Following the rise in energy prices in light of the post-Covid recovery and Russia’s war of aggression in Ukraine, the EU has found itself struggling with extremely high energy prices and energy supply issues. As part of EU efforts to remedy the situation, the European Commission President Ursula von der Leyen in her State of the Union Address 2022 announced an upcoming reform of the electricity market, which was later confirmed in the Commission Work Programme for 2023.

On 14 March 2023, the European Commission published its legislative proposal for an amending regulation to improve the EU electricity market design. The proposed revision concerns the Electricity Regulation, the Electricity Directive, the Renewable Energy Directive and the ACER Regulation (i.e. the EU Agency for the Cooperation of Energy Regulators). The overall electricity market reform also includes another legislative proposal for an amending regulation to improve the EU's protection against market manipulation in the wholesale energy market. This second regulation amends the regulation on wholesale energy market integrity and transparency (REMIT) and the ACER Regulation (see separate train carriage on Protection against wholesale energy market manipulation).

Under the current system, fossil fuel prices have a large impact on electricity prices. In order to decrease this impact, the changes aim to incentivise longer term contracts with non-fossil power producers and increase flexibility through measures such as storage and demand response. Boosting renewables is of particular importance, as it is also in line with the European Green Deal and the REPowerEU plan.

In terms of specific measures, the new proposed rules include:

• a wider choice of contracts and clearer information for consumers, with the possibility to lock in secure long-term prices but also to take advantage of dynamic pricing contracts
• reducing the risk of supplier failure, through new requirements on price risk management and the establishment of suppliers of last resort
• enhanced sharing of renewable energy, for instance by selling excess electricity from rooftop solar installations to neighbours
• more stable long-term contracts (Power Purchase Agreements, PPAs) between companies and suppliers
• two-way Contracts for Difference (CfDs) between electricity generators and public entities
• obligations to facilitate integration of renewables into the system.

The file has been allocated to the EP Committee on Industry, Research and Energy (ITRE) and Nicolás González Casares (S&D, Spain) has been appointed as rapporteur. The rapporteur's draft report was published on 12 May 2023. The rapporteur's report proposes some adjustments to the Commission proposal, especially as regards the design of CfDs so that they better support energy savings and vulnerable consumers, and the design of PPAs for instance by facilitating the entry of smaller players. An acceleration of grid development and more flexible connection arrangements are also proposed, along with quantifiable national targets for demand response and storage. Further changes concern boosting the role of electric vehicle charging services and strengthening consumer rights. In light of a possible future price crisis, the report suggests introducing a structural instrument, such as the temporary cap of the market revenues of infra-marginal generators, to provide a funding source for regulated tariffs and ensure predictability to consumers and investors.

The ITRE committee voted on the report on 19 July 2023, while on 14 September 2023 the plenary gave its green light to start negotiations with the Council.

The Council reached its general approach on 17 October 2023. Member States would promote the uptake of power purchase agreements, for instance through state-backed guarantee schemes at market prices, private guarantees, or facilities pooling demand for PPAs. Two-way contracts for difference would be mandatory in case of public funding being involved in long-contracts, with some exceptions. Two-way CfDs would apply to investments in new power-generating facilities based on wind, solar, geothermal, hydropower without reservoir and nuclear energy. Revenues generated by the state through two-way CfDs would be redistributed to final customers or used to finance the costs of the direct price support schemes or investments to reduce electricity costs for final customers. The position also foresees strengthening the role of the Council in declaring a temporary regional or EU-wide electricity price crisis and amended conditions for declaring such a crisis.

The interinstitutional negotiations (trilogues) were concluded on 14 December 2023. The provisional agreement between co-legislators foresees the use of CfDs in all investments in new electricity production from renewable and nuclear energy. The agreement also gives the Council the power to declare an electricity price crisis, reinforces the measures to protect energy poor and vulnerable customers, and enables a flexible use of the revenues generated by the state via two-way CfDs (e.g. to finance direct price support schemes or invest in reducing electricity costs for final consumers).

The next step will be a formal endorsement of the agreement by the Parliament and the Council. The ITRE committee voted to support the agreement on 15 January, while the EP plenary vote is planned for 10 April 2024.

References:

• EP Legislative Observatory, Union’s electricity market design, 2023/0077(COD)
• European Commission, Proposal for a regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design, COM(2023) 148
• European Commission, Commission proposes reform of the EU electricity market design to boost renewables, better protect consumers and enhance industrial competitiveness, press release, 14 March 2023
• European Parliament, Committee on Industry, Research and Energy report on the proposal to improve the Union’s electricity market design, 2023/0077(COD)
• European Parliament, Creating a more stable, affordable and sustainable electricity market, press release, 14 September 2023
• European Parliament, Electricity market: deal on protecting consumers from sudden price shocks, press release, 14 December 2023
• Council of the EU, Reform of electricity market design: Council reaches agreement, press release, 17 October 2023

Other relevant files in the European Parliament legislative train page:

• European Parliament, legislative train, Protection against wholesale energy market manipulation

Further reading:

• European Parliament, EPRS, Improving the design of the EU electricity market, Briefing, January 2024
• European Parliament, EPRS, Reforming the EU electricity market, Briefing, March 2023
• European Parliament, IPOL, The design of the European electricity market - Current proposals and ways ahead, Briefing, September 2023

Author: Agnieszka Widuto, Members' Research Service, legislative-train@europarl.europa.eu