Filenews 2 January 2024
There is a great deal of debate going on in Brussels and in many European governments about the changes that the European Commission, in cooperation with other EU institutions, intends to bring to the electricity market. Changes that take the character of a reform, which was deemed necessary during the unprecedented energy crisis in 2022, with negative consequences even today, despite the large drop in the prices of electricity produced.
High and volatile prices in 2022, mainly as a result of Russia's invasion of Ukraine and the interruption/reduction of Russian gas imports to EU countries, have placed an excessive and heavy burden on European energy consumers. Millions of consumers saw their bills soar, due to the huge increase in the price of natural gas, which also dragged down the selling prices of renewable energy on energy exchanges, leading to so-called sky-high profits of producers and suppliers.
During the energy crisis, the EU introduced a wide range of measures to mitigate the impact of high and volatile wholesale energy prices on households and businesses. In addition, in March 2023, the Commission responded to EU leaders' call to promote an electricity market reform to ensure European energy security and gradually achieve climate neutrality.
Although it was preceded on 14 December 2023 by a preliminary agreement between the European Parliament and the European Council, which was welcomed by the European Commission, finalising the content of the reform will take several more months. And in the meantime, it is likely that some of the agreed provisions of the reform will be modified, as interests and priorities differ from state to state. What is certain is that differences seem inevitable, as in the ordeal experienced by European societies in the wake of the energy crisis, it was found by the European Commission, governments and the European Parliament that the existing system of organization of the European electricity market cannot respond, as it stands, to the developments and new needs created by the commitments for the green transition and in particular the decarbonization of energy.
Renewables-based
In a Communication of 15 December, the European Commission welcomed the agreement in principle reached by the European Parliament and the European Council (in the margins of the last summit) on reforming the design of the electricity market.
The agreement will help the EU create an energy system based on renewables, with lower energy bills and more effective protection of consumers from sudden and large price increases and enabling them to benefit from the green transition.
In its communication, the Commission notes that the reform "will ensure a sustainable and independent energy supply in the EU, in line with the European Green Deal, thanks to better access to affordable renewable energy.
The preliminarily agreed reform includes revisions to several pieces of EU legislation – notably the Electricity Regulation, the Electricity Directive and the REMIT Regulation. Building on the lessons of the energy crisis caused by Russia's invasion of Ukraine, the agreed reform will bring more price stability to both consumers and suppliers thanks to the wider use of long-term contracts for clean energy generation "and bring more non-fossil flexible solutions to the system, such as demand response and storage."
Better protected consumers
Under the agreement, consumers will have a wider choice of contracts and clearer information on available production and pricing. At the same time, they will still be able to choose to enter into dynamic price contracts to take advantage of price fluctuations, to use electricity when it is cheaper (for example to charge electric cars or use heat pumps in their homes).
The agreement is considered by the Commission to reduce the risk of failure on the part of the supplier and strengthen consumer protection. Suppliers should manage the risks of sudden price fluctuations at least to the extent of volumes, on the basis of fixed bilateral contracts (PPAs), in order to be less exposed to price increases and market volatility (via the energy exchange or day-ahead market), while Member States should designate suppliers of last resort so that no consumer is left without power.
Vulnerable consumers and the energy poor will be protected from being disconnected from the electricity grid due to unpaid bills and member states will be able to extend regulated retail prices to households and SMEs in the event of a crisis.
In addition, the Commission could propose to the European Council to declare an "electricity price crisis" in the event of a sharp increase in retail prices, allowing member states to take further measures to protect customers and ensure access to affordable energy.
The agreed reform allows consumers, including businesses and public authorities, to play an active role in the energy system. As consumers involved in energy sharing, they will also be able to invest in wind or solar farms and sell surplus solar electricity to neighbours, not just their supplier, and paves the way for Member States to facilitate the deployment of renewable energy by consumers through plug-in mini solar systems.
To ensure that EU consumers benefit from competitive markets with transparent pricing, the Agency for the Cooperation of Energy Regulators (ACER) and national regulators will have an improved capacity to monitor transparency in the energy market.
Two types of contracts
The agreed reform – if formalised – will facilitate the development of more stable long-term contracts, such as bilateral Power Purchase Agreements (PPAs) – through which companies create their own direct energy supplies and thus can benefit from more stable renewable and low-carbon energy production prices. This will help strengthen the competitiveness of EU industry by reducing its exposure to volatile prices related to fossil fuels (provided that the energy that passes through auctions – stock exchanges is indeed limited).
In addition, the reform will boost market liquidity for long-term contracts that lock in future prices, so-called "futures". This will allow more suppliers and consumers to protect themselves from excessively volatile prices for longer periods of time.
In order to provide electricity producers with stability of revenues and shield industry from price volatility, under the interim agreement all State support (sponsorship) for investments in new generating capacity and mandatory renewable and low-carbon electricity production should take the form of two-way contracts for difference (CfDs) or equivalent schemes with the same results. With these contracts, the price for renewable energy is locked at some point and if the market price is higher than that set through a CfD, Member States reap the difference and channel excess revenues to consumers, either directly (subsidies) or by financing the cost of price support or investments to reduce electricity costs. The price of energy in the market is not directly affected by CfD's.
The new electricity market design will facilitate further penetration of renewables into the electricity grid and enhance reliable predictability for electricity generation to reduce grid congestion and green energy dumping.
More broadly, this agreement supports the achievement of the EU's target of 45% renewables in the energy mix by 2030 at EU level, as agreed under the revised Renewable Energy Directive (2413/2023).
Next steps
The preliminary agreement will now need to be formally endorsed by the European Parliament and the European Council. Once this process has been completed, the new legislation will be published in the Official Journal of the Union and will enter into force.
The promoted changes in the EU electricity market will not directly affect Cypriot consumers as long as the competitive electricity market is not operational, which under certain conditions is feasible in 2025.
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