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EU Electricity Market Design: An appropriate decision?

The European Commission tabled its long-awaited proposal to reform the EU electricity market by introducing more protection for consumers, rolling out more renewables and increasing demand-side measures.

“For over two decades, the electricity market design has served European companies and consumers well, letting them enjoy the benefits of a single market. However, the energy crisis spurred by Russia's attack on Ukraine exposed a number of shortcomings in the current system which needed to be addressed”, said Energy Commissioner Kadri Simson at the press conference on the reform of the EU's electricity market design.

The proposal foresees significant revisions to several pieces of EU legislation, notably the Electricity Regulation, the Electricity Directive and the REMIT Regulation. But also It includes a set of measures aimed to make electricity bills less dependent on fossil fuel prices by creating a buffer between short-term markets and the electricity bills paid by consumers.

With the new measures the Commission wants to ensure that long-term contracts are encouraged., in particular boosting the market of power purchase agreements (PPAs), stabilizing the prices of electricity and curbing excessive revenues of energy producers by requiring the use of two-way contracts for difference (CfDs).

The proposal also includes measures that aim at accelerating the deployment of renewables and the phase out of gas by facilitating further the integration of renewables in the electricity system and improving conditions for the use of flexibility solutions such as demand response, storage and other weather-independent renewable and low carbon sources.

Among other things, the Commission's proposal wants to protect consumers from the price volatility of fossil fuels and incentivise investments in renewables by facilitating access to longer-term contracts for developers (both State-supported Contracts for Difference, and private Power Purchase Agreements).

Under the current situation, the document proposed by the Commission wants to face up to the war in Ukraine but also wants to boost renewables to guarantee the territory's energy security. But is it enough?

Review Energy spoke to energy leaders and analysts to get their reactions to the proposal that aims to increase the development of the renewable market.

As Bram Claeys, senior advisor at the Regulatory Assistance Project (RAP), comments us, “Commission makes targeted improvements in the existing regulation, it doesn't turn everything upside down. This is appropriate: the market fundamentals are sound, but there's of course room for improvement. Long-term contracts and demand-side flexibility get most of the attention. We're probably most concerned about the risk for further fragmentation of markets”.

Claeys explains that the Commission's proposal will be instrumental to protect investors in renewable energy against regulatory risks and will help bring financing costs down and “this will help accelerate investments in renewables for sure”.

But for him, the main barriers are permits, public support and congested grids. “Those are tackled to some extent through the REPowerEU amendments in the Renewable Energy Directive. But the Commission also proposes to make grid companies be more transparent about the bottlenecks in their grids and more open to local flexibility to resolve congestion. This gets less airplay but may end up being at least as important for renewables”, says.

But for Luis Villar, advisor on M&A transactions in the renewable sector, "the European Commission's proposal is not a reform of the rules of operation of the electricity markets, as some expected and others feared, it is rather a set of good intentions aimed at accelerating the energy transition and independence from fossil fuels, facilitating investments in clean technologies".

Contracts, the key is in the contracts

Abelardo Reinoso, Energy Consultant and Analyst, welcomes the European Commission's intention to reform the electricity market to make it more predictable and transparent, which is necessary to manage energy crisis situations and protect consumers in such situations.

However, Reinoso told Review Energy that there are "some problems with the proposed measures. The European Commission's commitment to bilateral contracts or PPAs can generate imbalances in the electricity market, as it favours renewable energy producers and can lead to higher electricity prices for consumers who cannot access these agreements". According to him, the contracts can be very complex and difficult to negotiate for smaller companies.

The Energy Consultant and Analyst also points out that the idea of contracts for difference (CfD) as a mechanism to support new wind, solar, geothermal, run-of-river hydro and nuclear generation may leave out existing generation, which would not be fair or efficient from an energy point of view. "Innovation and the development of new technologies should be encouraged, but the importance of maintaining stable and secure energy for all consumers must also be taken into account", he says.

The perspective is somewhat different from the perspective of Antonio Delgado, Founder and CEO at AleaSoft Energy Forecasting. Delgado stresses that it is important for the Commission to strengthen and give relevance to forward markets, which, according to him, are the key to protecting consumers from volatility and for generators and marketers to hedge in the long term because "this also encourages investment and is key for large consumers".

The Founder and CEO at AleaSoft Energy Forecasting also assures Review Energy that the Brussels proposal is good news for three fundamental factors: the strengthening of PPAs, the guarantee that the spot market will not be intervened and the marginalist system will be maintained - as he explains that the spot market is necessary and the marginal price is the one that gives the right price signal and the most adjusted price at each moment for the consumer - and the guarantee that there will be no attempt to regulate the price of technologies such as hydro and nuclear and that they will be allowed to participate freely in the market if they wish to do so.

While the advisor on M&A transactions in the renewable sector also adds that "one of the most relevant issues of the proposal is the desire to shift energy from the highly volatile spot markets, where prices are determined by the costs of the most expensive technologies that enter the matching, towards medium and long-term markets, with greater price stability and in which each technology can reflect its own costs". 

