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EU electricity market redesigned


Following publication in the EU Official Journal on 26 June 2024, key legislation revising the design of Europe’s electricity market came into force 20 days later, on 16 July 2024. As from this date it became directly applicable in all EU member states, which then have up to six months to adapt their national legislation to the new provisions


The electricity market reform was the culmination of efforts prompted by Russia’s full scale invasion of Ukraine, which caused severe spikes in energy prices across the EU in 2022. The electricity market redesign aims to avoid such price shocks in the future and can be seen as the EU’s long- term response to the 2022 energy crisis. Despite a large share of renewables in EU power generation, big spikes in fossil fuel prices (especially gas) have caused a steep increase in EU electricity prices.


This is due to the functioning of the EU electricity market, where the price of power is based on the cost of the fossil fuels used in power generation, the merit order principle. When high prices hit consumers in summer 2022, EU countries acted immediately to ease the burden on citizens with short term measures such as grants and the suspension of VAT. The market reform focuses on long term solutions aimed at avoiding similar situations in the future.


The new rules aim to make electricity prices less dependent on the price of fossil fuels, creating a buffer between markets and the electricity bills paid by consumers. The reforms aim to ensure better protection for consumers, more stability for businesses and an increased share of green electricity in the energy mix.


Electricity consumers will have more options when signing an electricity contract. This means:


Two-way contract for difference, the basic principle (source: European Commission) 


Market price Strike prices





increased availability of fixed price and fixed term contracts; flexibility to choose dynamic pricing, with multiple or combined contracts possible; and clearer information before signing up. Access to renewable energy will be easier thanks to the trading of electricity generated from renewables locally (for instance power from solar panels can be sold to neighbours). Vulnerable consumers will be better protected, with governments ensuring that there are sufficient suppliers of last resort so no consumers remain without electricity and better able to regulate retail prices for households and SMEs.


Business consumers will have more stable prices thanks to long-term contracts (such as power purchase agreements whereby the power


Power generation fuel mix for EU member states (source: European Commission) 0%


25%


Luxembourg Denmark Latvia


Lithuania Austria Sweden Croatia Portugal Finland Greece Romania Germany Spain


Netherlands Ireland Italy


Estonia Slovenia Belgium France Poland Slovakia Hungary Bulgaria Cyprus Czechia Malta


Renewables Fossil fuels Nuclear 50% 75%


generator agrees to sell energy directly to energy consumers at a certain price).


The reformed market should also see power producers enjoying more stable revenue streams.


Investments in new power generating facilities based on wind, solar, geothermal, hydropower (without reservoir) and nuclear energy will be executed in the form of two-way contracts for difference (CfDs). On the one hand, this secures a minimum return on such investments and on the other, it prevents excessive costs in the event of another crisis.


In a two-way contract for difference regime, the generator sells electricity in the market but then settles the difference between the market price and the strike price agreed in advance with the public entity. Any excess revenues are distributed to final customers, with some flexibility for member states.


100%


As already noted, a main objective of the new rules is to make it easier to integrate renewables into the system. Moreover, renewables generation will be easier to predict (through new transparency obligations placed on system operators and enhanced ability to monitor the energy market).


This will make it possible to both keep prices under control and meet ambitious climate targets that the EU set out in the Fit for 55 package.


The mechanics of reform With the stated aim of boosting renewables, better protecting consumers and enhancing industrial competitiveness, March 2023 saw presentation of initial proposals from the European Commission for reform of the EU electricity market rules, as part of the Green Deal Industrial Plan.


The new electricity market design rules consist of the amending Directive EU/2024/1711 and the


12 | September 2024| www.modernpowersystems.com


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