Efficient forward trade fosters innovation, investment, and resiliency

Abstract

We propose a forward energy market design for Germany's electricity sector as an alternative to traditional capacity mechanisms. Drawing on two decades of U.S. experience, we point out the disadvantages of centralized capacity auctions and decentralized capacity obligations. Our forward energy market design enables transparent trading of granular energy products up to 48 months in advance through hourly batch auctions. In this design, load-serving entities have purchase obligations that increase from 0% to 100% of the realized load as the delivery date approaches. Unlike traditional capacity markets, which perpetuate spot market inefficiencies, our mechanism strengthens price signals, improves risk management, and enhances system resilience by providing efficient price discovery and clear investment signals. It also offers a robust, no-regret pathway to fostering innovation and demand flexibility, which are crucial for the energy transition.