European Commission initiatives |
Redesigning the EU electricity market, and responding to the IRA
Mid March proved to be a very busy time for the European Commission with the setting out of proposals for two major energy initiatives, one focused on reform of the EU electricity market design and the second, the Net-Zero Industry Act (NZIA), aiming to “scale up manufacturing of clean technologies in the EU”, which can be seen as a response to the USA’s Inflation Reduction Act. The proposed market reform package and the NZIA both have to be discussed and agreed by the European Parliament and the Council of the European Union before entering into force
The goal of the electricity market design reform proposal is to accelerate a “surge in renewables” and the phase-out of gas, make consumer bills less dependent on volatile fossil fuel prices, better protect consumers from future price spikes and potential market manipulation, and make the EU’s industry clean and more competitive. The energy crisis spurred by Russia’s invasion of Ukraine has underlined the need to quickly adapt the electricity market to better support the green transition and offer energy consumers, both households and businesses, widespread access to affordable renewable and non-fossil electricity, says the Commission.
The proposed reform foresees revisions to several pieces of EU legislation – notably the Electricity Regulation, the Electricity Directive, and the REMIT Regulation. It introduces measures that incentivise longer term contracts with non-fossil power production and bring “more clean flexible solutions into the system” to compete with gas, such as demand response and storage. This will decrease the impact of fossil fuels on consumer electricity bills, as well as ensure that the lower cost of renewables gets reflected in bills, says the Commission. In addition, the proposed reform aims to boost open and fair competition in the European wholesale energy markets by enhancing market transparency and integrity. Building a renewables-based energy system will not only be crucial to lower consumer bills, the Commission argues, but also to ensure a sustainable and independent energy supply to the EU, in line with the European Green Deal and the REPowerEU Plan.
The proposed market reform, which is part of the Green Deal Industrial Plan, will also “allow European industry to have access to a renewable, non-fossil and affordable power supply, which is a key enabler of decarbonisation and the green transition.”
To reach energy and climate targets, the deployment of renewables will need to triple by the end of this decade, says the Commission. High and volatile prices, such as those seen in 2022 provoked by Russia’s energy war against the EU, have put an excessive burden on consumers, the Commission notes. The market reform proposal “will allow consumers and suppliers
8 | April 2023|
www.modernpowersystems.com
consumers in arrears from being disconnected. Also, it allows Member States to extend regulated retail prices to households and SMEs in case of a crisis.
Renewable energy will increasingly be
the go-to resource for European citizens and industries in the future. Renewables are our ticket to energy sovereignty and ending our dependence on fossil fuels. We need to update our market design to ensure that this transition happens as quickly as possible, and that consumers can benefit from the lower costs of renewables.
Frans Timmermans, executive vice- president for the European Green Deal (photo: Christophe Licoppe)
to benefit from more price stability based on renewable and non-fossil energy technologies.” Crucially, “it will give consumers a wide choice of contracts and clearer information before signing contracts”, enabling them to “have the option to lock in secure, long-term prices to avoid excessive risks and volatility.” At the same time, they will still be able to choose to have dynamic pricing contracts to take advantage of price variability to use electricity when it is cheaper (eg, to charge electric cars, or use heat pumps). On top of expanding consumers’ choice, the reform further aims to foster price stability by reducing the risk of supplier failure. The proposal requires suppliers to manage their price risks at least to the extent of the volumes under fixed contracts, in order to be less exposed to price spikes and market volatility. It also obliges Member States to establish suppliers of last resort so that no consumer ends up without electricity. The protection of vulnerable consumers is also significantly enhanced. Under the proposed reform, Member States will protect vulnerable
Under the proposal, rules on sharing renewable energy are also being revamped. Consumers will be able to invest in wind or solar parks and sell excess rooftop solar electricity to neighbours, not just to their supplier. For example, tenants will be able to share surplus rooftop solar power with a neighbour. To improve the flexibility of the power system, Member States will be required to assess their needs, establish objectives to increase non-fossil flexibility, and will have the possibility to introduce new support schemes especially for demand response and storage. The proposed reform also enables system operators to procure demand reduction at peak hours. Alongside the market reform proposal, the Commission also issued recommendations to Member States on the advancement of storage innovation, technologies, and capacities.
Over the past year, many companies have been severely affected by excessively volatile energy prices, the Commission notes. Therefore, to enhance the competitiveness of EU industry and to reduce its exposure to volatile prices, the Commission is proposing to facilitate the deployment of more stable long-term contracts such as power purchase agreements (PPAs) – through which companies establish their own direct supplies of energy and thereby can profit from more stable prices of renewable and non- fossil power production. To address the current barriers such as the credit risks of buyers, “the reform obliges Member States to ensure the availability of market-based guarantees for PPAs.” In order to provide power producers with revenue stability and to shield industry from price volatility, all public support for new investments in infra-marginal and must-run renewable and non- fossil electricity generation will have to be in the form of two-way contracts for difference (CfDs), while Member States are obliged to channel excess revenues to consumers. In addition, the reform will boost liquidity of the markets for long term contracts that lock in future prices, so-called “forward contracts.” This will allow more suppliers
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