Reform of the EU Electricity Market: Member States Reach an Agreement on Contracts for Difference

In March 2023, the European Commission (the “Commission”) has presented a proposal to reform the regulatory framework applicable to the EU electricity market.[1]

After various failed attempts, Member States have found an agreement on the proposal (the “General Approach”) within the Council of the European Union (the “Council”), on October 17, 2023.[2]

One of the most contentious issues between Member States concerned the use of two-way Contracts for Difference (“CfD”) for investments in existing facilities producing nuclear energy.  Two-way CfDs are contracts signed between a public entity and a power generating facility operator that provide at the same time a minimum remuneration protection for the operator, when the market price is below the strike price, and a limit to excess remuneration, when the market price is above the strike price (i.e. the operator paying back the difference between the two prices).

The EU electricity market design proposal promoted the use of two-way CfDs for investments in renewable and low carbon energy facilities, i.e. for the generation of electricity from wind, solar, geothermal, hydropower without reservoir, and nuclear energy.[3]  Article 1(9) of the Commission’s proposal, which explicitly mentions investments aimed at repowering or extending existing power-generating facilities or at prolonging their lifetime, allowed Member States to use CfDs to subsidize existing power-generating nuclear facilities.

France strongly supported this aspect of the proposed reform, which would have allowed the use of CfDs to support investments aimed at extending the lifetime of 56 of its nuclear reactors.  In contrast, Germany and other Member States have tried to exclude or limit the possibility of using CfDs for existing nuclear facilities, alleging that this could have distorted competition and reduced the incentives to invest in renewables.  This is in line with the broader trend of divisions between EU Member States over the inclusion of nuclear energy and hydrogen derived from nuclear power in key legislative instruments of the EU Green Deal.[4] 

The Council’s General Approach provides that, as of three years after the entry into force of the new legislation, two-way CfDs will become the mandatory model of direct price support schemes for investments in new low carbon, non-fossil fuel electricity facilities.[5]  On the other hand, the Preamble to the General Approach clarifies that Member States will also be allowed to grant support schemes in the form of two-way CfDs for “new investments aimed at substantially repowering existing power generation facilities, or at substantially increasing their capacity or prolonging their lifetime.”[6]

The compromise has been reached by specifying that all two-way CfDs will have to be compatible with five design principles.  CfDs will have to be designed to:

1. Preserve incentives for the generating facility to operate and participate efficiently in the electricity markets, in particular to reflect market circumstances.
2. Prevent any distortive effect of the support scheme on the operation, dispatch and maintenance decisions of the generating facility or on bidding behavior in day-ahead, intraday, ancillary services and balancing markets.
3. Guarantee the long-term economic viability of the power generating facility while avoiding overcompensation by an alignment of the level of the minimum remuneration protection and of the upward limit to excess remuneration with the cost of the new investment and the market revenues.
4. Avoid undue distortions to competition and trade in the internal market, notably by determining remuneration amounts through an open, clear, transparent and non-discriminatory competitive bidding process.  In situations where a competitive bidding process is not feasible, CfDs – and the applicable strike prices – should be structured in a way that prevents distribution of revenues to undertakings from creating undue distortions.
5. Avoid any other distortions to competition and trade in the internal market resulting from the distribution of revenues to undertakings.[7]

The Commission will have to ensure the compatibility of CfDs with such design principles in its assessment of the schemes under Articles 107 and 108 of the Treaty on the Functioning of the European Union (the “TFEU”).

The Council has also reached an agreement regarding the use of the revenues generated by Member States through two-way CfDs.  According to the General Approach, such revenues will be distributed to final customers, and Member States may also use them “to finance the costs of the direct price support schemes or investments to reduce electricity costs for final customers.”[8]

The Council will now start negotiations with the European Parliament to define the final version of the proposed legislation.

This article was republished by The Global Regulatory Developments Journal.

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Co-authored with Giacomo Chiti

[1]             See Cleary Gottlieb EU Energy Resource Center, EC Proposed Reform of the EU Electricity Market, May 9, 2023, available here. 

[2]             See Council of the European Union, Press Release, Reform of electricity market design: Council reaches agreement, October 17, 2023, available here.  The text of the General Approach is available here.

[3]             Proposal for a Regulation of the European Parliament and the Council of March 14, 2023, amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design (COM (2023)148 final). Article 1(9).

[4]             See e.g. Cleary Gottlieb EU Energy Resource, Is nuclear green? European Union is splitting on hydrogen from nuclear power, July 7, 2023, available here; see also Cleary Gottlieb EU Energy Resource, The Net-zero Industry Act: The European Commission’s Latest Initiative To Scale up the Clean Energy Transition, April 14, 2023, available here.

[5]             See General Approach, Ibid., Recital 30 and Article 1(9).

[6]             Ibid., Recital 30.

[7]             Ibid., Article 1(9), p. 61 for the future Article 19(b) of the Proposal.

[8]             Ibid.