The European Commissioner for Energy, Kadri Simson, presented on Tuesday 14 March her proposal for the reform of the electricity market (2023/0077), which aims to mitigate high and volatile energy prices for consumers and businesses, but also to ensure energy sovereignty and achieve climate neutrality.
“The crisis spurred by Russia's attack on Ukraine exposed a number of shortcomings in the current system which needed to be addressed”, said Kadri Simson. “The current framework focuses on short-term market failures. Many national markets do not have instruments for a reality that exceeds three years. It is this short-term reality that has amplified the price surge and has been the source of the difficulties felt by consumers”.
The objective of this reform is therefore to improve the stability and predictability of energy costs for consumers, not by changing the price formation mechanism on the short-term market, but by promoting access to more stable long-term contracts.
“This does not mean that we will not eventually decouple the price of electricity from the price of gas”, the Commissioner continued: “Consumers will have more independence from these short-term prices, which are sometimes dictated by gas prices. This is one of the most important concepts underlying this policy proposal”.
Long-term contracts
These long-term measures take the form of ‘Power Purchase Agreements’, ‘Contracts for Differences’ and also aim to improve the ‘Forward Markets’.
Power Purchase Agreements (PPAs) are long-term private contracts between a producer and a consumer of electricity. They allow companies to benefit from more stable prices for non-fossil and renewable energy production.
Two-way Contract for Differences (or CfDs) are contracts signed between an electricity producer and a public entity, usually the state, which sets a ‘strike price’, usually through a tender. They settle together the difference between the market price and the exercise price. This system allows the producer to receive a stable income for the electricity he produces, while limiting the income when market prices are high. If the market price is lower than the strike price, the producer receives the difference. If it is higher, the producer pays the difference.
The reform also aims to increase liquidity in the markets for long-term contracts that set future prices, known as ‘futures’.
Accelerate the development of renewable energy and phase out gas
While the wholesale price in the electricity market is still determined by the last power plant needed to meet the demand according to the merit order and is therefore not directly decoupled from the gas price, new obligations will be put in place to facilitate the integration of renewables and improve the predictability of their production. This includes transparency obligations for network operators with regard to network congestion, but also the application of price negotiation deadlines that will be closer to real time.
The proposed measures also aim to improve the efficiency of the short-term markets, so that renewable energy market players have more trading opportunities.
To encourage investment in renewables, developers will therefore be given easier access to private power purchase agreements (PPAs) and state-backed Contracts for Differences (CfDs).
For PPAs, developers of renewable and low-carbon energy projects participating in a public tender will be allowed to reserve a share of the output for sale under a PPA. In addition, retail electricity companies will be required to ‘hedge’ appropriately, i.e. to ensure that they do not rely solely on short-term markets to purchase electricity, but also on longer-term markets.
Two-way CfDs will be mandatory where Member States want to provide public aid for investments in new low-carbon, non-fossil fuel electricity generation facilities. This also applies to investments to re-power and extend the life of power generation facilities.
This indicates, moreover, that the Commission’s proposal envisages treating nuclear energy in the same way as renewable energy.
The aim is to provide developers of renewable and low-carbon energy with secure investment conditions, while reducing risk and capital costs and avoiding windfall profits in times of rising prices.
Protecting consumers
The reform aims to provide consumers with a wider choice of contracts, while emphasising flexibility. They will therefore be able to benefit from long-term fixed contracts, but they will also be able to combine fixed and dynamic contracts to take advantage of price variability and use energy when it is cheaper (to charge an electric vehicle or use a heat pump, for example).
The reform also promotes energy sharing agreements between small consumers. This allows a group of consumers to access self-generation of energy from renewable sources, whether shared by an individual consumer with other consumers or shared between several consumers who co-own an off-site generation facility.
In the event of bankruptcy or failure of a supplier, all Member States will have to put in place a supplier of last resort so that no consumer is left without electricity. The proposal also prohibits Member States from cutting off electricity to people in energy poverty.
In the event of a crisis (period defined by the Commission), the reform also allows Member States to extend regulated retail prices to households and small and medium-sized enterprises.
Improving the flexibility of the electricity system
To improve the flexibility of the electricity system, Member States will now be required to assess their needs and will have the possibility to introduce new support schemes to meet demand and manage storage.
Based on the experience gained during the crisis, the reform also extends the principle of ‘peak-shaving’, a set of measures aimed at reducing gas consumption in the electricity sector by reducing demand during peak hours.
Ensuring transparency in the markets and avoiding abuse
The Agency for the Cooperation of Energy Regulators (ACER) and national regulators will monitor energy market integrity and transparency to ensure competitive markets and transparent pricing. The Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) will be updated to ensure better data quality and to strengthen ACER’s role in investigating market abuse of a cross-border nature.
The Commission’s proposal must now be negotiated and adopted by the EU Council and the European Parliament. Kadri Simson said she hopes that the co-legislators will make this a priority, so that the text can enter into force as early as next winter.
To see the Commission’s proposal: https://aeur.eu/f/5rp
To see the press release: https://aeur.eu/f/5s0 (Original version in French by Pauline Denys)