EU Commission proposes minor electricity market reform

EU Commission proposes minor electricity market reform

Nfter Russia’s attack on Ukraine, gas and electricity prices rose to record levels in the summer of 2022. Above all, France and Spain called for a fundamental reform of the EU electricity market in order to decouple electricity from gas prices. EU Commission President Ursula von der Leyen didn’t want to know anything about it for a long time. However, she finally gave in to the pressure and announced reform proposals for the EU summit in March. A draft for this has now leaked out, showing that there can be no question of a fundamental reform. The Commission wants to deal with excessive fluctuations in the price of electricity by strengthening long-term contracts.

It is about a “buffer between the short-term markets and the electricity bills of consumers,” says the draft. It is available to the FAZ. However, the Commission is sticking to the merit order system, which will be much discussed in 2022. It states that the most expensive energy source used determines the price. As long as it’s wind or solar power, electricity is cheap. If coal or gas power plants have to be started, the electricity becomes expensive. However, this sets exactly the right incentives. Investing in is only worthwhile because of the temporarily high prices green electricity.

Contracts for differences are intended to promote investments in green electricity

The Commission now wants to prevent large price fluctuations in two ways: with contracts for difference and long-term purchase agreements between private customers and producers (“Power Purchase Agreements” or PPAs). With contracts for difference, the EU states are to promote investments in green electricity and nuclear energy in the future. In a contract for difference, the state and producers agree on a fixed price or price corridor for around twenty years. If the market price is lower, the state pays the difference to the producer; if it is higher, the opposite is true. In the second case, the difference should then be distributed to the end customers depending on consumption.

The model is similar to Berlin’s ideas on the EU electricity market reform. France and Spain, on the other hand, had called for contracts for difference to be made compulsory for almost all plants, including existing ones – not on a voluntary basis for new investments, as in the Commission’s draft. That would be a much stronger intervention in the market. It would effectively be the continuation of the temporary skimming of “excess profits” introduced in 2022. The big question should therefore be whether the proponents of more far-reaching interventions will be satisfied with that. The European Parliament and the Council of Ministers must approve the reform before it can come into force. The idea is also not well received by German green electricity producers, as it is intended to replace the previous system of feed-in tariffs, which stipulates minimum but no maximum prices.

With PPAs, producers and customers fix prices and/or purchase quantities for five to twenty years. So far, industrial customers have used this to protect themselves from price fluctuations. The credit default risk for producers is too great for contracts with smaller customers. According to the draft, the state should help with guarantees to enable PPAs for all customers. Otherwise, the states should actively promote PPAs.

The reform provides consumers with a right to fixed-price contracts. “It allows risk-averse consumers to lock in safe, long-term prices to avoid surprises,” the draft reads. They should also be able to conclude contracts with several providers at the same time. This would enable them, for example, to conclude a fixed-price contract for their apartment and at the same time a contract with flexible prices, for example to charge their electric car in the garage when electricity is cheap.

In times of extraordinarily high prices, the Commission can declare a price crisis. This then allows the EU countries to limit electricity prices for consumers and small and medium-sized companies. In order to prevent this from leading to an increase in consumption, this should be limited to 80 percent of consumption – as with the German electricity and gas price brake.

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