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Commission proposes reform of the EU electricity market design

The European Commission has proposed a reform of the EU’s electricity market design to accelerate a surge in renewables and the phase-out of gas, make consumer bills less dependent on volatile fossil fuel prices, better protect consumers from future price spikes and potential market manipulation and make the EU’s industry clean and more competitive.

“Renewable energy will increasingly be the go-to resource for European citizens and industries in the future,” said Frans Timmermans, Executive Vice-President for the European Green Deal. “Renewables are our ticket to energy sovereignty and ending our dependence on fossil fuels. We need to update our market design to ensure that this transition happens as quickly as possible and that consumers can benefit from the lower costs of renewables.”

“The current electricity market design has delivered an efficient, well-integrated market over many decades,” recalled Commissioner for Energy, Kadri Simson. “But tight global supply and Russia’s manipulation of our energy markets have left many consumers facing massive increases in their energy bills. We are today proposing measures that will enhance the stability and predictability of energy costs across the EU. Driving investment in renewables will help us reach our Green Deal goals and make the EU the powerhouse of clean energy for the coming decades.”

Consumer protection

High and volatile prices, such as those seen in 2022 have put an excessive burden on consumers. Just to remember, monthly wholesale power market prices reached 550 euros/megawatt-hours (MWh) in some Member States in August 2022, more than 300 per cent higher than the average prices in 2021. Thus, as recalled by Agora Energiewende, several countries urged the Commission to modify the current market framework to ensure that spiking fossil gas prices would not again result in dramatic jumps in consumer electricity bills.

Today’s proposal will allow consumers and suppliers to benefit from more price stability based on renewable and non-fossil energy technologies.

Crucially, it will give consumers a wide choice of contracts and clearer information before signing contracts for them to have the option to lock in secure, long-term prices to avoid excessive risks and volatility. At the same time, they will still be able to choose to have dynamic pricing contracts to take advantage of price variability to use electricity when it is cheaper (for example, to charge electric cars, or use heat pumps).

On top of expanding consumers’ choices, the reform further aims to foster price stability by reducing the risk of supplier failure. The proposal requires suppliers to manage their price risks at least to the extent of the volumes under fixed contracts, in order to be less exposed to price spikes and market volatility. It also obliges Member States to establish suppliers of last resort so that no consumer ends up without electricity.

The protection of vulnerable consumers is also significantly enhanced. Under the proposed reform, Member States will protect vulnerable consumers in arrears from being disconnected.

Under the proposal, rules on sharing renewable energy are also being revamped. Consumers will be able to invest in wind or solar parks and sell excess rooftop solar electricity to neighbours, not just to their suppliers. For example, tenants will be able to share surplus rooftop solar power with a neighbour.

New incentives

To enhance the competitiveness of the EU, the Commission is proposing to facilitate the deployment of more stable long-term contracts such as Power Purchase Agreements (PPAs) – through which companies establish their own direct supplies of energy and thereby can profit from more stable prices of renewable and non-fossil power production. To address the current barriers such as the credit risks of buyers, the reform obliges Member States to ensure the availability of market-based guarantees for PPAs.

In order to provide power producers with revenue stability and to shield the industry from price volatility, all public support for new investments in infra-marginal and must-run renewable and non-fossil electricity generation will have to be in the form of two-way Contracts for Difference (CfDs), while Member States are obliged to channel excess revenues to consumers. In addition, the reform will boost the liquidity of the markets for long-term contracts that lock in future prices, so-called “forward contracts.” This will allow more suppliers and consumers to protect themselves against excessively volatile prices over longer periods of time.

There will also be new obligations to facilitate renewables integration into the system and enhance predictability for generation.

Reactions from Brussels: how the reform will impact hydrogen, solar energy and storage

Hydrogen Europe found that the Commission’s forward-looking electricity market reform will also benefit the upcoming hydrogen market.

“The possibility to combine both contract-for-difference and PPAs will be hugely beneficial for renewable hydrogen producers who depend on these PPAs to prove the renewable character of their hydrogen,” commented Daniel Fraile, Chief Policy Officer of Hydrogen Europe. “The proposed obligation for Members States to regularly assess their flexibility needs is also much welcome because it will highlight the need to deploy long-term storage solutions where hydrogen is poised to play a fundamental role.”

Also, SolarPower Europe recognised that today’s proposal builds on the well-established foundation of the European electricity market, without hindering it.

“Critically, the text protects all the ways we can deploy and enjoy solar energy,” stated Naomi Chevillard, Head of Regulatory Affairs at SolarPower Europe. “It’s a relief to see that only new solar projects which benefit from state support will be put under government-organised two-sided CfDs. We’re particularly grateful to have avoided CfD as the only route to market for new solar, or retroactive CfDs on existing solar projects. Investors can trust that the terms of their investments won’t suddenly change. Going forward, we’ll be working to make sure the CfD and PPA markets function well in parallel and that there’s enough room for EU countries to implement innovative ways to remunerate solar projects.”

She also defined this as “a historic moment for energy sharing.” “New proposals literally put the power in citizens’ hands,” she highlighted. “For the first time ever, we’ll have a legal framework to share electricity, complementing the energy communities’ framework. This will only improve access to solar.”

The attention to flexibility and support schemes also was praised by the European Association for Storage of Energy (EASE).

“EASE warmly welcomes the new national flexibility objectives. This mandates Member States and system operators to evaluate how much storage capacity is needed to ensure system security and renewable roll-out,” read the EASE press statement. “A long-term perspective for energy storage bolsters investor confidence and accelerates deployment.”

Implications for the Polish power market

Regarding Central and Eastern European countries, international law firm Dentons believes that market participants in Poland will appreciate a number of clarifying rules that strengthen their position already when dealing with a number of prevailing market hurdles.

“Due to increasing concerns about dispatchable capacity, we expect the Polish capacity mechanism will soon be modified to promote the participation of storage — through the introduction of additional features included in the Proposal to the current design,” read Dentons’ latest paper. “Other needed measures will take longer to implement. Notably, several elements of the Proposal will not be adopted until it eventually becomes binding law.”

“A market reform that is hard to grasp”

Now, the proposed reform will now have to be discussed and agreed upon by the European Parliament and the Council before entering into force. As Georg Zachmann, Senior Fellow at Bruegel noted, “the proposed electricity market reform is hard to grasp.” On the one hand, it keeps some of the elements of the current system, on the other hand, it gives freedom to Member States to adopt and design the best instruments. “Whether the remnants of the European energy-only market will then still be sufficient to converge to an efficiently coordinated power system cannot be determined with certainty,” he said.

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