European Commission fact sheet: Questions and answers on the changed electricity market structure

Brussels, Belgium, 21th May (TNSfact) – The European Commission issued the following information sheet:

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Questions and answers regarding the changed structure of the electricity market

How will the revised legislation affect prices for households and industry?

Reforming the electricity market structure reduces the risk that the high and volatile prices faced by the European electricity sector will affect households, businesses and industry by introducing measures to promote energy sharing agreements, power purchase agreements and bilateral agreements for difference exchange rates. These are key tools to increase the stability and predictability of energy costs for both households and businesses.

The reform also introduces prudential obligations on electricity suppliers to ensure that fixed-price and fixed-term contracts are available to consumers, and includes new measures to minimize the risk of supplier failure and allow consumers to choose from multiple electricity supply offers. Consumers will also be able to benefit from cheap renewable energy sources by sharing the electricity they produce.

As a result of these actions, electricity prices are expected to remain more stable and more independent of the variable costs of importing fossil fuels. Overall, this will have a positive impact on the energy bills of European households and businesses.

Will exchange rate differences and power purchase agreements be mandatory?

The reform of the electricity market structure introduces measures to promote the use of power purchase agreements (PPAs) as long-term tools to guarantee price stability for both suppliers and consumers. However, it does not impose an obligation on market participants to conclude such agreements. Member States will be obliged to ensure the availability of instruments limiting the financial risks associated with PPAs, thereby increasing access to these contracts. For this purpose, Members have the option of establishing market-based state guarantees. These guarantee programs cannot support fossil fuel power generation, but can support any zero-emission technology. Furthermore, Member States will have the option to limit these state guarantee schemes to supporting only renewable energy production, in line with the Member State’s decarbonisation policy.

Regarding Contracts for Difference, a new obligation is imposed on Member States to use bilateral Contracts for Difference or other equivalent schemes with the same impact when they provide public support in the form of direct price support schemes for investments in new renewable energy sources and low-emission non-fossil fuel power plants , in particular those using wind energy, solar energy, geothermal energy, tankless hydropower and nuclear energy. Public support for the expansion of existing production capacity could also be subject to bilateral contracts for difference. Similarly, participation by market participants in bilateral contracts for difference or other equivalent programs with the same effects is voluntary.

How will the new framework help integrate renewable energy sources?

The reform will help integrate renewable energy sources in several ways. Overall, this will facilitate the participation of renewable energy sources, demand regulation, storage and flexibility in wholesale electricity markets by increasing their liquidity and trading conditions in these markets.

It will also help connect more renewables and storage solutions to congested parts of the network and in areas awaiting network strengthening through intermittent, flexible connection agreements that could, for example, include energy storage or limit the time a generating unit can introduce electricity into the grid, enabling its partial connection. Energy sharing organizations, such as aggregators or energy communities, can help reduce network congestion by shifting energy demand to off-peak hours.

The reform also includes new rules aimed at integrating new large-scale offshore renewable energy projects linked to more than one market, offsetting the risks these projects face in accessing markets.

How legislation will improve Europe energetic safety?

In line with the objectives of the European Green Deal and REPowerEU, reform will play an important role in the phase-out process Europe dependence on fossil fuels in the production of electricity. This will be achieved in part by improving markets for long-term contracts, such as power purchase agreements (PPAs) and bilateral contracts for difference, and by facilitating the integration of renewable energy sources across the electricity system.

PPAs and bilateral contracts for difference not only provide consumers with stable prices. They also provide renewable energy providers with reliable revenues. This lowers financial risk and significantly reduces the cost of capital, acting as a push factor for investment. This creates a virtuous circle in which stable revenues effectively reduce costs and increase demand for renewable energy.

How and when could the EU declare an electricity price crisis and what would that mean?

