The 2022 energy crisis, triggered by the start of the war in Ukraine, and the resulting increase in prices throughout the community, highlighted the shortcomings of the European energy system. With the aim of renewing it and addressing some of its most important limitations, such as its dependence on fossil fuels and the highly volatile prices, the EU wants to implement new measures to guarantee consumer protection and offer them a more efficient energy service.
Electricity market reform
In October 2023, the EU Council reached an initial agreement for the renewal of its electricity system, which will allow negotiations to begin in the European Parliament to reach a definitive proposal.
The main objective of the reform is to decouple the cost of electricity from fossil fuels and depend less on their fluctuations in the energy pool. In this way, consumers, both individuals and companies, would be protected from any sudden increases in bills, and the implementation of renewable energies in the system would be accelerated, to also meet the carbon footprint reduction objectives set by the EU.
“It is key to move towards a more European and integrated scheme to create coherence and make sure all countries are treated the same,” Natalia Collado Van-Baumberghen, Research Economist. ESADE EcPol.
- Market stabilization
In order to improve price stability, the use of long-term energy power purchase agreements (PPA) will be encouraged. This is a type of contract at a specific and fixed price, signed between the electricity producer and the consumer. With these types of agreements, not only will companies be able to enjoy greater stability, but also energy producers will have more stable income.
Meanwhile, investments in new renewable electricity generation facilities—wind, solar, geothermal, hydroelectricity, and nuclear—will be structured as two-way contracts for difference (CFD). This type of agreement is characterized by the producer selling electricity at a certain price, previously set with public organizations, which is different from the price set by the market. If the market price is higher, the producer has to pay the difference to the public organization, but if the opposite is true and the market price is lower, the organization must pay the difference to the producer.
- Eliminating capacity mechanisms
Another reform to be implemented is to eliminate the temporary nature of the capacity mechanisms. These are support measures that different countries can introduce to remunerate power plants in order to guarantee supply security in the medium and long term. For example, one of the most important is the introduction of an exception to the CO2 emissions limits until the end of 2028.
- Protecting the end consumer
Some of the reform's most important measures are intended to provide greater coverage to users, giving them more flexibility when accessing different energy rates.
They are offered the possibility of accessing fixed-price, fixed-term contracts, as well as more flexible agreements with dynamic pricing in multiple or combined contracts. In addition, it is guaranteed that, at all times, they can have clear and accessible information about their services, facilitating access to renewable energies and distributed generation systems, protecting the rights of those customers who take part in energy sharing and self-consumption systems.
The renewal proposal also takes into account the most vulnerable consumers. For example, ensuring that there are enough “suppliers of last resort” to guarantee the service and establishing retail price regulations, for both households and SMEs.
- Greater capacity for renewable energies
One of the pillars of this reform is to accelerate the implementation of renewable energies, which are more sustainable and economical for citizens. In particular, it is worth highlighting the expansion and increasing importance of energies such as solar and wind, whose capacity volume in Europe is expected to increase by up to three times by 2030.
If measures such as new transparency obligations for network managers and greater capacity for energy market supervision are added to the renewable energy mix, as outlined in the renewal proposal, prices can be effectively kept under control and meet the EU's “Fit for 55” climate objectives.
In this context, a new RED III Renewable Directive was also set in March 2023, which establishes a renewable generation target for member states of 42.5% by 2030. All member states will contribute to this common goal, agreeing on more specific objectives in sectors such as transport, industry, or domestic heating and air-conditioning systems, to drive the integration of renewable energies in areas where their incorporation has been slower.
Both this RED III agreement and the proposal to reform the electricity market are awaiting final approval. They must be formally adopted by both the Council and the European Parliament to start being implemented and promote the fundamental transformations that the European energy system needs.
5. Measures in the event of an energy crisis
Finally, this new reform proposes different mechanisms of action in the event that market prices rise again or remain high over time. In particular, the most important thing to consider during an energy crisis situation is that states will be able to regulate prices for the most vulnerable consumers, as well as SMEs.
The conditions for declaring an energy crisis are also made more flexible, allowing these mechanisms to be put in place if wholesale prices are expected to be very high for a period of six months, or when retail prices remain high for at least three months.
States will also be able to set limits on excess revenues from electricity producers with lower marginal costs.
With these new measures, the European energy system will be able to adapt to current and future challenges, guaranteeing its efficiency, viability, and security.
