The European power sector welcomes the European Commission’s proposal aiming at reforming Europe’s electricity market design to make clean electrification the natural choice for decarbonising Europe and reducing our dependence on imported fossil fuels. We are convinced that the only way out of this crisis is a truly European internal energy market.
Ahead of the General Approach to be agreed at the next Energy Council on 19th June, we share our thoughts on five areas of the reform.
1. We strongly caution against weakening of the triggering criteria for a regional or Union- wide crisis under Article 66a and adding the inframarginal rent cap to the toolbox
The Electricity Market Design Reform is an occasion to reinforce the integration of the internal energy market, not weaken it. Emergency measures should only be developed to meet the specific needs of crisis situations and should always be temporary time-limited and – last but not least – targeted to the customers who really need them. Across-the-board retail price regulation leads to inefficient use of energy and harms the business case for decarbonization.
Our concern is amplified by the possible extension of the price cap on inframarginal rent as currently discussed within the European Parliament. Such an approach would lead to Member States/regions ending up in a ‘semi-permanent crisis mode’ where disproportionate and inefficient market interventions, such as price setting below costs, with unclear compensation guidelines would become a rule.
Indeed, as outlined in a recent report by the European Commission, the benefits of the current inframarginal revenue cap would not outweigh the impact on investor certainty and the risks to the market functioning and the transition. In particular, the Commission recognises that Member States’ heterogeneous implementation of the revenue cap may have affected existing power purchase agreements (PPAs) and other long-term hedging contracts as well as disincentivised the conclusion of new ones. The clear recommendation of the report is that the implementation of the infra-marginal cap should not be prolonged.
We therefore urge the European Council to adhere to the European Commission’s proposal on the triggering criteria for the “electricity price crisis”. Please find more details on our proposals in Annex.
2. Enhance voluntary long-term hedging and contracting opportunities
Forward hedging, power purchasing agreements, and contracts for difference (CfDs), all have a role to play to de-risk investments while mitigating exposure to severe short-term price volatility. When well designed and executed, these are the most dependable and sustainable mechanisms to ensure customers certainty for long-term power procurement and investments.
Positively, the European Council preserves the voluntary approach of the European Commission to long-term contracts. Most importantly, we warmly welcome that the Council has not shown support for the use of contracts for difference at regulated strike price for existing generation plants – such retroactive implementation would greatly compromise investor certainty.
3. Address massive grid growth and digitalisation challenge
The benefit of renewables and flexibility from consumers can be harvested only to the extent the grid deployment keeps up. Allowing System Operators to make anticipatory investment, as foreseen in the Commission’s proposal, is positive. However, we regret that the Council’s proposals fail to sufficiently address this challenge in the mandate given to National Regulators in Article 18 of the recast Regulation. In particular, the reform should ensure that network tariff design provide positive incentives to system operators and ensures a timely recognition of traditional investments in physical networks and adequate returns, with a flexible reflection of operational costs and removing all existing barriers at national level to the necessary investments in grid reinforcement.
4. Supplier resilience must be made more effective to ensure customer protection
We regret that the Council does not remove counter-productive hedging obligations on electricity suppliers in the text of Directive itself. Allowing the possibility for responsible retailers to optimize their hedging strategy is the best way to keep costs down for consumers. We welcome the Council’s clarification in the recitals that stress tests and reporting requirements on suppliers could be tools used to assess supplier hedging strategies, but they should be a clear substitute for prescriptive hedging mandates instead of a top-up.
Regarding the proposed obligation for suppliers to offer fixed-term, fixed price contracts, we ask the European Council to reconsider its proposal to exempt suppliers with only dynamic prices. This approach has risks: it will greatly affect competition with a discriminatory approach, and it incentivizes suppliers to shift their offers to exclusively dynamic price types of price structure, thus further reducing customers’ choice.
5. Ensure proper impact assessment of the Virtual Trading Hubs
Although in the first instance we would not recommend including such a non-tested technical instrument in a primary regulation, we welcome the Council’s cautious approach on the proposed regional virtual trading hubs by introducing an impact assessment phase. The virtual hubs proposal would not address the root cause of the lack of forward market liquidity and can strongly disrupt markets. Please find more details on our proposals in Annex.
Next steps
The electricity industry remains committed to its goal of powering a thriving, competitive, climate neutral European economy.
We remain at your disposal for further exchanges on how best deepen and reinforce the Internal Energy Market and make it even more fit for achieving net-zero.