S.E.R.G. WP Series #13-2025: Derisking Electricity Prices For Decarbonisation: A Novel Perspective on Market Incompleteness Through Irreversibility

2025 - Louis Soumoy and Jules Welgryn

Long-term electricity contracting has remained an unresolved issue in European markets, with growing implications for decarbonising industries. This ’missing market’ failure indeed let investors exposed to the long-term electricity market volatility, increasing the cost of capital, and hence reducing investments in both new generation and electrification of usages. In this paper, we argue that infrastructure-heavy industrial decarbonisation investments stand apart due to their unique characteristics: they are subject to strong ambiguity - rather than risk -, and are irreversible by design. Building on these insights, we develop a bilateral contracting model that accounts for ambiguity aversion and investment irreversibility, tailored to the dynamics between energy producers and industrial consumers. Using the real-world case of ArcelorMittal and EDF, we demonstrate that the current market design prevents parties from reaching a mutually advantageous agreement. Finally, we discuss implications for European firms and policy measures to overcome these barriers and stimulate low-carbon investment across both sectors.