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The electricity market reform explained – interview with Pál Ságvári, VP of the Hungarian Energy and Public Utility Regulatory Authority

An integrated EU energy market is the most cost-effective way to ensure secure, sustainable and affordable energy supplies to EU citizens, says the European Commission. Following the recent energy crisis which hit the security of supply and brought record-high electricity and gas prices, EU Member States called on the Commission to work on the structural reform of the electricity market design (EMD), with the dual objective of strengthening European energy sovereignty and achieving climate neutrality.

We spoke with the Vice President of the Hungarian Energy and Public Utility Regulatory Authority (MEKH) and Vice-Chairman of the Energy Regulators Regional Association (ERRA) Pál Ságvári, about what is still missing in the proposal, the main challenges to still overcome and the position of MEKH in particular.

“What is particularly challenging in the context of the 2050 goals,” he begins, “is that on the one hand there’s a strong focus on the deployment of renewables but on the other hand, we have less and less balancing capacity to face the emerging challenges posed by intermittent power generation and to ensure the security of supply at all times.”

He explains that “in the last decade in Europe, the support schemes were clearly aimed at the spread of renewables. However, due to the lack of appropriate market signals, new power plants using other more conventional technologies were not built in sufficient numbers and a structural short situation gradually developed in the electricity market, for example, the supply began to be scarce both in terms of resource adequacy and system flexibility.”

“In Hungary, in recent years, renewables, especially solar PVs started to be integrated into the system at an accelerated pace. However, the dynamic PV boom was not accompanied by the development of flexible capacities capable of ensuring the system balance”.

“When the crisis hit the electricity market in Europe, it became evident to everyone how exposed the electricity sector was to the gas market,” he continues. “In this unprecedented energy market turmoil, European leaders urged a radical modification of the existing electricity market model, in which many expressed a desire to separate the pricing of electricity from that of gas. However, the EMD proposal, which is still on the table for the final touches, can be seen as a fine-tuning rather than a radical transformation: the legislative package identifies the relevant problems, but the range of answers is not comprehensive”.

Pál Ságvári explains that there are four main pillars of the EMD reform. The first one is about improving the forward markets to boost the supply side. The main challenge so far was that the market signals on the far end of the curve were simply not there. “The ideal solution would be to make the long-term future, for example, 10-15 years ahead, visible on the market contrary to the current liquidity that goes up to one year ahead. The vision of the EU Agency for the Cooperation of Energy Regulators (ACER) is to extend the liquidity of forward markets with cross-zonal financial transmission rights up to 3 years ahead which is still not long-term enough but it makes new projects more bankable,” he underlines.

electricity market reform
Source: MEKH (2023).

Another debated aspect in this regard is the possibility of merging the forward markets that operate usually within national borders under a structure where the liquidity of the currently existing 8-10 bidding zones can be put together into so-called regional virtual hubs.

Beyond that – hopefully extended – time horizon the Power Purchase Agreements (PPAs) will come into play to supplement the missing market fundamentals of new electricity supply generation assets. Another relevant point of the reform would be to standardise PPAs and to create transparent data in order to encourage their use.

“There is a general idea in the EMD reform to standardise the different types of subsidies and maybe the Contract for Difference (CfD) solution could be the preferred choice, something that in our region, for example, Hungary has already been using for years, especially when it comes to supporting renewables,” Mr Ságvári says.

The second pillar of EMD reform concerns the promotion of flexibility through the market, and this is the one where MEKH would like to see significant changes compared to the initial proposal of the Commission.

“It has to be taken into account that each country and each energy mix is different, therefore a one-size-fits-all proposal is far from being ideal,” MEKH’s Vice President says, mentioning Hungary as an example.

“A fundamental challenge for the Hungarian electricity system is that, due to the lack of proper market signals mentioned at the beginning, there is a structural imbalance in the system between the increasing need for flexibility created by mass deployment of intermittent renewable generation and the scarce availability of resources capable of providing the necessary volume and quality of flexibility,” he says.

“We would have expected the EMD package to promote the introduction of market-ready flexible technologies with appropriate market signals and support scheme options, but instead it only prioritises technologies that are still immature or only provide a partial solution.”

“We believe that a solution to the challenges can be provided if the capacity support mechanisms – which enable technology-neutral support for all categories of production resources – are made available to all EU Member States considering the introduction of such tools,” he continues. “Obviously some harmonised parameters and design rules must be put in place but we think that each country should be free to introduce capacity mechanisms if needed, without having to go through the existing bureaucratic EU approval process – indeed, this should be significantly simplified and accelerated.”

The third pillar is putting the consumer at the centre and, from this point of view, the package can be regarded as a continuation of the previous large EU legislative package, the CEP (Clean Energy Package), and also as a supplement to it, since it organises the active promotion of the role of prosumers and consumers who can provide flexibility with both technically (use of submeters) and from a settlement point of view (right to share energy).

“From a customer point of view, there are some lessons we have learnt from the energy crisis,” Mr Ságvári recalls. “Many traders went bankrupt in Europe and though in Hungary and in the region, it was less perceived than in many other member states, the need for improvement in prudency regulation is clear.” In this regard, what tools are available to the member states and the regulatory authorities in the event of a possible new energy price crisis is an important element. These could cover the right and obligation of state administration control over the risk management practices of traders, the methods of handling possible bankruptcy of electricity market players and the creation of below-cost pricing rules and funding sources.

The final pillar is the amendment of the so-called REMIT which is a piece of European legislation mandating energy regulators to seek and sanction abusive practices on wholesale markets to guard its integrity. Recently, the Council reached a general approach to this part of the EMD package.

“The amendment of the REMIT regulation also does not bring about revolutionary changes, but rather reflects the experience and technological development gained in recent years such as the appearance of automated or algorithmic trading,” notes Pál Ságvári. “I see two relevant changes. First is the fact that ACER receives investigative powers in certain cross-border cases. When we see signs of anomalies together with ACER we can now prevent market manipulation and insider trading in complex multi-market dossiers, as well. The second substantial change is the new and more standardised regime regarding sanctioning: types of sanctions, amount of fines, circumstances of consideration for a given group of malpractice is defined now in details.”

So, what is still open in the EMD proposal on the political level is which type of power plants can be subsidised.

“France advocates nuclear energy, Poland is heavily reliant on coal, while Italy, Spain, Greece and Hungary support gas-fired power plants to address the intermittency challenge of the energy transition, so there is a big controversy between countries,” he says. “A final political agreement might be reached under the Spanish presidency (by the end of this year) but then it needs to be translated into several further European legal packages (for example, like revised Network Codes) and part of them shall be transposed into further or more detailed national regulations before these new rules can be effectively applied.”

Overall, it can be expected that in 2024 the text of the EMD package will be final and it will be followed by a transposition period, which might take years.

“And the challenge of complying with the 2050 targets is there for the long term,” Mr Ságvári concludes.

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