The reform of the electricity market is the EU’s long-term response to the energy crisis experienced in 2022.
Despite a high share of renewables in energy generation, high spikes in fossil fuel prices (especially gas) have caused a steep increase in electricity prices.
This is due to the functioning of the EU electricity market, where the price of power is based on the cost of the fossil fuels used in electricity generation. This mechanism is called the merit order principle. When high prices hit consumers in summer 2022, EU countries acted immediately to ease the burden on citizens with measures such as grants and the suspension of VAT.
The reform focuses on long-term solutions, in order to avoid similar situations in the future.
What will change with the electricity market reform?
The new rules will make electricity prices less dependent on the price of fossil fuels. This will create a buffer between markets and the electricity bills paid by consumers.
The reform aims to ensure: Better protection for consumers, more stability for companies and increased green electricity
Better protection for consumers
Citizens will have more options when signing an electricity contract. This means:
- increased availability of fixed price and fixed term contracts
- flexibility to choose dynamic pricing, with multiple or combined contracts possible
- clearer information before signing
Access to renewable energy will be easier thanks to trading electricity generated from renewables locally (for instance energy from solar panels can be sold to neighbours).
Vulnerable consumers will be better protected:
- governments will ensure that there are sufficient suppliers of last resort so no consumers remain without electricity
- governments can better regulate retail prices for households and SMEs
European Commission proposes reform of the EU electricity market set-up |
More stability and competitiveness for companies
Businesses will have more stable prices thanks to long-term contracts (such as power purchase agreements whereby the power generator agrees to sell energy directly to energy consumers at a certain price).
Power producers will have more stable revenue. Investments in new power-generating facilities based on wind energy, solar energy, geothermal energy, hydropower (without reservoir and nuclear energy) will be made in the form of two-way contracts for difference (CfDs). On the one hand, this secures a minimum return on such investments and on the other, it prevents excessive costs in the event of another crisis.
How does a two-way contract for difference work?
The generator sells the electricity in the market but then settles the difference between the market price and the strike price agreed in advance with the public entity. Any excess revenues shall be distributed to final customers, with some flexibility for member states.
Increased green electricity
New rules will also make it easier to integrate renewables into the system. Moreover, renewables generation will be easier to predict (through new transparency obligations for system operators and enhanced ability to monitor the energy market).
This will make it possible to both keep prices under control and meet ambitious climate targets that the EU set in the Fit for 55 package.
More information: European Council
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