The free market system refer to how a market functions based on free competition, whereby supply and demand determine the prices, production and distribution. This is the case in the gas and electricity markets, where more demand for energy usually drives up prices, while oversupply leads to a drop in prices. Suppliers strive to offer the most attractive prices and services, while consumers and producers base their choices on expected prices. These same principles apply to the wholesale market for gas and electricity. Here, trades can occur bilaterally, as well as openly on different types of markets, such as the day-ahead or imbalance markets.
For a well-functioning free gas and electricity market system, it is essential to maintain a free price mechanism, sufficient competition, and a level playing field for all market participants and technologies. This requires a clear separation (also called ‘unbundling’) between transport of energy, and other commercial activities such as production, storage, trade, and supply. This is because the transport of energy cannot be a free market system. Transport is a natural monopoly due to the economies of scale of having one single nationally integrated grid or network, and thus must be regulated.
Energie-Nederland supports the free market system because of the advantages for efficiency and innovation, ultimately lowering costs for consumers. Furthermore, the investment risks are borne by the market participants themselves and are not socialized.
Gas and electricity prices are affected by many other factors than merely supply and demand. One important effect on the market comes from policies and legislation, both from government and the EU. This includes, for example, the subsidy policy for renewable energy sources or taxes on carbon emissions, all of which can affect the pricing and production of gas and electricity. The EU in particular has ambitious intentions when it comes to restructuring the European energy market to make it more sustainable – see, for example, the EU electricity market revision, or the hydrogen and decarbonized gas market package. Such legislation on safety and environmental standards can affect the activities of energy companies.
Technology can also have an impact on the gas and electricity markets, with innovations related to energy storage systems, smart networks and renewable energy. These innovations could lead to more efficient and sustainable energy production and consumption.
Pricing in the gas and electricity markets is complex; a wide range of economic, social, and technological factors affect the market. It is wise to understand these market forces properly. This understanding is required to achieve a sustainable and efficient energy system that meets the needs of consumers and businesses and minimizes the environmental impact at the same time.