Getting the EU Electricity Market Design over the line

The 14th of March 2023 was a historic day, when the EU proposed a revision of the Electricity Market Design rules. Its goal? To give a European answer to the energy price crisis, and offer both citizens and companies a wider toolbox to shield themselves from higher energy prices, in the longer term.

There’s room for improvement for this deal as it goes through negotiations. Concerningly, the text prolongs the status quo on market caps. However, we see new energy sharing proposals which literally put the power in citizens hands, and help with the grid integration of local renewables. The text also allows businesses to access Power Purchase Agreements (PPAs) more easily, and encourages a flexible application of Contracts for Difference (CfDs).

The latest developments in EU negotiations are encouraging. On 17th October, EU Energy Ministers agreed on the EU Council negotiating position on the regulation, allowing them to launch negotiations with the Parliament and Commission. However, a rapid conclusion of the file is absolutely necessary to deliver legal certainty to invest in new renewables, and reach our climate and energy targets.

Over the next few months, it will be crucial to accelerate discussions, and guarantee an industry and market-friendly Electricity Market Design regulation. We need a deal before the end of the year.

State of Play

The Commission’s initial proposal did not prolong market revenue caps. Market caps were introduced by some Member States, and later recognised and regulated by the EU Council in an emergency decision limited to June 2023. The European Parliament have not endorsed making the market revenue cap a permanent feature of the electricity market; EU Energy Ministers have continued with the status quo, prolonging the current measures until June 2024.

However, the measure has led to a mix of various national implementation, offering a fragmented electricity market and a Frankenstein-like patchwork of rules. In several cases, market caps also don’t not properly account for renewable derivative contracts based on the electricity market i.e. corporate renewable power purchasing agreements. This puts investors and developers in a position where they need to navigate 27 different regulations without any certainty on their possibility to invest in future projects. We’re scaring off investors at a time when they’re most needed. It’s not just industry sharing these concerns, EU energy regulators have also highlighted the inefficiencies of the market cap. The European Commission has even warned that there is no need to continue the revenue caps.

On another issue, the negotiations risk taking a step backward on fighting climate change. The Council proposes to allow Member States to continue subsidising fossil assets until the end of 2028, by introducing an exemption to the CO2 threshold of 550g/kWh for capacity mechanisms. Undoubtedly, this is a missed opportunity. The idea is that coal generation could support balancing electricity supply and demand. In effect, this gives coal a backdoor to continue generating emissions, even as our net-zero deadline looms.

The better choice is to double-down political attention and support towards reinforcing the grid and flexibility – delivering 24/7 renewables.

More positively, the text reinforces consumers’ direct access to low-cost and stable electricity, shielding them from high energy prices. The EU Market Design framework already included a right to self-consume the electricity produced by one’s renewable system; this new revision went a step further and laid out new rules for people to share low-cost solar energy with their neighbours. Energy sharing, or collective self-consumption, is already in place in Spain, Portugal, and France. The concept empowers households to directly benefit from reductions on their energy bills, while supporting the grid integration of solar. For example, people can benefit from the solar electricity produced from their local school during the weekend, or share energy with their neighbouring shop during the day. In negotiations, the Parliament has improved the provision, notably by broadening its access to industrial clusters, or factories’ large rooftops.

For larger consumers, the text proposes tools to support their access to Power Purchase Agreements, ensuring a low-cost, stable, and green electricity price over 5 to 20 years.

The text proposes bank guarantees for those consumers with the most credit risk, something which is endorsed by the EU institutions. Some amendments in the Parliament propose to unnecessarily further standardise or regulate those contracts, which are fundamentally business-driven and tailor-made.

In parallel, the text reinforces support mechanisms to invest into solar PV, by using CfDs (i.e. state-backed investment schemes for clean energy projects) which will provide remuneration certainty for solar constructors to invest into projects, while granting extra revenues when appropriate. The design rules of CfDs are smart, and left sufficiently flexible to cater to national realities. On the other hand, administratively placing existing solar plants into CfDs would have the complete opposite effect, and force developers to look backwards into the cost-revenue structure of past installations, slowing down our transition. The final text needs to make it very clear that CfDs must remain voluntary, competitive, and apply only to new investments.

The Electricity Market Design revision will also help modernise the electricity system, and boost storage solutions to replace fossil flexibilities. Flexibility resources are assets that are capable to respond to a system stress, like a battery that charges or discharges.

They are urgently needed to accompany the grid integration of renewables and electric vehicles, and make the system independent from fossil assets. The text requires all grid operators to assess their needs, and develop a national target for flexibility growth. It also encourages anticipatory investments in grid infrastructure and requires Distribution System Operators (DSOs) to make more information about their grid capacity available. This is with the objective of accelerating solar connections. The Commission should lead the implementation of these proposals.

However, they will also need to be complemented by further policy actions through the upcoming Grids Action Plan.

What next?

Discussions in Council will likely continue to be difficult, especially between between Germany and France on the use of CfDs, and revenues to support vulnerable energy consumers. Over the next few months, it will be critical to preserve a market-based electricity system. Regulated electricity markets are used across the world, and are the only way to organise a complex power system through powerful price signals. Direct and private renewable electricity supply solutions, such as PPAs, must be preserved. They are flexible and can adapt to consumers’ needs. At the same time, they foster innovation on the generation side, and they immediately channel private investments into renewable assets. As a result, public resources can be focused on other projects, and certain vulnerable or strategic consumers, can benefit from competitive electricity prices. This is necessary to preserve a business-friendly environment, one that is flexible for innovators, and provides a stable framework for investors.

Ultimately, we have to establish new electricity market rules before EU elections next year. We? need to invest in new renewables now. The Market Design proposal revision is a momentous opportunity; we cannot let it slip away.