The recently published European Commission proposals for electricity market design reform are a response to the record-high wholesale electricity prices experienced across the bloc during 2022. The Commission’s three-week consultation process during January and February 2023, which we reviewed here, left open the possibility of significant reforms to the wholesale electricity market.
That has not materialised in the proposals that have emerged. More revolutionary ideas such as reform of the marginal pricing model, so as to decouple short-term electricity prices from the price of natural gas, have not been adopted. Still, it is important for participants in the Irish electricity market to be aware of what are detailed legal proposals for the foundational EU legislation.
Scope of the Proposals
The Commission proposes to implement reform mainly by:
- Amending the Regulation (EU) 2019/943 (Electricity Regulation) and Directives (EU) 2018/2001 (RED II) and (EU) 2019/944 (Electricity Directive) to reform the electricity market design rules, and
- Amending Regulation (EU) No 1227/2011 of the European Parliament and of the Council (REMIT) to enhance monitoring and enforcement of market integrity and transparency
The proposals will be adopted through the ordinary legislative procedure, meaning they are subject to legislative review and possible amendment by the European Parliament and the Council of the EU before entering into force. The proposals focus on four main areas, including:
1. Making electricity bills less dependent on short-term fossil fuel prices and boosting the deployment of renewables
The proposals include measures to support the development of long-term Power Purchase Agreement (PPA) markets, which are said to promote long-term price stability. There is focus in the proposals on making PPAs more attractive to generators by requiring Member States to reduce the credit risk of off-taker payment default, by establishing state-backed guarantee schemes. There is also a proposal to require that renewable electricity projects can participate in public support schemes despite having part of their capacity reserved to service the demand under a PPA.
For direct price support schemes for new renewable generation, the proposal would require Member States to implement this support by way of two-way contracts for differences, or CfDs.
The Commission’s view is that the functioning of the forwards market, i.e. the market for the pre-sale of electrical output up to three years ahead of its generation, must be improved in order to create deeper and more liquid hedging opportunities. The Commission is also of the view that the forwards market should incentivise the development of fixed-price contracts. This covers long-term price exposure and makes bills less dependant on short-term fossil fuel prices.
2. Improving market functioning to ensure security of supply and fully utilise alternatives to gas, such as storage and demand response
National regulatory authorities will be required, under the proposed amendments to the Electricity Regulation, to set a national objective for non-fossil flexibility including demand response and storage.
Storage is considered, in addition to the proposals outlined above, in a Recommendation on Energy Storage. The document underlines the fundamental role of flexibility that storage can provide to the electricity system. The Commission is recommending that EU Member States consider the specific characteristics of energy storage when designing network charges and tariff schemes and that they also facilitate permitting of such assets.
3. Enhancing consumer protection and empowerment
It is proposed that the EU may declare an emergency in case of sustained excessive prices for a period of up to one year, during which price regulation tools could be applied. Proposals also include providing an entitlement for customers to fixed term, fixed price electricity supply contracts of up to one year and mandatory risk management which would require suppliers to put in place hedging strategies to mitigate short-term price volatility.
4. Improving market transparency, surveillance and integrity
The Commission notes increased interaction between financial and energy markets. The REMIT proposal would bring the definitions of ‘market manipulation’ and ‘inside information’ in the REMIT Regulation into line with the stricter definitions for those terms that apply in the EU Market Abuse Regulation. There is also a proposal to increase the reporting obligations that apply to market participants.
This reform cycle has not produced the “deep and comprehensive reform” of the electricity market that was originally promised by the President of the European Commission in 2022. From an Irish perspective, many of the proposals – such as those requiring that public support for renewable generation take the form of CfDs – do no more than codify what is already the practice in Ireland.
But the proposals are not trivial. While the Commission appears to have abandoned its quest to detach wholesale electricity prices from natural gas prices, it is instead reserving for itself significant powers to intervene in retail electricity pricing. In addition, by proposing to legislate around PPAs, the Commission is demonstrating a willingness to intervene in what had previously been a market characterised by private contracting.
Perhaps the biggest takeaway from this exercise – particularly when considered alongside the revenue cap and solidarity contribution that we discuss separately – has been the reminder that the energy markets remain firmly on the radar of the European Commission, and that the only constant in EU energy markets these days is change.
For more information, contact a member of our Energy team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.