneration mechanism. To ensure a steady supply of dispatchable electricity
Markus Schülde is a consultant in McKinsey’s Munich office, Xavier Veillard is a partner in the Paris office, and Alexander Weiss is a senior partner in the Berlin office. The authors wish to thank Alexander Bülow, Tommaso Cavina, Diego Hernandez Diaz, Thom Luttenberg, Lucas Pirard, and Eivind Samseth for their contributions to this article.
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Accelerating the journey to net zero
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