The European Commission’s long-awaited reform of the European Union’s electricity market proposes to maintain the merit-based mechanism, but in the future the European energy market will be more strongly characterized by long-term power purchase agreements and bilateral separation agreements.
From autumn 2021 and especially after the Russian occupation of Ukraine, energy prices have risen sharply. Although the share of renewable energy is considerable in some price zones, electricity price spikes are related to the costs of fossil fuel production. EU member states have had to provide an unprecedented amount of support to protect consumers and industry from such prices.
In response, negotiations have been held in the EU on the redesign of the internal energy market. The member states agreed that short-term price fluctuations in the fossil fuel market should no longer have such a catastrophic effect on consumer prices of electricity. While Spain called for significant changes, countries such as Germany and the Netherlands warned: “Don’t throw the baby out with the bathwater.” Excessive cuts in the market mechanism can cloud the investment climate for renewable energy and thus cause the expansion to stall.
When preparing the proposal, the member states disagreed on how far the electricity market planning reform should go. In the future, electricity suppliers could protect themselves from unstable markets with long-term power purchase agreements.
The European Commission’s (Commission’s) proposal represents a compromise and envisages a revision of the Electricity Directive, the Electricity Regulation and the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT).
Stabilizes prices
The primary goal of the review of the internal energy market is to stabilize prices. The merit ranking mechanism received a lot of attention after last year’s price increases. The Commission cannot remove it completely because the mechanism is not provided for by law, but is a way for homogeneous goods such as electricity to operate in the market.
In its proposal, however, the Commission accepted that renewable energies obtained with state support must be limited by a two-way contract for difference (CfD). In the current European support systems, the price is limited only to the floor of the producer. in the other direction, the sky is the limit. In a two-sided CfD, the legislature would also set a price ceiling (ceiling). In this way, the extra profits of the electricity trade would be transferred to households.
Separation agreement negotiation process
In the discussions with the energy industry during the preparation of the draft, it was found that 70 percent of the participants considered bilateral CfD contracts as an effective way to stabilize the price of electricity.
The second proposal aims to improve the market conditions for long-term power purchase agreements. Electricity suppliers should buy a larger part of their electricity with long-term contracts, also called hedging. This means that electricity suppliers would not have to pass on high prices directly to customers or apply for government support when the market is renewed. Electricity suppliers would be required to secure long-term electricity purchase contracts for renewable or non-fossil production as part of the electricity produced by fixed contracts.
According to the commission, there are still weaknesses in the power purchase agreement market at the moment. These are primarily related to buyers’ credit risks. Therefore, member states should be obliged to guarantee market-based responsibilities and guarantees for electricity procurement contracts. This would also lead to secured income for producers and improve the investment climate for renewable energy.
More consumer protection
The energy market reform also aims to increase transparency, integrity and consumer protection. For example, member states can define vulnerable consumers who can benefit from regulated electricity prices in the event of a crisis. However, this only applies to households and medium-sized companies. There should be no regulated, affordable electricity prices for industry.
The Commission’s proposal also places a duty on the Agency for the Cooperation of Energy Regulators and national regulators to better enforce the integrity of open pricing and competitive markets. In particular, the REMIT amendment aims to improve the quality of monitoring data and prevent market abuse.
Collective self-consumption and tenant’s electricity
In addition to stable prices, the reform of the design of the electricity market is intended to increase the production of electricity with renewable energy sources. Therefore, the new market model should enable end customers to invest in wind and solar power plants – simplifying the path to citizens’ energy projects. In addition, the commission proposes that the simple sharing of surplus electricity from rooftop electricity systems with nearby neighbors is made possible.
This form of collective self-consumption is already partly possible in some Member States. However, there is no uniform EU-wide regulation. In some parts of the single market it is completely banned, which should now change. The goal is also to give end customers with private roofs the opportunity to protect themselves from high electricity prices by investing in renewable energy systems.
The transparency obligation of network operators regarding trading periods and network bottlenecks will further facilitate the supply of renewable energy sources.
Enables flexibility
Another proposal to stabilize prices is to promote system flexibility and storage capacity. For example, all end users must be offered access to dynamic electricity prices so that they can use electric cars and heat pumps more cost-effectively. Member States must also formulate their needs and goals for storage capacity and non-fossil flexible capacity.
New storage and load management frameworks should be considered in future tenders and support instructions.
The European Council and Parliament still have to confirm the Commission’s proposal.