The Commission monitors electricity prices on wholesale and retail markets on an ongoing basis. Under the changed electricity market structure, the Commission may submit to the Council a proposal to declare a regional or EU-wide electricity price crisis if the circumstances justify taking action. It is worth noting that two conditions must coexist:

* Very high average prices on wholesale electricity markets, at least two and a half times the average price over the last 5 years and at least 180EUR/MWh, which is to be maintained for at least 6 months, excluding the average price over the last 5 years.

* A sharp increase in retail electricity prices in the range of 70%, which is expected to last for at least 3 months.

If the Council adopts a decision declaring such a crisis, Member States will be able to apply temporary targeted public interventions in pricing electricity supplies to small and medium-sized enterprises (SMEs) (up to 70% of their consumption) and households (up to 80% of average household consumption households and up to 100% for vulnerable and energy-poor households).

How will the changed electricity market structure help increase the competitiveness of European industry?

The reform would promote more stable prices for energy consumption and increase the availability of cheaper renewable energy sources.

In particular, to improve the competitiveness of EU industry and reduce its exposure to volatile prices, the revised electricity market structure includes measures to implement more stable long-term contracts, such as power purchase agreements (PPAs). Through PPAs, companies establish their own direct energy supply, so they can benefit from more stable prices for energy produced from renewable and non-fossil sources. To remove current barriers to PPAs, such as buyers’ credit risk, the reform obliges Member States to ensure the availability of market-based financial instruments.

Direct price support schemes introduced by Member States for new investments in marginal and compulsory electricity generation from renewable and non-fossil sources will have to take the form of bilateral contracts for difference or equivalent schemes with the same effects. Member States are also obliged to direct surplus revenues to final recipients. This is intended to provide energy producers with revenue stability while protecting the industry from price volatility.

In addition, the reform will increase market liquidity in the case of long-term contracts that lock future prices, the so-called “forward contracts”. This will enable more suppliers and consumers, including EU industry, to protect themselves against excessively volatile prices over longer periods of time.

How will consumers become active players in the market?

One way to increase consumers’ resilience to the effects of high and volatile prices on the wholesale market is to make them proactive participants in the energy market. The new electricity market structure enables this for consumers, including those who would otherwise not have the opportunity to become an active customer due to financial or space constraints, especially vulnerable customers and those affected by energy poverty.

Thanks to energy sharing, consumers can use electricity generated or stored outside the plant for their own needs. This not only provides consumers with direct access to low-cost renewable energy sources, but also unlocks additional incentives for active customers to invest in renewable energy deployment and engage in demand response.

Consumers can share the electricity they produce themselves or with friends, family, neighbors, communities, vulnerable consumers or people suffering from fuel poverty. For example, low-income families living in social housing could benefit from renewable energy from solar panels installed on public buildings.

Another important change is the possibility for consumers to conclude more than one electricity supply contract or energy sharing contract within the same connection point for their premises. In other words, they will be able to enter into a fixed-price contract to have predictable costs for their household’s main needs, and at the same time a dynamic-price contract specifically to power a heat pump or charge an electric car at those times of the day when electricity is cheapest, i.e. when it is most renewable energy. The decision on measurement solutions is left to Member States, but smart metering systems may be used where technically feasible.

How do the revised rules improve market integrity and transparency?

As part of the electricity market reform, the review of the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) strengthens the framework for preventing and protecting consumers and businesses from abuse in European electricity and gas markets.

More specifically, the revised REMIT Regulation introduces a new enforcement regime with an increased role European Union Agency for the Cooperation of Energy Regulators (ACER) in cross-border investigations. As a result, cross-border cases could be handled more effectively, strengthening protection against any market abuse and enhancing the integrity and supervision of the wholesale energy market.

In addition, the revised REMIT Regulation strengthens supervision of market participants subject to reporting obligations, such as registered reporting mechanisms (RRMs) and insider information platforms (IIPs), and strengthens enforcement regimes at national and EU level, including against external market participants, i.e. market who are not resident or established in the EU. Such enhanced enforcement and supervision of market participants aims to protect wholesale energy markets from market manipulation and abuse.

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Original text here: https://ec.europa.eu/commission/presscorner/detail/en/qanda_24_2260