In a ‘non-paper’ sent to the European Commission on Tuesday 10 January, the Spanish government presented its proposal for reforming the EU electricity market.
According to Madrid, the current design of this market does not meet the challenges of decarbonisation or the increasing volatility of commodity markets.
The paper points to the existence of barriers to entry, which prevent competition in the market from bringing prices down to the average cost, and a lack of incentives to invest in renewable energy.
“Renewables investments will be at risk because renewable entry (into the market) drives down prices in the day-ahead market at times when they produce. As a result, the captured price of renewables in the day-ahead market will likely lie below their average cost”, the text points out.
Developing long-term contracts
In the Spanish government’s view, the solution lies in the development of a futures market with instruments adapted to the needs of each technology. More specifically, it recommends complementing the existing short-term electricity markets (day-ahead and intraday) with long-term electricity markets and capacity markets.
Such a reform would make it easier for regulators to sign long-term contracts with producers, says Madrid.
The Spanish proposal suggests regulators sign contracts for contract for differences (CfD) with renewable energy producers. These contracts would set the price the renewable energy producer will receive per unit of production and the duration of the contract.
Facilitating the implementation of capacity mechanisms
Spain also recommends simplifying the process of notifying and obtaining EU approval for capacity mechanisms. These markets “are needed because there are underlying market failures that prevent energy-only markets from delivering sufficient amounts of security of supply, and these market failures are not going to disappear”, the paper says.
Madrid also wants to extend the mechanism that allows the Iberian Peninsula to cap the prices of fossil fuels used in electricity generation (see EUROPE 13096/19).
The Commission plans to present a legislative proposal to review the functioning of the electricity market in March.
See the Spanish proposal: https://aeur.eu/f/4uo (Original version in French by Damien Genicot)