Electricity Market Design Reform: Ensuring affordable prices for all European citizens

It′s time to accelerate the deployment of renewable energies, reduce electricity prices, and enhance system stability

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Considering the pressing challenges posed by climate change, the European Union recognizes the critical importance of transitioning to a more sustainable and environmentally responsible energy system. To address these challenges and seize the opportunities for a greener future, there is an increasing need for reform in the design of the electricity market. Such reform aims to not only combat climate change but also promote energy efficiency, reduce carbon emissions, and enhance the resilience of the European energy landscape. This reform seeks to align the EU's electricity market with the imperatives of the 21st century, and it encompasses a range of measures designed to transform and modernize the energy sector.

On October 17, 2023, the Council of the European Union (EU) achieved a consensus (general direction) regarding a proposed modification to the EU's electricity market design. This paves the way for the Council Presidency to commence discussions with the European Parliament, ultimately aiming for a final agreement.

This substantial reform, now slated for negotiation between the European Council and the European Parliament, is primarily oriented towards (i) diminishing the reliance of electricity prices on the volatility of fossil fuel prices, (ii) safeguarding consumers from sudden price spikes, (iii) expediting the adoption of renewable energy sources, and (iv) fortifying consumer protection.

The proposal forms a part of a broader overhaul of the EU's electricity market structure, which also encompasses regulations concentrating on enhancing the Union's defenses against market manipulation through improved oversight and transparency (REMIT - Regulation on Wholesale Energy Market Integrity and Transparency).

Regarding LONG-TERM ELECTRICITY MARKETS, the reform seeks to ensure stability in long-term electricity markets by (i) promoting the electricity procurement contract market, (ii) standardizing bilateral contracts for differences (CfD), and (iii) improving market liquidity.

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• About CAE: Member states are expected to promote and boost this market by removing unjustified barriers and disproportionate or discriminatory procedures or fees. Measures may include market price guarantee schemes supported by the state, private guarantees, or structures that aggregate CAE demand.
• About CfD: These should be the mandatory model to be used, with some exceptions, when long-term contracts involve public financing.CfD will apply to investments in new energy production facilities based on wind, solar, geothermal, reservoir-less hydro, and nuclear power, providing predictability and security.CfD rules will only apply after a 3-year transition period (5 years for offshore hybrid projects linked to two or more zones) following the regulation's entry into force to maintain legal certainty for ongoing projects.The Council has added flexibility regarding how state revenues generated through CfD will be redistributed. Revenues will be distributed to end consumers and may also be used to finance the costs of direct support schemes or investments.

As for CAPACITY MECHANISMS, the Council agreed to remove the temporary nature of capacity mechanisms and introduced an exemption from existing carbon dioxide emission limit requirements for producers to receive support under capacity mechanisms, under strict conditions and until December 31, 2028.

Member states also agreed that approval procedures for capacity mechanisms should be simplified. The Council proposed changes focused on streamlining the current capacity mechanism framework. The Commission was also asked to submit a detailed report analyzing other possible ways to simplify the capacity mechanism application process. Proposals to simplify the process will follow the report three months after the regulation's entry into force.

Concerning CONSUMER PROTECTION, clarifications were introduced regarding provisions for consumer protection. Agreement was reached to strengthen consumer protection by establishing the free choice of supplier and the possibility of accessing dynamic, term, and fixed-price contracts, unless the supplier does not offer term contracts, if this does not reduce the overall availability of term contracts.

The Council also agreed to impose stricter rules on suppliers regarding price-hedging strategies to protect customers from wholesale market fluctuations and decided to protect vulnerable customers against electricity disconnections by creating a last-resort supplier system to ensure continuity of supply for at least household customers, where such systems do not yet exist.

?It was also agreed that all customers would have the right to energy-sharing schemes (usage, sharing, and storage of self-generated energy), and all consumer rights would be extended to end consumers participating in energy-sharing schemes.

Finally, concerning ACCESSIBLE ENERGY DURING A CRISIS, under current rules, member states can set regulated prices for households in energy poverty and vulnerable situations, as well as temporarily for households and small businesses, whether or not there is an electricity market price crisis. The reform adds the temporary option of applying regulated prices, even below cost, to small and medium-sized enterprises (SMEs) in times of crisis.

Member states have strengthened the role of the Council in declaring a temporary electricity price crisis at the regional or Union level. They have also changed the necessary conditions for declaring an electricity price crisis so that it can be declared when average prices in wholesale electricity markets are expected to remain very high for at least six months, and sharp price increases in the retail market are expected to last for at least three months.

The Council also agreed that member states may apply a cap on excess market revenues generated by lower marginal cost electricity producers, such as renewable energies, nuclear power, and lignite ("inframarginal producers") until June 30, 2024, under the same conditions as the emergency measure.

The agreement reached, a significant milestone in European institutional relations, provides a basis for negotiations with the European Parliament on the final format of the legislation to be applied that will allows accelerate the deployment of renewable energies, reduce electricity prices, and enhance system stability, critical for a just energy transition.

Nelson Lage/DEPP (ADENE)