Commission Launches Consultation on Reform of the EU Electricity Market Design To Support a Clean and Affordable Energy Transition
January 26, 2023
On January 23, 2023, the European Commission (the “Commission”) launched a public consultation on the reform of the EU’s electricity market design.[1]
The consultation will run until February 13, 2023 and focuses on possible measures aimed to “better protect consumers from excessive price volatility, support their access to secure energy from clean sources, and make the market more resilient”.[2]
Background
From the 1990s, the Member States have progressively put in place an increasingly integrated energy market in order to build a more competitive, customer-centred, flexible and non-discriminatory EU energy market with market-based supply prices. Five Energy Packages have been adopted since 1996 to address market access, transparency and regulation, consumer protection, supporting interconnection, and adequate levels of supply. The Fourth Energy Package of 2019 intended to complete the implementation of the EU’s internal energy market and introduced new electricity market rules for renewable energies.[3] The Fifth Energy Package, “Fit For 55”, was published on 14 July 2021 with the aim of aligning the EU’s energy targets with the new EU climate ambitions set by the European Green Deal for 2030 and 2050.[4]
Over the last year, with the resumption of global gas demand following the easing of COVID-19 restrictions and, subsequently, Russia’s invasion of Ukraine, energy prices have seen unprecedented spikes and volatility. This has had a severe impact on EU households and the economy. To mitigate the effect of these market dynamics, the EU provided an energy prices toolbox with a wide range of emergency measures to tackle high energy prices while ensuring security of supply.[5]
In this context of energy crisis where the current system has demonstrated some shortcomings, the European Council called on the Commission to work on the structural reform of the EU electricity market, with the dual objective of securing European energy sovereignty and achieving climate neutrality. The planned reform of the EU electricity market design was announced by President von der Leyen in her annual State of the Union Speech[6] last year and is included in the Commission’s 2023 Work Programme[7].
Main areas
The consultation launched this week focuses on four main areas.
- Making electricity bills less dependent on short-term fossil fuel prices and boosting the deployment of renewables. The current market design is very much focused on short-term markets, which are still very often driven by volatile fossil fuel prices. This has exposed households and companies to significant price spikes and has also boosted the revenues and profits of many producers with lower marginal costs such as renewables and nuclear, while their minimum profitability has been often protected by public support. The consultation considers incentivising the use of long-term contracts, like power purchase agreements (PPAs) or two-way contracts for difference, in order to ensure that energy bills become less dependent from the fluctuation of prices in short-term markets. The contemplated reform also aims to ensure that electricity bills better reflect the overall electricity mix and the lower cost of generating electricity from renewables, while promoting the deployment of renewable energy as a key element in the EU’s strategy.
- Improving market functioning to ensure security of supply, and fully utilise alternatives to gas, such as storage and demand response. The consultation covers ways to improve the conditions under which flexibility solutions such as demand response (i.e., adapting consumer’s electricity use in response to the needs of the grid), energy storage and other weather-independent renewable and low-carbon energy sources compete in the markets. The consultation also seeks input on how to safeguard security of supply and adequacy in unforeseen crisis situations, in order to ensure timely investments in capacity.
- Enhancing consumer protection and empowerment. The consultation explores different options to better protect consumer from extreme prices. In particular, it considers the possibility of developing the use of digital tools to allow consumers to control their costs. Consumers using renewable heating or electromobility could for instance avoid the most expensive times of the day to use grid electricity. The consultation also addresses the potential requirement for suppliers to be adequately hedged, combined with an effective Supplier of Last Resort Regime to ensure continuity of supply, so that consumers do not bear the costs when suppliers fail. In addition, the consultation considers the possibility of allowing Member States to guarantee households and SMEs access to a minimum necessary amount of electricity at an affordable price.[8]
- Improving market transparency, surveillance and integrity. The consultation discusses the relevance and robustness of Regulation 1227/2011 on wholesale market integrity and transparency (REMIT)[9] to ensure the integrity of the energy market, a fair and competitive interplay between supply and demand, and tackle market abuse. It seeks input on improvements to the REMIT framework to further increase transparency, monitoring capacities and ensure more effective investigation and enforcement of potential market abuse cases in the EU to support new electricity market design.
Next steps Replies to the consultation can be submitted until February 13, 2023.[10] The Commission intends to present its proposal with any relevant amendments to the electricity market design by the end of Q1 2023.
[1] See Commission’s website “Electricity market – reform of the EU’s electricity market design”, available here.
[2] See Press release from the Commission of January 23, 2023, Electricity Market Design: Commission launches consultation on reform to support a clean and affordable energy transition, available here.
[3] The Fourth Energy Package consists of one directive (Electricity Directive 2019/944/EU) and three regulations (Electricity Regulation 2019/943/EU, Risk-Preparedness Regulation 2019/941/EU and EU Agency for the Cooperation of Energy Regulators (ACER) Regulation 2019/942/EU).
[4] See European Council’s website “Timeline - European Green Deal and Fit for 55”, available here.
[5] See, e.g., Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions of May 18, 2022 (REPowerEU Plan), available here; Communication from the Commission of March 24, 2022, Temporary Crisis Framework for State Aid measures to support the economy following the aggression against Ukraine by Russia, available here.
[6] See President von der Leyen’s speech, “State of the Union 2022” of September 14, 2022, available here.
[7] See Commission work programme 2023 of October 12, 2022, available here.
[8] This is consistent with the approach taken in Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to address high energy prices,
[9] See Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency, available here.