Flexibility key within new EU electricity market reform proposal
The European Commission yesterday proposed to reform the EU electricity market design to accelerate a surge in renewables, incentivise flexibility and make the continent’s energy industry clean, more competitive and affordable for consumers.
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 is hoped to decrease the impact of fossil fuels on consumer electricity bills and ensure that the lower cost of renewables gets reflected.
The proposed market reform will aim to boost open and fair competition in the European wholesale energy markets by enhancing market transparency and integrity.
This reform, which is part of the Green Deal Industrial Plan, will also allow the European industry to have access to a renewable, non-fossil and affordable power supply – a key enabler of decarbonisation and the green transition.
On the proposal, Kadri Simson, commissioner for energy, commented: “The current electricity market design has delivered an efficient, well integrated market over many decades, but tight global supply and Russia’s manipulation of our energy markets has left many consumers facing massive increases in their energy bills.
“We are today proposing measures that will enhance the stability and predictability of energy costs across the EU. Driving investment in renewables will help us reach our Green Deal goals and make the EU the powerhouse of clean energy for the coming decades.”
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The reform 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, 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.
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. This proposal will further aim to allow consumers and suppliers to benefit from more price stability based on renewable and non-fossil energy technologies.
Consumers will be given a wide choice of contracts and clearer information before signing to have the option to lock in secure, long-term prices and 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 (e.g. to charge electric cars, or use heat pumps).
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 suppliers.
To improve the flexibility of the power system, Member States will now 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 side response and storage.
The reform also enables system operators to procure demand reduction at peak hours. Alongside this proposal, the Commission has also issued recommendations today to the Member States on the advancement of storage innovation, technologies and capacities.
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In response to the draft regulation, ESMIG – the European association of smart energy solution providers – welcomed the proposal, stating its necessity to “lead to a more resilient market, contain excessive price volatility and ensure secure energy supplies, especially from clean sources.
In particular, the association welcomed the new proposals on demand side flexibility, “notably the introduction of peak shaving products to enable demand response and decrease electricity consumption at peak times.”
In enabling such flexibility, ESMIG references the much-needed deployment of smart meters across smart electricity grids:
“Smart metering brings tangible energy savings, empowers consumers to better manage their energy and enables the integration of a growing share of renewables, supporting the green energy transition and reducing the reliance on fossil fuels and energy imports.
“Accelerating and completing the roll-out of smart meters across Europe is therefore essential to enable demand side flexibility: The lack of smart meters, and consequently lack of consumer visibility on their consumption (currently only an average of 54% of household consumers are equipped with intelligent/smart meters) has been recognised by the Commission as the first barrier in delivering flexibility.”
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Contract-induced competitiveness
To enhance the competitiveness of EU industry and to reduce its exposure to volatile prices, the Commission is also proposing to facilitate the deployment of more stable long-term contracts such as Power Purchase Agreements (PPAs).
Through these contracts, companies will 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.
To provide power producers with revenue stability and to shield the 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 the liquidity of the energy markets for long-term contracts that lock in future prices, so-called “forward contracts.” This will allow more suppliers and consumers to protect themselves against excessively volatile prices over longer periods of time.
There will also be new obligations to facilitate renewables integration into the system and enhance predictability for generation. These include transparency obligations for system operators as regards grid congestion, and trading deadlines closer to real time.
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Finally, to ensure competitive markets and transparent price-setting, the Agency for the Cooperation of Energy Regulators (ACER) and national regulators will have an enhanced ability to monitor energy market integrity and transparency.
In particular, the updated Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) will ensure better data quality as well as strengthen ACER’s role in investigations of potential market abuse cases of cross border nature. Overall, this will step up the protection of EU consumers and industry against any market abuse.
The proposed market reform forms part of the Green Deal Industrial Plan aimed to enhance the competitiveness of Europe’s net-zero industry and accelerate the transition to climate neutrality.
The proposal will now have to be discussed and agreed upon by the European Parliament and the Council before entering into force. A date for this debate has not been set yet.
