What Models Tell us about Long-term Contracts in Times of the Energy Transition

Abstract

The efficiency of short-term markets is a recurrent and major concern in EU documents on the restructuring of the gas and electricity sectors. The Winter Package of the European Commission reinforces that message: efficient short-term energy markets and associated short-term energy price signals are implicitly presented as sufficient conditions for steering investment in the energy transition. This is a folk, theorem for which one finds no proof whether in theory or observation. The reason is that there is a long and risky path between creating value in short-term markets and appraising this value in investment calculations. Without a proper environment for trading risk the future benefits from the efficient short-run market will not be properly conveyed to the investor. Risk is today overwhelming both in the global economy in general and in the gas and power sectors in particular and it is commonly acknowledged that it has a devastating effect on investment. Short run efficiency is certainly of the essence for the success of the restructuring and the transition of the energy sector but it will not suffice if unmanageable risks cloud the path from the short term to the long term.