What about the consumers?

The senior advisor at the Regulatory Assistance Project (RAP) told Review Energy that consumers get better protection against price shocks through the increased uptake of PPAs and CfDs. “That is of course very important in these energy crisis times. The Commission does recognise there is a balance to strike between consumer protection against price shocks on the one hand, and making sure consumers are incentivised to make their electricity use flexible. They need price signals to get value for their efforts”, explains.

Long-term contracts are well-suited to protect consumers against extreme price swings, says Claeys, and investors against regulatory risk. He also recognises that “it's great the Commission is clearly pointing out best practice: so-called double-sided Contracts for Difference. But also, their design matters, and I would have expected more guidance from the Commission here”.

Villar also points out to Review Energy that the proposal will also allow consumers to be offered greater price stability and benefit from the lower costs of producing electricity from renewable generation sources and introduce robust monitoring mechanisms to protect consumers from market abuses, while encouraging self-consumption and shared self-consumption.

However, from Reinoso's perspective, although it is important to protect consumers from price volatility, the energy analyst does not see it as appropriate to force marketers to sell products at a fixed price, "as this can limit market flexibility and mean that prices do not reflect the reality of supply and demand".

A clean green light at the end of the tunnel

And although the proposal will be adopted through the ordinary legislative procedure, meaning that the different pieces of legislation will have to be discussed and agreed by the European Parliament and the Council, experts can already draw some rough conclusions for the future.

Such is the case of Pierre Nadelar, Director of Investor Relations and Communication at Opdenergy, who states that "in the end it is a proposal that still has to be approved by the European Parliament and, if approved, would come into force in 2024. For renewables it will mean practically no changes. What will be positive for the sector will be the measures to encourage energy storage".

Lucia Conde, Country Manager for Spain at Econergy Renewables, also assured Review Energy that “we see this as a positive development in general terms, focused on long-term contracts with the purpose of lower dependence on gas and consumer protection. We look forward to the implementation of these proposals”.

The look of Massimo Poli, Country Manager Italy at Smartenergy, also seems positive. According to him "in principle the EU electricity market is made of multiple self-sufficient markets which are physically and legally independent, therefore it is quite complex to be ruled as a whole. However, this set of proposals, if implemented effectively, will facilitate the development of renewables energy projects by fostering investments in the sector. As investors, less volatility in the market and a clear commitments to renewable energy integration are key signals that positively impact our portfolio's growth".

"It is difficult not to agree with the good intentions of the proposal, but it remains to see concrete measures to make them a reality, such as remuneration mechanisms, capacity markets or other mechanisms that allow storage technologies to be adequately remunerated, without which these intentions will hardly become a reality," adds Villar.

The proposal is simply a response to a new, cleaner and fairer era. Finally, the senior advisor at the RAP notes that “the crisis has demonstrated how important it is to have well-conceived consumer protection mechanisms in place, especially for vulnerable consumers. It's good the Commission clarifies the role of Suppliers of Last Resort. But we need to do a much better job in enabling consumers to partake in the value of flexibility and renewables”.

For him, lifting demand-side flexibility and storage is where the Commission is taking some significant steps forward. “Rightly so, the demand side should be put on par with supply resources. This proposal pushes grid companies to take local flexibility more seriously and allows smaller size groups of consumers to get value from the market for their flexibility”, Claeys concludes.

In the end, as Bird & Bird Partner Pierpaolo Mastromarini tells Review Energy, "the  reform is the response of the Commission to work on a structural reform of the electricity market in order to accelerate the green energy transition towards the Europe’s net-zero industry."

What was the industry's reaction?

For Daniel Fraile, Chief Policy Officer of Hydrogen Europe, “the possibility to combine both contract-for-difference and power purchase agreements (PPAs) will be hugely beneficial for renewable hydrogen producers who depend on these PPAs to prove the renewable character of their hydrogen. The proposed obligation for Members States to regularly assess their flexibility needs is also much welcome because it will highlight the need to deploy long-term storage solutions where hydrogen is poised to play a fundamental role”.

Meanwhile, for Naomi Chevillard, Head of Regulatory Affairs at SolarPower Europe, “critically, the text protects all the ways we can deploy and enjoy solar energy. Homes and businesses will be able to access PPAs more easily. Businesses are set to benefit from new government de-risking schemes that backup their ability to sign these long-term energy supply contracts. The reinforced legislative framework for PPAs will give both suppliers and buyers more clarity in signing new agreements”.

Chevillard acknowledges in an official statement that it’s a historic moment for energy sharing. “New proposals literally put the power in citizens’ hands. For the first time ever, we’ll have a legal framework to share electricity, complementing the energy communities’ framework”, she says.

Finally, it is WindEurope CEO Giles Dickson who says that "the problem of Europe’s electricity market these last two years has not been the market design. It’s been high gas prices, made worse by the war. The market design has been extremely efficient in matching supply and demand – and has given consumers years of affordable electricity prices. It’s good the Commission proposal builds on the strengths of the existing market design. What’s needed is an evolution not radical changes”.



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