European Parliament Approves 'Patchwork' Power Market Legislation

Friday, 12 April 2024

Initially spurred by gas prices dramatically spiking in 2022, the European Parliament reformed its power market regulations to combat rising electricity costs across Europe.

Originally conceived as a major overhaul, the reform was scaled back during negotiations into a series of targeted adjustments, with an enhanced emphasis on protecting consumers.

This involved shielding consumers from practices like unilateral contract modifications and disconnections from the power grid.

At the time of writing, the legislation is nearly finalised, having secured the approval of 473 EU lawmakers, with only 80 dissenting.

A formal endorsement from EU member states is currently pending, though this is expected to proceed smoothly.

While not as ambitious as initially planned, the reform still retained significant support due to its scaled-back objectives. Although EU leaders initially questioned core aspects of the power market, including the merit order system and marginal pricing, the President of the European Commission noted in 2022 that the existing market system was failing.

Despite pressure from experts, EU nations, and industry lobbying groups, the reform preserved many of the market’s fundamental traits. Some criticised the reform as minimal, expressing disappointment that it fell short of establishing a fully renewable power system.

Others echoed the sentiment that more work was needed to strengthen the unified European energy market.

The revised market design aims to increase the proportion of long-term power supply contracts, which are less vulnerable to the price volatility seen during the 2022 energy crisis.

On this note, EU countries are being encouraged to support renewable energy sources and upgraded nuclear facilities through 'contracts for difference’. The latter help secure minimum revenues for power suppliers regardless of market fluctuations, as well as impose a cap on earnings.

The reform also enables national governments to subsidise smaller firms and renewable energy developers through long-term 'power purchase agreements', enhancing market stability.

However, controversially, it also allows for the temporary subsidisation of coal power plants during crises until 2028, a provision that led to the Greens withdrawing their support.

Robust social measures were integrated into the market design in response to the persisting energy price crisis, together with a centre-left negotiator at the helm.

A notable inclusion is a 'safety switch' for future emergencies, enabling the Commission to recommend the declaration of an electricity price crisis when wholesale rates exceed €180 per megawatt-hour or retail prices jump by 70%.

This would allow governments to reduce electricity prices significantly for both industrial and residential consumers.

However, further discussions and actions are being considered for the next parliamentary session.