One month ago, the European Commission released its proposal to reform the EU electricity market. The initiative aims to promote the use of renewables, reduce dependency on volatile fossil fuel prices, safeguard consumers from price fluctuations and market manipulation, and enhance the competitiveness of the EU’s industry.
The war in Ukraine and the cooling of relations with Russia have contributed to a spike in prices in 2022 and raised questions about the security of supply. Against this background, the price volatility of energy has severely impacted the living conditions of households in the EU. Consequently, this act represents the EU’s response to these two concerns with an eye on the necessity to support a zero emissions economy.
The proposed reform involves modifications to several EU regulations, including the Electricity Regulation, the Electricity Directive, and the REMIT Regulation. It includes measures to encourage long-term contracts for non-fossil power generation and to introduce clean, flexible solutions, such as demand response and storage, to compete with gas.
On April 11, for the Parliamentary procedures, the ITRE Committee appointed Nicolás González Casares from the S&D Group to draw up the report in the next period. On the Council’s side, the Spanish Energy Minister Teresa Ribera has said that hopefully a deal would be reached during the Spanish Presidency so that the act can be put into force from 2024, when the Belgian Presidency takes over. She also highlighted the need to “create a business case for solutions like demand-side management and storage of electricity”.
The two pillars of the proposal presented by the Commission involve a better consumer protection with easier access to energy by empowering them with new rights and improved contractual arrangements, which goes hand in hand with the objective of improving competitiveness through stabilisation by increasing the use of long-term contracts.
In order to reduce the impact of price volatility, the Commission proposal aims at facilitating the use of long- term contracts such as the Power Purchase Agreements (PPAs). These are contracts between an electricity producer and consumer or trader, which outline the terms of the agreement including the amount of electricity, negotiated price, risk allocation, accounting, and penalties. PPAs can be customised to meet the needs of the parties and can provide direct or virtual electricity supply. They are typically long-term contracts, lasting 10-15 years, and can reduce the risk of market fluctuations for large renewable energy projects or for the continued operation of installations that no longer receive subsidies.
Here, the support of the Member States should be in the form of a two-way contract for difference (CfD) which is an agreement between an electricity generator and a public entity, usually the state, which establishes a fixed price for the electricity produced. The generator sells the electricity in the market and pays the public entity the difference between the market price and the fixed price, ensuring a stable revenue for the generator. If the market price is lower than the fixed price, the generator receives the difference, and if the market price is higher, the generator pays back the difference. Therefore, these revenues should be redistributed by the states in the form of services.
To improve the flexibility of the power system, Member States must assess their needs, establish objectives to increase non-fossil flexibility, and introduce new support schemes for demand response and storage. The reform enables system operators to procure demand reduction during peak hours. Additionally, the Commission has issued recommendations to Member States to develop storage innovation, technologies and capacities.
The proposal seeks to improve price stability for both consumers and suppliers by leveraging renewable and non-fossil energy technologies. It offers consumers a wider array of contracts with clearer information to make well-informed decisions, including the option to choose secure, long-term prices or dynamic pricing contracts to take advantage of price fluctuations. The reform also aims to reduce the risk of supplier failure by requiring them to manage price risks and establishing suppliers of last resort.
Vulnerable consumers are protected under the proposed reform, preventing disconnection due to arrears, and regulated retail prices may be extended to households and SMEs in times of crisis. The reform also revamps rules on sharing renewable energy, allowing consumers to invest in wind or solar parks and sell excess rooftop solar electricity to their neighbours.
In the current scheme, retailers will be required to offer consumers both fixed and dynamic price contracts, and all Member States will have to identify providers of last resort to avoid supply interruptions in the event of seller failure. Consumers will be able to combine fixed and variable prices and have multiple contracts with one or more suppliers. Sellers must also provide information on the benefits and risks of different types of contracts. Greater choice and more information are considered tools to strengthen active consumer participation in energy markets. The proposal also includes regulated tariffs for households and small businesses. In case of excessively high prices, a crisis regime would be triggered. Specifically, this would be declared by the Commission on a European or regional basis, if wholesale electricity market prices are jointly recorded at least two and a half times the average price of the previous 5 years and are expected to continue for at least 6 months, if retail electricity price increases of at least 70% are expected to continue for at least 6 months, and if there is a negative impact on the economy due to the increase in electricity prices.
In this situation, consumers would obtain preferential prices, even lower than costs, for a share of their consumption (not exceeding 70% for SMEs and 80% for households), in order to promote demand reduction.
It should be noted that, contrary to expectations, the reform does not intervene in wholesale markets and price formation mechanisms, initially identified as its focus. Therefore, the marginal price system is not questioned, as its adequacy and efficiency of functioning and ability to transmit correct short-term price signals are recognised. At present, the possibility of making taxes on inframarginal generators permanent has also been excluded. According to the Commission, these would risk negatively affecting forward markets and discouraging investments in renewable energy plants. However, it is still unclear whether Regulation 2022/1854, which introduced a cap of €180/MWh on inframarginal plant revenues, will be extended beyond the June 30 deadline.
Currently, the Working Party on Energy, from the Council part of the legislative procedure, is working on the parts of the proposal related to the demand side, in particular, Articles 7a, 7b, 19c, 19d, 19e and 19f of the regulation, as well as the provisions related to PPAs and CfD (Articles 19a and 19b).