Electricity Markets 2023: Policy and Regulatory Developments

2023 has been a year of major policy and regulatory developments with major implications for the industry.

Electricity Market Design Reform

In January, the European Commission launched a consultation on the future Electricity Market Design and questioning its fundamentals in the face of growing electricity bills. In March, it unveiled its EMD proposal. The industry let out a sigh of relief as the more extreme proposals didn‘t make it to the text. The draft reform focused on 3 main issues around EMD rather than on a direct market intervention:

1. revising support mechanisms for RES by promoting both CfDs (for RES and nuclear) and encouraging market-based PPAs to speed up investment,
2. introducing measures for protecting consumers, especially vulnerable consumers, from future sky-high bills, e.g. by prohibiting their disconnection and by offering fixed-price tariffs. Here‘s where the proposal secured a ?back door“ for introducing national (!) emergency measures in the event of another crisis.
3. Introducing measures for increasing system flexibility by e.g. proposing new support schemes for non-thermal flexibility, potential national flex targets and a new peak shaving product; EU COM will be in charge of a DR and storage strategy to be drafted by 2025.

In mid-December, the Council and the Parliament reached provisional agreement paving the way for formal adoption.

A very interesting result of the last round of the Trilogue negotiations is the possibility to organize EU-level RES auctions as a mechanism to finance the achievement of the EU goal of 42.5% (+2.5%) by 2030. In addition, the right to share energy – not just among residential consumers but also large industry – was formalized to open up more possibilities to higher RES integration.

Recast Renewable Energy Directive

?Speaking of RES integration, another major regulatory document, the Recast Renewable Energy Directive (REDIII) came into force in November 2023.

What makes it significant is not just the topping up of the EU RES target in energy consumption to 45% but also its broad coverage of other sectors, transport, industry, heating and cooling. Interestingly, by 2026 Member States will designate special RES acceleration areas that will be able to profit from simplified procedures while making sure that RES are installed where they are needed the most.

Network Code on Demand Response

In 2023, progress has also been made on the Network Code on Demand Response (NC DR). For background, ACER drafted a Framework Guideline based on EU COM‘s request in December 2022. DSO Entity and ENTSO-E submitted the draft NC DR for public consultation in September this year:

The Network Code is significant in that it covers all types of distributed resources – despite its more limiting name – and a broad spectrum of areas. In this way it aims to harmonize the overarching principles for balancing, congestion management and voltage control in terms of aggregation, prequalification, data exchanges, etc.

Hydrogen and Decarbonized Gas Market Package?

Another output of the productive Spanish presidency was the provisional agreement on the landmark Hydrogen and Decarbonized Gas Market Package proposed back in 2021. The Package for the first time regulated the nascent hydrogen sector and covers such aspects as hydrogen infrastructure and market and the approach to the certification of renewable and low-carbon gases. These will also have an impact on the obligatory uptake of renewable hydrogen in transport and industry in 2030 (see REDIII above). This should be facilitated by the 65 selected H2 XB projects.

The Package also marks the onset of the ramp-up phase for the H2 sector and hydrogen market in Europe, including unbundling and tariff-setting requirements. It is set to create regulatory basis for new entities, hydrogen transmission and distribution network operators and ENNOH. The latter stands for European Network of Network Operators for Hydrogen – a sister of ENTSO-E and ENTSO-G. Jointly, they would be responsible for the integrated infrastructure planning for H2, gas and electricity. A welcome step – after all, flexibility is not isolated to the electricity sector. Exploring the sector coupling potential for higher overall system flexibility will be crucial.

Grids, grids, grids

Energy system stakeholders have been waking up to the urgent need for more grids to connect more and more RES projects and offset rising congestion. In November, this culminated in the EU COM presenting its Grid Action Pan to be implemented by Q1 2025. The proposed measures included the improvement of network supply chains, of access to finance, e.g. for smart grids, incentives for efficient network use and accelerated approval of PCI projects.

Regional developments

On the regional level, December was marked by the decision to restart of the talks between the Commission and the Swiss government. After the stalemate since 2014, this is a crucial step to integrate Alpine state into the European markets and coordination processes – a logical move since it’s already closely linked with the rest of the European countries over 40 interconnectors! ?

Finally, In December, a declaration signed by the Baltic States, Poland and the Commission to synchronize the Baltic networks with continental Europe by Q1 2025.

In the next installment of the 2023 Year in Review, I‘ll share technology highlights.

*images above generated by DALL-E.