The EU electricity market reform deal: JUST DO IT!

The interinstitutional negotiations on the EU electricity market reform are in full swing. Yesterday another political trilogue took place where the European Commission , European Parliament and Council of the European Union agreed on the reform on the oversight framework to ensure market integrity and transparency, known as REMIT.

Eurelectric has welcomed the balanced outcome reached by negotiators, but now comes the hard part. Energy companies will need to implement a wide array of complex reporting provisions that require thorough preparation. Let’s ensure they granted sufficient time to comply with the new rules.

Now that REMIT is a done deal, let’s look at what’s left.

Brussels is trying to finalise the market design reform by the end of year after breaking a 4-month deadlock in the Council due to the Franco-German spat over energy subsidies and contracts for difference. As reported by POLITICO Europe in its article, the pressure to come to an agreement before Christmas coming from the electricity industry is just as high.

Eurelectric President and E.ON CEO Leo Birnbaum voiced this urgency: “My message is: get it done and don’t do any last minute rush[ed] interventions that you don’t really understand in detail.” Earlier last month, the President called on reaching a deal as soon as possible in a letter addressed to the Council:

“A deal on the electricity market design is needed as we see an urgent need for a significant rollout of renewable and low-carbon technologies, greater investment in the distribution infrastructure system which supports them and protection for consumers against the most extreme volatilities of the short-term markets. We have no additional time to lose as visibility on and stability of the regulatory environment are required for these investments to take place”.

While the EU institutions power through the next round of trilogues, success will hinge on finding the right balance among equally important needs, as Eurelectric details in its priorities.

Let’s focus on what really matters

A reform of the EU internal power market should first and foremost unlock the necessary investments to achieve our 2030 decarbonisation targets through a clear, predictable and technologically neutral regulatory framework. Long-term contracts such as power purchase agreements (PPAs) and direct price support schemes like contracts for difference (CfDs) can effectively shield consumers from short-term price swings and allow producers to have stable contract prices and asset revenues.

It is crucial, however, that these hedging instruments remain voluntary, technology-neutral, are allocated on a competitive basis and most importantly, are not applied retroactively. What about Nuclear? CfDs should facilitate investments in existing energy generation only for the purpose of repowering, capacity expansion, and the extension of the asset's operational life.

Any hurdles that might hamper the development of long-term contracts, like the proposed Union PPA database, should be sidestepped to keep bureaucracy and costs low.

“Leave energy suppliers do what they know best”

We say this in our article: Getting the electricity market reform negotiations right. Last year’s gas crunch brought to light that some EU energy retailers took unnecessary risks by not adequately hedging themselves against volatile spot markets. When gas and electricity prices soared, this risky behaviour led to a wave of bankruptcies across Europe, with the UK alone witnessing 27 suppliers going bust since 2021.

Now, the EU is thinking about making hedging mandatory for suppliers. But is that really the best way to ensure suppliers stay strong financially? If everyone follows the same hedging rules, it might lock in high prices for consumers and stifle competition. Instead, how about we let suppliers choose their hedging strategy and report to national authorities on it.? Stress tests enforced by national regulators could be the way to go, ensuring suppliers are resilient in the face of market shocks.

Prevent permacrises and ensure predictability

Crises are unexpected. Locking in some measures based on the past energy crisis, such as the infamous inframarginal cap, is not efficient for addressing future crises. We should instead define specific crisis triggers, like a price threshold set at €180 per megawatt hour, to ensure stability and reduce uncertainty for investors. Protecting vulnerable customers should always be addressed through social policy measures rooted in the existing legal framework and must not result in systemic market interventions of any kind.

No flexible source left behind

Flexibility is the name of the game. While demand-response and storage are important, we shouldn't play favourites. All forms of flexibility should be nurtured in a fair, tech-neutral way and seamlessly integrated into existing EU long-term scenarios and assessments like the European Resource Adequacy Assessment and the Ten-Year Network Development Plan. More inclusive incentives would make sure system operators have access to all dispatchable sources beyond demand response and storage to balance our energy systems.

While fostering more flexible capacity with support schemes and capacity mechanisms, we should also make sure existing provisions are properly implemented by Member States. The Clean Energy Package already entails several provisions aimed at facilitating the uptake of demand-side response. Yet, Member States have not equally implemented them. The Commissions should therefore follow up with the EU countries that are lagging.

Bring the grid up to speed

Our electricity grids need a serious upgrade to handle the net-zero era. To make that happen, we are talking about investing €38 billion per year until 2030 and even more - €65 billion per year - until 2050. That's an 84% increase from current levels. Breaking down national barriers to grid investments is crucial. The surest way to do so is having national authorities embrace a forward-looking approach to infrastructure planning and investments, one that anticipates the need for integrating the expected massive amounts of renewables, electric vehicles (EVs) and heat pumps directly connecting to the distribution grid.

When in doubt leave it out

Talking about the future, the reform suggests virtual trading hubs to boost forward market liquidity. But hold on! Let's not dive into uncharted waters without a solid plan. We need a thorough impact assessment and proper consultation before introducing an untested solution that risks not solving the problem.

As defended by the Parliament’s proposal, the reform should prioritise existing quick wins to enhance liquidity such as longer time horizons, more frequent auctions and higher volumes of long-term transmission rights.

Speaking of uncharted waters, the same should apply to peak shaving – that is leveling out peaks in electricity use by industrial and commercial power consumers. We should limit peak shaving products to emergency situations. Any implementation of such a policy needs to be well assessed as it could risk being a distortive tool depending on how it’s implemented.

What’s next?

I guess we will have to wait for the next trilogue, expected for 13 December where co-legislators will try to wrap up before year end. We’ll make sure to keep you posted!

This week's edition written by:

Eleonora Rinaldi , Strategic Communications Officer -?Eurelectric