European Commission opens public consultation on electricity market reform

The European Commission has opened a public consultation on reform of the EU's electricity market design as it works on proposals to shield consumers from high prices, increase resilience and accelerate the transition, it said Jan. 23.

The controversial reform is focused on ways to reduce the impact of volatile gas costs on wholesale power price formation by moving low-carbon "inframarginal" generators onto long term contracts based on their actual costs.

"The EU's electricity market has served us well for over 20 years. But the unprecedented energy crisis we are facing shows that we need to make the electricity market design fit for the future, allowing it to deliver the benefits of affordable clean energy to everyone," Commissioner for Energy Kadri Simson said.

The consultation runs to Feb. 13. The EC aims to deliver a legislative proposal in March.

PPAs and CFDs

Power purchase agreements and two-way contracts for difference were the two main instruments the EC is looking at to ensure consumers benefit from the lower costs of renewables versus short-term market prices driven by fossil fuels, it said.

"Power purchase agreements bring multiple benefits. For consumers, they provide cost competitive electricity and hedge against electricity price volatility. For renewable projects developers, they provide a source of stable long-term income. For governments, they provide an alternative avenue to the deployment of renewables without the need for public funding," the EC said.

It would suggest ways in which the share of PPAs in the market could be increased and their roll-out incentivized.

PPA uptake by small and medium companies could be improved via public tendering for renewable energy in which a share of a project could be contracted, it said.

Further, credit guarantees to PPAs backed by public entities would support participation.

At the same time, two-way CFDs could be integrated into the electricity market design via a requirement on new and/or existing generation assets to agree such contracts in order to access public subsidies, it said.

"A number of issues need to be considered in this context, notably as to the extent to which the use of CFDs becomes mandatory for investments involving public support," it said.

While a far-reaching approach would impose CFDs on existing inframarginal generators to accelerate their uptake, the EC acknowledged that doing this via ex-post price regulation rather than competitive tendering "would also create significant uncertainty for investors in renewables."

In any case, given the multiple benefits of PPAs, any reform concerning CFDs "should not affect the development of the power purchase agreement market across the EU," it said.

PPA platform Pexapark's latest market trends data showed a composite European PPA price of Eur72.60/MWh ($79/MWh) on Jan. 20, down from Eur82.93/MWh a month earlier.

Non-gas flex

The consultation also covers ways to help non-gas-based flexibility services such as demand response and energy storage compete in short-term markets.

Reform of system operator tariff design would ensure they consider all sources of flexibility, while allowing trading nearer to real time would deepen liquidity in intraday markets.

Exchange warning

In what has become a familiar stand-off, European participants warned against jettisoning the existing market design based on merit orders and marginal pricing.

"The wholesale price formation in Europe is essential and one of the most efficient systems in the world," Epex Spot CEO Ralph Danielski said.

"We should listen to what this price signal tells us rather than throwing overboard a market design built across European countries over the last 20 years, and that creates an annual welfare of Eur34 billion," Danielski said.