As a result of the Russian attack on Ukraine, the price of electricity also skyrocketed. The functioning of the European electricity market has therefore been discussed for months. The EU Commission now wants to optimize it.
With a reform of the electricity market, the EU Commission wants to avoid excessive prices for consumers and promote the expansion of renewable energies. Above all, long-term contracts for electricity generation from renewable energies and nuclear power are to be promoted, according to a proposal presented by the authority in Strasbourg on Tuesday. Renewable energies are the key to energy sovereignty, said Commission Vice-President Frans Timmermans. “If we want this transition to happen as quickly as possible, and for consumers to see that in the form of lower electricity bills, we need to transform our market.”
Why the Commission wants to reform the electricity market
Electricity prices have skyrocketed over the past year. The reason for this was, among other things, that at times around half of the French nuclear power plants failed. The increase was also a result of skyrocketing gas prices as a result of Russia’s war of aggression in Ukraine. Because: The electricity market in the EU works according to the so-called merit order principle. This describes the order in which the power plants that are offered on the electricity exchange operate. Power plants that can produce electricity cheaply are used first to meet demand. These are wind turbines, for example. In the end, however, the price depends on the power plant that was switched on last, i.e. the most expensive one – often gas-fired power plants.
Calls for a reform of the European electricity market were therefore made last year. However, no far-reaching reform of the electricity market, including decoupling the electricity price from the gas price, is planned.
What should change for consumers
According to the proposal, consumers should benefit from long-term contracts, among other things: In order to protect end customers from strong price fluctuations, there should be a right to fixed-price contracts and contracts with dynamic prices. For example, consumers could opt for secure, long-term prices as well as contracts with changing prices if they want to take advantage of price fluctuations – for example to use electricity when it is cheaper for charging electric cars or for heat pumps.
In addition, consumer protection is to be expanded: According to the Commission, the EU states should protect needy households that have defaulted on payments in future from having their electricity cut off.
How renewable energies should be expanded
According to the Commission’s ideas, investments in renewable energies should be boosted with special contracts for difference and public guarantees for so-called Power Purchase Agreements (PPA). The latter are power purchase agreements between energy producers and commercial customers and thus offer long-term price stability and the producer the necessary security to make an investment decision.
With the contracts for difference, the EU states are supposed to guarantee electricity producers a minimum price for electricity if they make new investments. This should apply to investments in renewable energies and nuclear power. If the market price is lower, the state compensates for the difference in order to create long-term price stability for the producers. If earnings exceed the upper limit specified in the contract, the end customers should benefit from this. These contracts for difference are said to be the only permitted direct state aid for energy production. This is the only way to ensure that prices cannot skyrocket, it said.
How the reactions are
The Association of Municipal Enterprises (VKU) welcomed the fact that the Commission is sticking to the merit order system. “The current market model has served the integration of the European electricity market well and should continue to be viewed as an essential element for effective and efficient pricing and thus for the deployment planning of generation capacities,” said Managing Director Ingbert Liebing.
The energy economist Claudia Kemfert from the German Institute for Economic Research (DIW) said that the differential agreements may also promote nuclear power should be viewed critically “since nuclear power is not renewable, too expensive and risky”. Sharp criticism came from the German Renewable Energy Federation (BEE). “The EU proposals go too far and massively interfere with the systems of the member states,” said President Simone Peter. The association rejects the mandatory introduction of the planned differential agreements at EU level.
How to proceed now
The European Parliament and the countries must finally negotiate the Commission’s proposal. When they have found a common position, the reform can come into force.