Reforming EU Electricy Market Design: PPAS, CFDS, and Long-Term Signals for a Renewable-Dominates System

Francesco Decarolis

No 26264, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: The energy crisis of 2022–2023 marked a turning point for European electricity markets. It exposed how tightly power prices remain linked to gas, how market volatility can destabilize investment, and how fragmented national responses can undermine the integrity of the internal energy market. In the wake of that shock, the European Union has placed electricitymarket reform at the center of its Clean Industrial Deal, coupling decarbonization with competitiveness and energy security. The 2024 Electricity Market Design (EMD) reform and forthcoming guidance on Contracts for Difference (CfDs) and Power Purchase Agreements (PPAs) aim to ensure that long-term investment signals coexist with short-run market efficiency. Yet implementation will determine success: translating legislative intent into market outcomes requires sound economic design and clear institutional coordination. This report was prepared to support that process. It analyzes how PPAs and CfDs can jointly mobilize private and public capital while preserving efficient dispatch and price discovery. Drawing on academic research, EU policy documents, and empirical evidence from different countries, the study provides a structured framework for reform. It links economic theory on incomplete markets and risk allocation to the operational experience of regulators, utilities, and corporate buyers. The analysis proceeds from the recognition that volatility in high renewable systems is not an anomaly but a structural feature, one that must be managed.

Pages: 44
Date: 2026
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