【Energy Policy】Changes and Impacts of European Electricity Market Reform

EU consumers will benefit from the passage of the electricity market reform plan, enjoy more stable energy prices, reduce dependence on fossil fuel prices, and have a more solid path towards a carbon-free Europe. The European Council adopted a new electricity market reform plan on May 21, which specifically introduced energy sharing and called on member states to establish relevant policies and regulatory frameworks. Under the new rules, regulators need to eliminate unreasonable barriers to energy sharing, renewable energy and citizen energy communities. At the same time, member states and EU institutions will take measures to help small market participants sell renewable energy products, including the establishment of guarantee programs. This new rule will apply directly to all EU member states.

"Today is a milestone for the EU to move towards a carbon-free green future." Belgian Energy Minister Tinne Van der Straeten said. "With the passage of the electricity market reform plan, we are empowering consumers, ensuring security of supply, and paving the way for a more stable, predictable and sustainable energy market."

Background information
On March 14, 2023, the European Commission proposed a proposal for reforming the design of the EU electricity market to cope with high and volatile energy prices in 2022. The reform package includes electricity market design regulations and a proposal for a regulation to protect wholesale energy markets from market manipulation, which was formally adopted by the Council on March 18, 2024. The EU Council and the European Parliament began negotiations on electricity market reform on October 19, 2023, and reached a provisional agreement on December 13, 2023 in less than two months. On May 21, 2024, the European Council adopted a new electricity market reform package.

Main contents of the reform package

1. Stable and predictable energy prices
Power purchase agreements (PPAs) are long-term contracts that provide stability to customers and investors; updated rules promote their adoption and reduce unnecessary red tape and costs. Member States can further support renewable energy investment through power purchase agreements in accordance with their decarbonization plans, including the establishment of guarantee schemes. The new rules allow member states to adopt two-way contracts for difference (CfDs) or plans with the same effect to support new power generation investment, thereby reducing the impact of electricity prices on price fluctuations in fossil fuel markets.

CFDs can be applied to investments in new power generation facilities based on wind, Solar PV System Solutions, geothermal, reservoir-free hydropower and nuclear energy. The regulation also requires electricity suppliers to develop hedging strategies and member states to establish favorable conditions so that energy communities can access hedging products and ensure a fair competitive environment so that energy communities can flourish with this new activity. The new rules will apply directly to all EU member states.
2. Crisis response
The new rules give the Council the power to declare a crisis when extreme price fluctuations occur in the electricity market. Member states need to take measures in times of crisis to strengthen protection measures for electricity consumers and further reduce electricity prices for vulnerable users, while preventing improper changes in the electricity market and ensuring fair competition among suppliers during crises. In addition, the reform also encourages energy sharing plans and supports existing renewable energy communities and citizen energy communities. The capacity mechanism will become a structural element of the electricity market, ensuring supply security and flexibility, and gradually achieving a carbon-free system as the proportion of renewable energy increases.