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No need to extend EU's inframarginal revenue price cap: commission


Prices have dropped, outlook more stable

Cap reported to have impacted PPAs

Demand, tariff measures can also cease

  • Author
  • Henry Edwardes-Evans
  • Editor
  • Alisdair Bowles
  • Commodity
  • Coal Electric Power Energy Transition LNG Natural Gas

The European Commission has advised against extending the Eur180/MWh ($193/MWh) inframarginal revenue cap placed on wholesale electricity prices beyond June 30 as prices have fallen and a reprise of 2022's spikes this winter looks unlikely.

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The cap was applied on Dec. 1, 2022 in response to prices soaring over Eur350/MWh in August. It is due to expire on June 30.

In a June 5 market review the EC said it "does not recommend the prolongation of the Council Regulation with respect to the inframarginal revenue cap."

The review found divergent implementation of the cap across member states had led to significant investor uncertainty.

"This is compounded by the fact that in certain member states the implementation of the cap has reportedly impacted the conclusion of PPAs and other long-term contracts," it said.

A prolongation of the measure would hinder a key objective in the EC's electricity market design proposal, to incentivize the uptake of power purchase agreements and ensure as liquid a PPA market as possible, it said.

Further, given current market conditions, the benefits of the cap do not outweigh market risks, it said.

Since December electricity prices have fallen heavily, to average less than Eur80/MWh, leading to market expectation that price spikes would be less likely this winter.

Higher gas storage levels, demand reduction efforts, and the addition of gas pipeline and LNG infrastructure indicate an easing of price risk, the EC said, supported by expectations of improved availability of nuclear power and overall higher availability of hydro power versus 2022.

It added that there was also no need to prolong emergency measures on demand reduction and retail price regulation.

Both have been addressed in the longer-term electricity market design reforms proposed by the EC, which is wary of regulating tariffs outside of exceptional circumstances.

"There are significant downsides to regulated prices. In particular, they can reduce energy efficiency incentives and undermine competition to the long-term detriment of consumers," it said.

On demand, the design reforms call on member states to assess power system flexibility, including demand response and storage, and set tailored objectives.

The commission also noted a new network code on demand response was being drafted.

"Once finalized, this network code is expected to include binding rules on aggregation, energy storage and demand curtailment, which will further facilitate the participation of demand response to all existing markets," it said.

The EU's October 2022 exceptional measures
Measure Application Target
Electricity demand reduction Dec. 1, 2022-March 31, 2023 Mandatory 5% cut to peak demand, indicative 10% cut to overall demand
Inframarginal revenue cap Dec. 1, 2022-June 30, 2023 Eur180/MWh cap on renewable, nuclear, lignite generators. Member state discretion. Revenues to help defray high retail bills
Support for final customers Oct. 8, 2022-Dec. 31, 2023 Allow below-cost regulated prices for households and SMEs
Source: European Commission, Council Regulation (EU) 2022/1854