European Commission publishes proposals to revise EU internal electricity market

The Commission has published proposals for a revision of the European Union's internal electricity market. The objectives of the revision are the expansion of renewable energies, the decoupling of electricity prices from natural gas prices, the protection of end customers from highly fluctuating electricity prices and measures against market abuse. The proposals do not represent the feared hasty revolution, but rather a sensible evolution in several stages. 

The EU internal electricity market is the result of a reform process spanning more than two decades. Key elements are EU-wide, cross-border trading and marginal cost pricing. According to the Agency for the Cooperation of Energy Regulators (ACER), the EU internal electricity market in its current form has led to billions of euros in efficiency gains for the benefit of consumers. However, in connection with the rise in energy prices and electricity prices since the summer of 2021, there have been EU-wide market interventions by EU member states. Last autumn the EU adopted temporary emergency measures, such as the EU’s inframarginal revenue cap for electricity and the EU’s market correction mechanism for natural gas; furthermore, the Council tasked the European Commission with a fundamental revision of the EU's electricity market design. The European Commission responded to this on March 14 by presenting two legislative proposals that suggest changes to five laws relevant to the electricity market: Electricity Market Directive and Regulation, Renewable Energy Directive, REMIT Regulation and ACER Regulation. In addition, the European Commission has submitted recommendations addressed to EU member states on the expansion of energy storage; these recommendations are not legally binding.

The measures in detail:

Consumer protection

To protect consumers from high electricity prices and pronounced volatility in the future, they are to be given a wider choice of contract offers; among other things, energy suppliers are to be obliged to offer fixed-price contracts with fixed terms. In addition, the possibility for end consumers to have different electricity meters and thus different electricity supply contracts is to be introduced, for example for charging electric cars or using heat pumps.

In addition to expanding consumer choice, the revision also aims to reduce the risk of supplier default. To this end, energy suppliers are to be given guidelines on their hedging strategy. Further requirements relate to the obligation of EU member states to designate suppliers of last resort (SLR) in the event of company insolvencies. Other measures relate to vulnerable consumers and their treatment in the event of payment arrears. In the event of a crisis - declared at EU level - EU member states will be empowered to introduce retail prices for households and SMEs below market prices.

The revision also affects rules for renewable energy sharing: consumers will in future be able to invest in wind or solar farms and sell surplus solar power to both their energy supplier and their neighbours.

Flexibility

To improve the flexibility of the electricity system, EU member states will be required to assess the need for flexibility instruments and promote demand-side management and storage accordingly. Grid operators will also be required to introduce new instruments for peak-shaving. In addition, the European Commission has published ten non-legally binding recommendations for the promotion of storage technologies.

Long-term stabilization of electricity peaks

To improve the competitiveness of industry and reduce its vulnerability to price fluctuations, the European Commission proposes to strengthen the role of long-term power purchase agreements (PPAs). To this end, among other things, buyer-side credit risks are to be assumed through government measures. In order to provide electricity producers with stable revenues and to protect the industry from price fluctuations, state support for new investments in wind energy, photovoltaics, geothermal energy, hydropower without storage and nuclear power will only be possible in the form of two-sided contracts for difference (CfDs). EU member states will be required to pass on revenues from CfDs to consumers. In addition, liquidity in the long-term futures markets will be improved.

More transparency in the network sector

The revision includes proposals to improve the integration of renewables. These include transparency obligations for grid operators regarding grid congestion and shortened trading periods of 30 minutes before gate closure time.

More robust market supervision

To ensure competitive electricity markets and transparent pricing, the Agency for the Cooperation of Energy Regulators (ACER) and national regulators will be given additional powers regarding the supervision of wholesale energy markets. This includes stricter rules for data collection.

In this context, it is significant for the Swiss electricity industry that, according to the revision, the prohibitions and obligations contained in the REMIT Regulation are also to apply explicitly to acts and omissions in third countries and ACER will be in charge of monitoring it.

Further procedure

The proposals of the European Commission will be dealt with in the EU’s ordinary legislative procedure involving the European Parliament and the Council. According to the current Swedish Council Presidency and Members of the European Parliament, the proposals are to be adopted as soon as possible, but at the latest in the second half of 2023. On the one hand, this would ensure that the changes are in place before next winter; on the other hand, there are elections for the European Parliament in spring 2024, which will bring unfinished legislative processes to a standstill.

Independent of the proposals presented on March 14, 2023, a far-reaching reform of the EU internal electricity market is on the horizon and could be tackled by the next European Commission in the 2nd half of 2024.

Evaluation

The energy industry reacted with relief to the fact that the inframarginal revenue cap, e.g. for wind power, PV and hydropower was not extended. In addition, and contrary to the expectations of EU member states France, Spain and Poland and the statements of Commission President Ursula von der Leyen, the fundamentals of the EU's electricity market design have not been touched; this applies in particular to short-term electricity trading. For the time being, the experts in the administration of the European Commission and the EU member states seem to have prevailed, who wanted a gradual adjustment of the electricity market design whilst keeping its core elements.

The outcome of the legislative process will depend, among other things, on the development of energy prices in the coming weeks and months: If there is another sharp increase combined with high volatility, more radical approaches could prevail.