Electricity market reform : what is (not) in the European Commission proposal

Abstract

In 2022, we experienced an unprecedented energy crisis. Governments intervened to help consumers pay their bills and to apply revenue claw-back mechanisms on utilities. ACER identified a total of 400 emergency measures. The European Commission has also been tasked to draft a market reform proposal in record time. Two main reasons why we like the proposal: it preserves the pricing mechanism of the short-term electricity markets; it complements the existing electricity markets with regulatory measures to address the main concerns that emerged during the crisis: energy poverty and inflation; insufficient hedging by consumers and retailers; difficulties in accessing cheap renewables by consumers; and investment uncertainty. Recommendation to improve the proposal: it could include the development of detailed guidelines for the implementation of two-way CfDs. Developers that sign such a contract should still be exposed to the incentives of short-term wholesale and balancing prices. Risk for the trilogue negotiations: The proposal does not foresee that Member States can continue with revenue claw back mechanisms and/or (regulated) long term contracts for existing assets. Some Member States might want to add that option to the proposal. Undermining investor confidence in this way would be unfortunate because we have to speedup investments to comply with the Fit-for-55 Package. Need for a bigger reform (with impact assessment during the next Commission mandate): If we modernize and Europeanize capacity mechanisms, they can guide the investments we need in backup solutions for a renewable-based system, which includes demand response and storage.