Getting the electricity market reform negotiations right

News Article
Istock 607886220

The interinstitutional negotiations on the electricity market reform are in full swing now. With this reform, the European Parliament, Commission and the Council are asked to ensure a clear, stable and technology-neutral regulatory environment to incentivise greater investments in clean and renewable generation as well as in the expansion and digitalisation of the power infrastructure that support them.  At stake is Europe’s success in delivering 2030.

To this end, the trilogues must strike the right balance amid several equally important needs – as detailed in Eurelectric’s latest paper – starting from the imperative to protect energy users against volatile market prices while maintaining a healthy retail competition to spur clean and renewable growth.

Leave energy suppliers do what they know best

The energy crisis revealed that some rogue suppliers across the EU did not properly hedge themselves. This is a risky behaviour which goes against the standard practice of securing part of your energy portfolio in the forward markets while leaving a certain percentage to the spot market. In 2022, as power prices skyrocketed due to the gas supply shock triggered by Russia, several suppliers went bankrupt across Europe. The UK alone recorded around 27 suppliers going bust since 2021.

The EU now wishes to impose hedging obligations on suppliers. Yet, making hedging mandatory is not the right policy tool to ensure the resilience and financial robustness of suppliers. If any part of hedging is normalised between suppliers, it may lock in high prices for consumers and reduce competition in the retail markets.

Suppliers are the most well-placed to know how to hedge their portfolio based on the specificities of the market and consumer profiles where they operate. Instead, these suppliers should be subject to stress tests to be enforced by national regulatory authorities to check suppliers’ resilience against market shocks as suggested by the European Parliament and Eurelectric’s paper on the market design reform.

Prevent permacrises and ensure predictability

Crises are unexpected and varied. Establishing fixed emergency measures based on the past energy crisis does not guarantee success in addressing future crises. To avoid creating a de facto permanent crisis, the reform should define only quantitative crisis-triggering criteria that allow room for manoeuvre based on the nature of the crisis. A price threshold set at 180 euros per megawatt hour, for example, could give predictability to the market and reduce concerns over unexpected interventions detrimental to investor’s certainty.

In the interest of predictability for both investors and customers, long-term contracts must remain the key focus of the market reform. These tools are instrumental in shielding consumers from short-term volatility thanks to their fixed long-term prices. Any obstacle to their deployment should therefore be avoided including the proposal of a Union PPA database. This burdensome measure will only increase bureaucracy and administrative costs for market players and force them to disclose commercially sensitive data.

Bring the grid up to speed

Electricity grids are the backbone of the energy system, but Europe is lagging behind when it comes to investments aimed at getting grid ready for net zero. As shown in our study, grid investments should reach at least €38 billion per year every year until 2030 and grow even further to €65 billion per year until 2050. This is an increase of 84% from current levels.

Removing national barriers to anticipatory grid investments is a key prerequisite. The existing provision allowing for anticipatory investments in the proposal is pivotal, but further clarification about the regulatory treatment is needed to operationalise this possibility.

Unlock flexibility without discrimination

All flexibility options should be considered in the reform. Currently preferential treatment is given to demand-response and storage. Although these sources of flexibility are paramount to complement variable generation, the flexibility needed to balance the unprecedented amount of wind and solar coming online in the near future is so high that Europe cannot simply afford any discrimination.

All forms of flexibility, must be fostered in a market-based, technologically-neutral way and should be directly integrated into existing EU long-term scenarios and assessments like the European Resource Adequacy Assessment and the Ten-Year Network Development Plan.

Avoid uncharted waters to enhance forward market liquidity

The current reforms makes a case for virtual trading hubs as a solution to improve liquidity forward markets. This measure, however, has never been properly assessed and therefore risks not delivering the expected outcome. As defended by the Parliament’s proposal, the reform should prioritise existing quick wins to enhance liquidity such as longer time horizons, more frequent auctions, and higher volumes of long-term transmission rights.

Introducing virtual trading hubs should thusly be rejected until their efficacy has been demonstrated by a positive impact assessment and proper consultation.

Structurally reforming Europe electricity market is no easy task, let’s make sure all institutions remain laser focused on what’s crucially needed to deliver on decarbonisation targets and reach the net zero finish line.