The importance of Electricity Market Design trilogues and recommendations

Lawmakers in the European Parliament agreed on their negotiating positionon 14 September to reform the EU’s electricity market to avoid a repetition of the soaring prices witnessed in 2021 and 2022.

The reform, presented by the European Commission in March this year, aims to boost consumer protection, speed up renewables’ rollout and improve demand-side measures to reduce pressure on the electricity grid. Lawmakers are now ready to negotiate with EU countries, which are still attempting to find a common position.

Liberal lawmaker Morten Petersen said he was “very pleased” with the reform that the European Parliament had put together “at record-breaking speed, all the while holding together the broad compromise”. Petersen said: “It’s job done on our part so far, but of course tough negotiations now await with the Council.”

As a component of the reform, lawmakers wanted to strengthen consumer protection against unpredictable electricity prices and ensure consumers have the right to fixed-price contracts and dynamic price contracts that are suited to different types of consumption. In addition, the draft law would also allow consumers to be pioneers of the energy transition, said the lawmaker negotiating for the Greens, Michael Bloss. “These include the right to ‘energy sharing’ and balcony solar, as well as the ban on power cuts,” he explained. This could help boost rooftop solar as it would allow consumers to share electricity produced with their neighbours and was welcomed by the industry as “historic”.

Naomi Chevillard, head of regulatory affairs at industry group SolarPower Europe commented: “We’re happy to see today’s outcome, and we’re looking forward to the speedy progress of trilogues. Negotiators should aim for a conclusion before the end of the year.”

These trilogues are of great importance as the reform of the Electricity Market stands as the only tool capable of systematically addressing the considerable volatility in energy prices and steering towards a future energy system that is generated using more renewables and is more flexible, decentralised, fair and resilient. CAN Europe has published five vital expectations when it comes to the reform of the Electricity Market Design.

1.“Demand-side Flexibility” which is based on support for storage and demand-side response needs to be ramped up quickly

Many member states have not implemented the flexibility measures that already exist under current legislation and are intended to increase implementation of the demand-side flexibility measures introduced in the 2019 Clean Energy Package. So far, slow progress has been made in letting demand-side response and storage services bid or participate in the wholesale market.

However, an assessment in 2022 indicates that for other markets there are still obstacles and that for the EU capacity mechanisms, most of the contracts (meaning financial compensation) are still awarded to coal/lignite power plants . The currently discussed revision adds new elements that aim to further promote and incentivise more storage and demand-side response by member states by: a) giving member states the possibility to lower CO₂ limits that would restrict the participation of fossil gas in the capacity mechanisms, in alignment with the Climate, Energy and Environmental Aid Guidelines (CEEAG) and b) introduce the idea of flexibility needs assessment, flexibility targets, and additional remuneration.

Additionally, it is important that the flexibility needs must be examined 10 years in advance, assessed by National Regulators and validated by the European Union Agency for the Cooperation of Energy Regulators. The European Parliament has added that an assessment should be established with a climate-neutral future electricity system as an objective. However CAN proposes that this term should be expanded to a climate-neutral fully renewable-based future electricity system. CAN Europe’s modelling of the PAC Scenario  shows that achieving such a system by 2040 is possible. It is also important to have clear definitions of flexibility targets, restricted to mature and ready-to-deploy solutions and avoiding “non-fossil flexibility” language.

2. Improvement of the energy-sharing legal framework is necessary, with a focus on local solutions.

Enhancing the legal framework for energy sharing is crucial, with a specific emphasis on local solutions. Energy sharing empowers citizens and energy communities to become prosumers by offsetting off-site generation from metered consumption. This allows individuals and groups to participate in renewable projects, gain control over bills, guard against price spikes, and potentially allocate surplus energy to vulnerable households. It is essential to ensure that those engaged in energy sharing contribute fairly to costs, particularly in supporting grid expenses. CAN Europe endorses the Commission’s proposal to create effective rules and responsibilities for system operators to enable energy sharing, which includes the defined concept of energy sharing. It is also important to make sure that energy communities have fair conditions.

3. Consumer protection must be designed in a way to shield the vulnerable from price spikes while keeping the energy demand reduction incentives.

Creating a system where people take ownership of the shift to cleaner energy, use new tech to cut bills, and actively participate in the market, all while safeguarding vulnerable consumers, is achievable. The Commission’s proposal is good for this as it mandates member states to ensure that customers can have multiple electricity contracts simultaneously. Suppliers should provide both fixed-term, fixed-price contracts, and dynamic electricity price contracts, tailored to individual customer situations and needs. This choice empowers everyone to be proactive self-prosumers, enjoying affordable electricity and protection from price spikes in wholesale markets. At the same time, a ban on disconnections for vulnerable consumers, as proposed by the Parliament is also vital.

4. Capacity mechanisms should remain temporary.

Capacity mechanisms serve as public subsidies to compensate capacity providers (generators, storage and DSR providers), addressing temporary gaps in power market adequacy. They are meant to ensure system reliability and resolve resource adequacy concerns. If the market alone can’t achieve this, governments implement support schemes. The Electricity Regulation outlines design principles for capacity mechanisms, emphasizing their temporary, last-resort, transparent and competitive nature. It also establishes an emission limit of 550g CO₂/ kWh, excluding old coal power plants from support after January 2025.

Proposals from the Parliament exclude the “last resort” requirement, and the Council goes further by removing the phase-out condition for existing capacity mechanisms and eliminating their temporary nature. Both parties call for a Commission assessment of capacity mechanisms’ impact on the electricity market’s functioning and its evolution towards a net-zero emission system.

While supporting storage and demand-side response, relaxing these rules may distort the market and excessively favour new fossil gas-fired power plants meeting the emission limit. It is important that negotiators maintain the current provisions and the subsidy’s temporary nature. To achieve a climate-neutral energy system with 100 per cen renewables, redesigning capacity mechanisms to support demand-side flexibility is essential. Gradually lowering the CO₂ emission threshold should be part of this and any future electricity market reform.

5. No extra public subsidies for coal. Coal derogation must be removed.

Despite no changes to the emission limit in the Commission’s proposal or Parliament’s stance, the Council introduced a new Article (64) allowing an extension of the 2025 emission deadline to December 2028 via a dedicated derogation. Member states can request a waiver, offering extra support to old coal power plants with one-year contracts to address adequacy gaps.

It is vital to remove this Coal Derogation from the text. This provision jeopardises the EU’s climate goals, risks market distortions and undermines the shift away from fossil fuels. Keeping the Coal Derogation would also reward member states that identified resource concerns in 2019 but have not acted.

The latest ACER report shows that capacity mechanisms across the EU heavily favour fossil fuels, with 57 per cent of support going to gas and coal.

Emilia Samuelsson

Based on the Briefing CAN Europe’s Top Five Expectations towards the Electricity Market Design trilogues. Available at https://caneurope.org/electricity-market-design-emd-trilogues/

And EURACTIV ‘Job done’: MEPs react to Parliament vote on electricity market reform 15 September 2023. Available at https://www.euractiv.com/section/energy/news/job-done-meps-react-to-parl...