This is the EMD

After more than a year of tireless work, Parliamentarians this week cast their final vote of the Electricity Market Design (EMD) reform, first proposed by the European Commission last March. The final step is now for the @Council of the European Union to formally adopt the legislation before going into effect in the Member States. Over the past year, we have also been tirelessly involved in the reform alongside our partner, Compass Lexecon , from our Electricity Market Design Fit for Net Zero to our more recent guidance on contract for difference (CfD) design. Moving on from this legislative phase, it will now be about implementation where we hope to see the right levels of investment in the energy transition to deliver on agreed ambitions for 2030 and beyond.

We now have the market design in place

The reform, proposed by the Commission at the height of Europe’s energy crisis, aims to turbocharge the adoption of clean power while safeguarding consumers against volatile price fluctuations. Now with the worst of the crisis in the rearview mirror, the reformed market will be relied on for delivering investments in Europe’s power system to achieve targets laid out in the Fit for 55 package of legislation, REPowerEU and come the next Commission, the 2040 climate target and net zero by 2050.

Favourable contract agreements are set to be prioritised under a reformed market through both regulation and directive components. The reform sailed through Parliament with a thunderous 433-140 vote for the Regulation and a commanding 473-80 victory for the Directive. With the Parliament’s thumbs-up, the legislation now eagerly awaits the formal adoption of the legislation by the Council to transform into law. The Energy Council is set to convene 30 May 2024.

Now, as the dust settles, the real challenge emerges. Getting these rules for a strong single market implemented at Member State level requires considerable effort across all parties involved.

How two-way contracts for difference come into play

With investment needs for the energy transition racking up at record pace, a strong implementation of the rules for a strong single market in energy is needed for a successful green energy transition. Two-sided CfDs emerged recently as a key support mechanism for direct price support to new capacity. Market-based de-risking schemes like these are instrumental in realising EU ambitions and these contracts have consistently been at the forefront of shaping Europe’s electricity market.

Yet, such mechanisms bring forth a host of issues, sparking debate among key Member States over specific clauses. France and Germany find themselves at odds over critical challenges, such as the potential distortion of dispatch incentives, the diversion of liquidity from other markets, ensuring efficient risk allocation and addressing potential inefficiencies in incentives.

The risks and rewards of CfDs

This is where explanatory guidelines on the matter can help chart a course forward. Eurelectric recently took this role on, following our successful and authoritative study on the EMD reform with Compass Lexecon, aiming to showcase the necessary reforms and adjustments for CfDs to unlock their full potential.

In March this year, we unveiled important guidelines for CfDs. These recommendations set out to optimise two-way CfDs in three key ways:

1. Supporting the expansion of clean and renewable energy build out
2. Ensuring consumer protection while directly delivering the benefits of renewables
3. Maintaining liquidity in forward markets.

While these contracts can be a transformative tool for financing new energy projects, their effectiveness comes with a caveat. Depending on how they are structured, they can either be a boon or a bane. We must ensure that the integrity of these long-term instruments remain market-based, voluntary and equitable. The objective? Prevent any drain on liquidity from forward markets and safeguard the efficiency of short-term markets. ?

It is also important to remember that CfDs are not the only stars in the long-term hedging show. We must also consider power purchase agreements (PPAs) and tailor-made market-based deals, as these offer additional strategies that can work hand in hand. We encourage giving developers the freedom to pick and choose which parts of their portfolio benefit from CfDs through voluntary, competitive, market driven participation. It is all about flexibility and maximising options in the ever-evolving energy landscape.

Standing as a veritable source of knowledge and expertise, our report details the best practices, recommendations, and technical insights on the matter. We believe these guidelines are instrumental in garnering the investments needed for reaching ambitions of the Green Deal while safeguarding European competitivness. We now have the market design in place and regulatory bodies on our side, let’s work with this system to get this implementation on the road.

Adding extra voltage to the conversation…

Discussions on correctly implementing the provisions of the reform are sure to be a topic of conversation in the halls of national governements in the coming months, and certainly will be at Power Summit 2024. Through collaborative efforts and informed conversations, we’ll be delving into this subject and many more pressing issues throughout the event. Be sure to join us to harness the collective expertise gathered there to navigate the complexities of market design and shape our future towards a greener Europe.

This week's edition written by:

Juliet Destrade Strategic Communications Trainee - Eurelectric

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