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News 30 January 2023

EU Commission launches official consultation on electricity market reform

The European Commission (EC) has officially opened a consultation on the forthcoming electricity market reform, one of the most awaited policy moves of the year. The reform has become a key topic at the end of 2022, when the stress posed by the challenges linked to the Russian invasion of Ukraine brought energy prices to sky-high levels. Many EU stakeholders started then to question the current functioning of the electricity market design, which uses gas prices as a base for all types of electricity sales in the EU, notwithstanding the source they come from.  

The focus has shifted towards consumers last year, with inflation hitting hard EU citizens and prompting the EU Commission to declare that “a reform is therefore needed to better shield households and businesses from high energy prices, to increase resilience, and to accelerate the transition set out in the European Green Deal”. According to the Commission, the reform will aim to expand Europe’s use of long-term contracts, providing power plants with a fixed price for their electricity. The target is creating a “safety area” where prices are more stable for consumers and revenues are more stable for the producers.  

Among the main instruments to be used figure contracts for difference (CfDs), a solution designed to provide generators with price certainty over the lifetime of the contract under the condition that certain milestones are respected. The aim is not only to deliver low carbon electricity, but also to attract investments in renewable energy projects. According to sources in Brussels, stability for consumers could be achieved through introducing specific EU rules for CfDs and leaving it up to national governments to decide to use them, or requiring new power plants that receive state support to sign CfDs, the Commission said. More radical changes, like allowing national governments to impose CfDs on certain existing power plants, could also be possible. 

Discussions have already spilled over to EU member states: just a few weeks ago, a vote in the French Parliament showed that a divide is already happening. The vote was cast on the possibility to “leave the European electricity market”: while the motion did not pass, the majority won with 180 against 153. The Spanish minister for the ecological transition, Teresa Ribera, similarly stated that “the current crisis has shown how vulnerable the current design of the electricity market is to stress situations, as well as the tremendous consequences for domestic consumers and, undoubtedly, a total risk of demand destruction due to the increase in energy poverty”. A non-paper by the Spanish government argues in favour of using contracts for difference to create a stable price for investors and consumers, as well as using long-term contracts for storage and demand response. The proposal was also supported by German minister Robert Habeck. 

The EU consultation is now open until the 13th of February. While stakeholders are invited to submit their opinions, many in Brussels question the little timeframe dedicated to the contributions, with the formal EC Communication expected to be published already by March.