Reform of European electricity markets launched

Europe has experienced an unprecedented energy crisis

An initial European response deemed insufficient by many member states

Faced with soaring energy prices, the European Commission initially put in place a package of measures which it itself called the “toolbox”, a sign of the limited ambitions of these measures. Many Member States, starting with France, consider this response to be woefully inadequate.

An in-depth analysis of the reform of European electricity markets

The persistence of high electricity prices has finally prompted the European Commission to initiate an in-depth review, starting with a definition of the objectives to be achieved.

This organizational reform has 4 main objectives:

1. Reduce the dependence of wholesale electricity prices on rising fossil fuel prices (and natural gas prices in particular).
2. Accelerate the deployment of renewable energies, aiming for a 42.5% share of Europe’s energy consumption by 2030.
3. To have responses to protect consumers in the event of sharp price rises (as in winter 2022/2023, for example).
4. Improving consumer protection on a broader scale

One point of discussion was quickly dismissed: reforming the way market prices are set. Commonly referred to as “merit order”, it is based on a simple principle: operate the means of production from the cheapest to the most expensive on the basis of their marginal cost of production. The last generating facility called upon to cover consumption sets the price for all plants in operation. This pricing system has proved to be an effective way of guaranteeing the balance of power systems in the short term. On the other hand, the question of the long term has been the subject of much debate.

The consecration of long-term contracts

On October 17, 2023, a key milestone was reached with an agreement by the European Council on the general guidelines of this future reform of the European electricity markets.

First and foremost, this reform aims to stabilize electricity markets over the long term. To achieve this, two main tools are favored by Europe.

Power purchase agreements (PPAs) are to be encouraged by member states. PPAs are private contracts between a producer and a consumer that can be signed on a long-term basis, offering price visibility to both parties. Member states will have to remove any legal obstacles and disproportionate procedures or costs. They may also set up a public guarantee to encourage the development of this type of contract. In France, for example, industrial customers will be able to subscribe to long-term contracts with producers. Industrial customers will thus be able to stabilize part of their electricity budget over 5, 10 or 15 years, for example, and thereby significantly reduce their exposure to a future surge in wholesale prices.

Contracts for difference (CfDs), already in force to support certain renewable energies, will become compulsory for all new generation facilities receiving public support. CfDs are based on a simple principle: they guarantee the producer a target price, thus facilitating his investment decision. If wholesale prices fall below this target price, the public authorities pay the difference to the producer. But at the same time, these CfDs also provide security for public authorities. If wholesale electricity prices are higher than the target price, generators pay the difference to the states concerned. In the event of a price surge, public authorities are thus assured of recovering part of the increase. Importantly, they will be able to use this revenue to support consumers in the event of price rises.

Better protection for manufacturers in the event of a crisis

The section on customer protection contains several emblematic measures:

• Suppliers will have to systematically propose several offers (fixed price, dynamic price, etc.), while the possibility of using several suppliers for the same site has been mentioned. For example, a company could subscribe to a fixed-price offer for part of its electricity supply, but also, in parallel, to a dynamic-price offer, for example for recharging electric vehicles;
• All customers will be able to participate in energy-sharing programs (e.g. in energy communities), using, sharing and storing self-generated energy;
• Electricity suppliers will have to strengthen their price hedging to protect customers from excessive price fluctuations, while a supplier of last resort will have to be appointed to take over customers of a bankrupt supplier;
• Public authorities can temporarily apply regulated prices to households, but also to SMEs, and these prices can be lower than wholesale prices, a new way of protecting consumers from a future price explosion.

The agreement also gives governments the option of continuing to tax excess profits generated by electricity companies during periods of high price rises. The proceeds of this tax can then be used to directly help customers, including industrial customers, to reduce the rise in their bills.