Reaction letter to EC on designing an electricity market design that delivers the necessary investments and benefits consumers
Brussels, 9 March 2023
Subject: Designing an electricity market design that delivers the necessary investments and benefits consumers
On behalf of Eurelectric, the European Power Sector Association, ahead of the European Commission’s expected publication of the electricity market design review on 14th March, we are writing to you to share our thoughts on how your proposal can be improved. This input is a reaction to the leaked draft which has been widely circulated across media outlets.
Positive elements
We welcome many aspects of the Commission’s draft text and ask that the following five elements shall remain in the final version of the text due for adoption.
Firstly, short-term wholesale markets based on marginal pricing is essential for an efficient functioning power system. It has ensured an efficient dispatch of generation and flexible assets, efficient cross-border trading and reduced volatility despite the exceptional circumstances of the energy crisis. We are pleased to see that this essential feature of European electricity market design is not being questioned in the proposal.
Secondly, the reform focuses on further developing better long-term markets & contracts. We believe that this should be the focus on the market design reform. An updated market design should more directly deliver the economic benefits of renewable and low-carbon generation to customers. The surest way of accomplishing this is through an increased and simplified offering of long-term contracts that allow customers of all kinds to hedge the future price of their power. Forward hedging, PPAs, and CfDs, all have a role to play to de-risk investments and mitigate exposure to short-term volatility for consumers. If well designed, these instruments present different but complementary hedging purposes that could be adapted to a wide range of customers’ needs and preferences.
Thirdly, while we believe two-way contracts for difference and similar de-risking support mechanisms will have an important role to play, we welcome that the Commission’s proposal does not impact on existing assets nor mandates new generation to sign contracts for difference. Such an approach, as proposed by a recent Spanish non paper, would have greatly undermined investor confidence in the power sector. Needless to say, Europe needs to continue to attract the investment needed for the renewable and low-carbon technologies that will power Europe’s drive towards net-zero. However, the current treatment of CfD seems incomplete. For instance, the design principles should not only cover the pay-back situation, but also ensure a sound integration of all instruments (CfDs, PPAs, forward markets...).
Fourth, the proposal allows System Operators to to build grid on forecast based on forward looking objectives such those set in FF55 and RepowerEu. Allowing System Operators to make anticipatory investment will enable them to accelerate the grid by supporting its expansion, flexibilisation and further digitalisation which is a pre-requisite if policy accelerate renewables built out. However, the proposal fails to address the massive grid investment challenge required to electrify further. We think the proposal can be usefully complemented with a clear statement that any obstacle at national level to invest in digitalisation and automation of the grids in view of procuring flexibility services should be removed.
Last but not least, the proposal does not foresee any institutionalisation of any form of revenue limitation of inframarginal generators. Such measures erode signals for an efficient dispatch thus affecting producers’ incentives and jeopardize crucially needed investors’ confidence. The patchy implementation of national emergency/temporary price caps on market revenues for inframarginal technologies shows us a cautionary tale in terms of market fragmentation. The revised Electricity Regulation should explicitly prevent Member States to keep or extend such emergency measures.
Suggested modifications/improvements
However, there are a number of areas where we feel improvements are needed. In Annex, we provide details on areas where we believe the text can be improved. From our perspective, there are five priority areas where changes are most needed.
Firstly, the proposed introduction of regional virtual trading hub should be removed. The proposal could strongly disrupt forward markets while not addressing the issues behind the current lack of liquidity. The review of the Electricity Regulation should focus instead on targeted measures to remove regulatory disincentives, widen non-cash collateral options and improve access to cross-border capacity on forward markets. Such technical policy options should rather be addressed as part of the Forward Guidelines review and be subject to a thorough impact assessment.
Secondly, while we welcome proposals to incentivise flexibility, it is essential to ensure a technologically-neutral approach and to set a market-based framework. The proposed peak-shaving product and the proposed flexibility support schemes for new storage and demand response should be integrated via an enhanced participation of demand response and storage in all short-term energy markets or ancillary services and in capacity mechanisms, rather than establishing separate and non-harmonized mechanisms which discriminate among technologies providing flexibility and firmness or between existing and new assets.
Thirdly, provisions around enhancing suppliers’ resilience are welcome and needed but balance should be struck between consumer protection and supply offer regulation to avoid undermining retail competition. Indeed, current draft provisions should be further clarified as they do currently leave a lot of manoeuvre for Member States to impose hedging obligations on suppliers that would be detrimental to retail competition and customer’s interests. A more efficient system, as called for in our consultation response, is to introduce guidelines for a resilience framework to be used by NRAs to perform regular stress tests and introduce reporting requirements for suppliers.
Fourth, the methodology for defining a price crisis should be further detailed and based on objective criteria to avoid that regular volatility which signals a healthy, functioning market, may be misconstrued as a price crisis.
Last but indeed not least, the power sector believes that the REMIT framework has worked well as a sector specific regime in the energy industry and does not see the need for a fundamental review. The proposed extensive review of REMIT would require thorough impact assessment, in particular when it comes to the significant extension of ACER’s powers and the implementation of a supervision framework for NRAs’ activities, including harmonised sanctions, as well as the risk of overlap with existing provisions under financial regulation, such as the Market Abuse Regulation. Amended wording with a very broad and unclear scope also gives reason for uncertainty besides potentially enlarging the scope of breaching behaviour beyond what is appropriate. Further, we are worried about the proposed framework for guidelines and recommendations which in practice could lead to de facto binding rules introduced without being subject to necessary impact assessments, political considerations and stakeholder involvement.
Many thanks for taking these suggested modifications into consideration. With these modifications, sensible market design reform can deepen and reinforce the Internal Energy Market and make it even more fit for achieving net-zero.
Yours sincerely,
Cillian O’DONOGHUE
Policy Director, Eurelectric