6.2.2023
ESG
> Sustainability, Environmental -Social -Governance (ESG)

Reform of the electricity market design in the EU to support a clean and affordable energy transition

The current energy crisis has severely disrupted the global energy system, caused high and volatile electricity prices and largely passed on the economic burden of the crisis to final consumers.

This is why the European Commission launched a public consultation on the reform of the electricity market design in the European Union on 23 January 2023.[1]

The European Commission’s reform to support a clean and affordable energy transition is based on the main objectives outlined in the European Green Deal[2] and the Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions[3], and includes amendments to Regulation (EU) 2019/943 on the internal market for electricity[4], Directive (EU) 2019/944 on common rules for the internal market for electricity[5] and Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency[6].

Background of the reform

The military invasion of Ukraine by Russia has created problems resulting in high energy prices and prompted a series of measures to rapidly reduce dependence on Russian fossil fuels and accelerate the green transition.[7]

Although the share of renewables in the energy mix is increasing, current instruments to protect large industrial consumers, small and medium-sized enterprises and households are not effective enough. As the revenues of many generators with lower marginal costs such as renewables, are influenced by the short-term market prices determined by the marginal pricing system, generators that have low production costs have benefited from unexpected surplus profits, while their minimum profitability has been often protected by public support.[8]

This has led to extraordinary regulatory intervention in pricing in the European Union’s energy markets, making it essential to ensure that any regulatory intervention in electricity market design maintains incentives for investment.[9]

What will the reform bring?

Looking ahead to the 2023/2024 heating season, the European Commission wants to protect people and businesses from excessive price volatility and high energy prices, improve access to secure energy from clean sources and increase the resilience of the energy system at EU level.[10] The consultation focuses on four main areas and aims to:

  • Make electricity bills less dependent on short-term fossil fuel prices, and boos the deployment of renewables;
  • Improve market functioning to ensure security of supply, and fully utilise alternatives to gas, such as storage and demand response;
  • Enhance consumer protection and empowerment;
  • Improve market transparency, surveillance and integrity.[11]

Guaranteeing direct access to affordable clean energy to all consumers will require market tools to achieve more stable prices and contracts based on the true costs of energy production.[12]

Public consultation process

The public consultation, lasting from 23 January 2023 until 13 February 2023, is mainly addressed to representatives of ministries and public authorities, national regulators, Transmission System Operators, Distribution System Operators, Market operators, companies conducting business in the energy sector, industrial consumers and associations, NGOs, etc.[13]

The comment of the European Commission on the opinions received on the basis of the questionnaires[14] is going to be published in a report on its website. The questionnaire covers questions on the appropriateness of certain customer protection instruments, such as long-term Power Purchase Agreements, organised forward markets, Contracts for Difference and some measures such as better consumer protection and empowerment, limiting the revenues of producers with low marginal costs, and strengthening the integrity and transparency of the energy market. The European Commission will take the contributions to the public consultation into account when preparing the legislative proposal for the Directive, which is expected to be finalised in the first quarter of this year.[15]

Conclusion

The European Commission has followed the European Council’s call to pursue a structural reform of the market with a twofold objective: i) to ensure European energy sovereignty and ii) to achieve climate neutrality objectives. The consultation paper therefore focuses on possible measures to create a more resilient energy market in the European Union, while at the same time promoting the green transition and significant investment in renewable energy. The European Commission’s reform aims in particular to ensure that all Europeans benefit from the increasing use of renewable energy sources.[16]

 

[1] Europa.eu. Electricity Market Design: Commission launches consultation on reform to support a clean and affordable energy transition Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_324  (1. 2. 2023).
[2] Europa.eu. A European Green Deal. Available at: https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en  (1. 2. 2023).
[3] Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions COM(2022) 230 final (»REPowerEU Plan«).
[4] Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity.
[5] Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU.
[6] Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency.
[7] REPowerEU Plan, page 1.
[8] Europa.eu. About this consultation. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13668-Trg-elektricne-energije-reforma-zasnove-trga-elektricne-energije-EU/public-consultation_sl  (2. 2. 2023).
[9] Europa.eu. About this consultation. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13668-Trg-elektricne-energije-reforma-zasnove-trga-elektricne-energije-EU/public-consultation_sl  (2. 2. 2023).
[10]Europa.eu. Electricity market – reform of the EU’s electricity market design. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13668-Electricity-market-reform-of-the-EUs-electricity-market-design_en  (1. 2. 2023).
[11] Europa.eu. Electricity Market Design: Commission launches consultation on reform to support a clean and affordable energy transition Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_324  (1. 2. 2023).
[12] Europa.eu. Electricity Market Design: Commission launches consultation on reform to support a clean and affordable energy transition. Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_324  (1. 2. 2023).
[13]Europa.eu. About this consultation. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13668-Trg-elektricne-energije-reforma-zasnove-trga-elektricne-energije-EU/public-consultation_en (2. 2. 2023).
[14] Europa.eu. Public Consultation: Revision of the EU’s electricity market design. Available at: https://ec.europa.eu/eusurvey/runner/EU-EMD-revision?showecas=true  (2. 2. 2023).
[15] Europa.eu. Electricity market – reform of the EU’s electricity market design. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13668-Electricity-market-reform-of-the-EUs-electricity-market-design_en  (1. 2. 2023).
[16] Europa.eu. Electricity Market Design: Commission launches consultation on reform to support a clean and affordable energy transition Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_324  (1. 2. 2023).