Achieving climate neutrality of all sectors by 2050 requires a zero-emissions power sector by mid-2030s. Securing a decarbonised power system early will unlock pathways for the whole economy.

The least-cost power system transformation will be one that integrates new technologies, while making best use of existing energy assets and utilizing the capabilities of all market participants, including end-users. We present a regulatory blueprint for the future European power sector (the Blueprint), from a system needs perspective. The Blueprint brings together the key elements required for a timely and efficient transition, which meets the goals of achieving a clean, reliable, affordable and equitable power system for Europe.

The power sector needs to go first.

In 2019, the EU endorsed the European objective of climate neutrality by 2050 aligning with the 2015 Paris Agreement to keep global warming under 2°C and as close to 1,5°C as possible. This is a significant shift in climate mitigation ambition, in response to the science of climate change (IPCC).

Climate neutrality requires the full decarbonization of the power sector. One of the biggest challenges today is the need for speed. The EU wants to achieve the carbon neutrality of the power sector by 2040. The International Energy Agency has demonstrated that respecting the Paris Agreements means reaching zero emissions in the power sector in industrialized economies by 2035. The U.S. has set its net zero target dates at 2035. The scenario consistent with the UK legally binding carbon budget also foresees 2035 as the target year for eliminating carbon emissions of power generation.

Figure 1. Carbon intensity of electricity supply (gCO2/kWh)

Source: Rosslowe, C. (2021). Zero-Carbon Power: A key milestone on the route to Net Zero. Ember.

Figure 2. Speed of EU power decarbonisation insufficient to meet climate targets

Clean share of total EU-27 electricity production (%)

Source: 2021 : full year estimate based on H1-2021 data and previous years’ trends. The EU Commission -55% scenario shown is the “MIX” scenario which includes a balance of carbon pricing and regulatory measures, Ember’s NECP analysis, IEA net zero 2050 scenarios • Clean generation includes all renewable sources and nuclear

We are not currently on track. Analysis by Ember demonstrates that the policy actions and investments of OECD countries are far from sufficient, pointing to a clear need to accelerate efforts now.

This demands a rapid and systemic rethink of the existing European power system regulatory framework, with simultaneous and complementary actions on multiple fronts.

Devising a strategy for change starts with defining the barriers. We have identified 8 key barriers that, if left untouched, would impede the transition and/or inflate its cost.

Legacy bias: The current regulatory framework was built around a centralized, fossil fuel-based design which has been in place over a century.  Institutional inertia runs counter to the rapid change the current situation demands. Political and regulatory hesitation means decision makers often fail to see the opportunity cost of non-action. Incumbentincumbent Market leading entity, often long standing with inherited customers or assets following privatisation/unbundling. It may also hold market power. companies are often more effective in influencing regulation than new entrants.

Stranded assets: Most traditional generation assets will become stranded in the next decades. It is challenging to write them off efficiently and fairly.

Vested interest:  Interest of market actors are not aligned with the goal of timely transition: operators owning grid infrastructure, or fossil fuel generators wanting to sweat their assets or extend their lifetime via subsidies rather than allowing them to be stranded. We need to re-align incentives so they work with, rather than against, the transition.

Weak competition: Unlevel playing field for all actors still constrains the efficient operation of markets. Market entry rules are still defined for traditional resources in many markets baring new actors, including consumers that can be engaged.

Market inconsistencies: The European power market is not fully integrated: we still have national rules that are not (yet) harmonized and the place of coordination in system planning and operation is not aligned with market integration.

Constrained price formation: Prices do not always reflect the wider value and the cost of the resource to the system and society: we still think in capacities and not capabilities, with a focus on generation and not all resources, including demand and storage. Prices do not reflect that value depends on time and location. Carbon pricing covers only some emitters and its impact on swapping fossil generation assets for renewables is partly neutralized by all forms of market support for fossil generation.

Market inertia: Markets are powerful mechanisms but need to be accompanied by complementary policies for correcting their failures and speed-up the pace of change to reflect climate urgency as expressed.

Public opposition: Last but not least, decarbonization is often seen by people as a process that cost now but the benefits are in the future and less tangible. A process that is external to them they must go through without actively participating in it.

Our solutions are clustered around 6 principles:

Regulate for equity and fair competition: The presence of markets does not means the end of regulation. Regulation is essential for securing fair competition and is a a powerful tool to not only to safeguard but enhance equity all along the transition.

Ensure efficient service and reliability: Energy service needs to be efficient and reliable to meet consumer expectations. The level of reliabilty is set at the value consumers attach to it.

Integrate, harmonise and coordinate: The completion of European power system integration is to deliver further benefits. Harmonisation of market rules and supranational coordination enhances the efficiency of system operation.

Market prices reflect system conditions: Prices need to reflect the cost of equalling flexible supply with flexible demand granular in time and location, considering the availability of networks, to support operation and investment choices.

Intervene to accelerate: The relatively short time horizon for achieving zero emissions requires interventions in the form of complimentary policies to market coordination.

Maintain social contract: The ultimate goal of the energy transition is to enhance individual and social benefit. The process needs to be inclusive – aiming for equitable distribution of costs and benefits and effective communication of rationale – to maintain public trust and confidence.

Based on the identified barriers and guiding principles, we collected a toolbox of regulatory solutions clustered around the main powers system elements.

Blueprint

Smart design of policies and regulation minimises the cost and drives the speed of the energy transition

	Demand	Supply	Networks	System operation and market design
	Applying the E1st principle to save on network and generation costs, driven by	Speedy phase out of fossil generation to reduce excess capacity and give room net zero resources, driven by	Minimised network investment to accommodate electrification	Efficient price formation, dispatch and investment, building on
	Speedy metering roll out Network tariff designed for flexibility Market-based retail tariffs with targeted social programmes Scaling up of energy efficiency programmes Value-based DER compensation Full market access of the demand-side	Existing national phaseout programs accompanied by a net zero portfolio standard anchored at 2035 Discontinued fossil fuel subsidies Carbon pricing – adequate in scale and scope with revenues ringfenced to low-income households Environmental regulations reflect true climate change contribution of resources such as biomass and protect European biodiversity Value-based resource adequacy analyses Rebalance of tax and levy cost between energy vectors to help electrification	Contestable infrastructure development for downward pressure on cost Coordinated offshore build Efficient transmission grid development driven by Independent SO and informed by LMP Well designed incentives on grid companies that drive productive efficiency (PBR) and motivate them to pursue efficient non-wire solutionsnon-wire solutions Any action, strategy, program, or technology intended to defer or remove the need to construct or upgrade physical components of a distribution and/or transmission system, or “wires investment”.	Marginal prices and efficient market arbitrage Dual and average imbalance prices/ Energy and reserves co-optimised Scarcity pricing Wholesale price caps removed Reserve scarcity pricing functions to secure adequate generation capacity NRAs sufficiently independent of political pressure, sufficiently resourced to address abuse of market power No capacity markets LMP to inform investment and reduce redispatch cost Regional ISOs for efficient system operation Greater role for ACER to harness the benefits from harmonisation and integration

The decarbonization of the power sector can be done in the given tight time framework but requires demands a rapid and systemic rethink of the existing European power system regulatory landscape. It can be achieved via multiple pathways but due to the ever-changing economic viability of existing and upcoming technological options, it is essential to preserve technology neutrality and regulatory flexibility to harness new opportunities while avoiding lock-ins and stranded assets.

The following graph provides an indicative timeline for implementing the key elements of the Blueprint. It is important to note that, due to longer lead times of more complex or significant changes, policy action will need to commence now for some actions with later implementation dates.