The reform of the European electricity markets is underway.

Faced with the soaring energy prices, the European Commission first implemented a package of measures that it itself called the “toolbox”, a sign of the limited ambitions of these measures. A response widely considered very inadequate by many Member States, starting with France.

This reform of the organization aims at 4 main objectives:

1. Reduce the dependence of wholesale electricity prices on the upward trend of fossil fuel prices (particularly natural gas)
2. Accelerate the deployment of renewable energies to target a 42.5% share in Europe’s energy consumption by 2030
3. Have responses in place to protect consumers in the event of a sharp price increase (such as during the winter of 2022/2023, for example)
4. Improve consumer protection more broadly

One point of discussion that was quickly dismissed was the reform of the market price-setting mechanism. Commonly known as the “merit order,” it is based on a simple principle: operating production means from the cheapest to the most expensive based on their marginal production cost. The last production means called upon to cover consumption sets the price for all operating power plants. This price-setting mechanism has indeed been deemed effective in ensuring the balance of electrical systems in the short term. However, the question of the long term has been the subject of many discussions.

First and foremost, this reform aims to stabilize electricity markets in the long term. To achieve this, Europe favors two main tools.

Power Purchase Agreements (PPAs) will need to be encouraged by the Member States. PPAs are private contracts between a producer and a consumer that can be signed for the long term, providing price visibility to both parties. Member States will need to remove any legal obstacles and disproportionate procedures or fees. They may also establish a public guarantee to promote the development of such contracts. In France, industrial customers will, for example, have the option to subscribe to long-term contracts with producers. Industrial customers will thus be able to stabilize a portion of their electricity budget for 5, 10, or 15 years, for example, and consequently significantly reduce their exposure to any future spike in wholesale prices.

Already in effect to support certain renewable sectors, Contracts for Difference (CfDs) will become mandatory for all new means of production benefiting from public support. CfDs are based on a simple principle: they guarantee a target price to the producer, facilitating their investment decision. If wholesale prices are below this target price, then the public authorities pay the difference to the producer. However, at the same time, these CfDs also provide security to the public authorities. Indeed, when electricity wholesale prices exceed the target price, the producers pay the difference to the relevant States. In the event of price spikes, public authorities are thus assured of recovering a portion of this increase. Importantly, they will have the option to use these financial inflows to support consumers in case of price hikes.

The section on customer protection includes several emblematic measures:

• Suppliers will have to systematically offer multiple options (fixed price, dynamic price, etc.), while the possibility of using multiple suppliers for the same site has been discussed. For example, a company could subscribe to a fixed-price offer for part of its electricity supply, but also, at the same time, to a dynamic price offer, for instance for electric vehicle charging;
• All customers will be able to participate in energy sharing programs (for example within energy communities) involving the use, sharing, and storage of self-produced energy;
• Electricity suppliers will need to strengthen their price coverage to protect customers from sharp price fluctuations, while a supplier of last resort will need to be designated to take over customers from a bankrupt supplier;
• Public authorities may, on a temporary basis, apply regulated prices to households, as well as to SMEs, and these prices may be lower than wholesale prices, a new way to protect consumers from a future price surge.

The agreement also allows States to continue taxing windfall profits generated by electricity companies in times of sharp price increases. The revenue from this taxation can then be used to directly help clients, including industrial clients, reduce the rise in their bills.