Reform of electricity market design: Council reaches agreement

Today the Council reached an agreement (general approach) on a proposal to amend the EU’s electricity market design (EMD). This will allow the Council presidency to start negotiations with the European Parliament to reach a final agreement.

I am proud to say that today we have taken a strategic step forward for the future of the EU. We have achieved an agreement that would have seen unimaginable only a couple of years ago. Thanks to this agreement, consumers across the EU will be able to benefit from much more stable prices of energy, less dependency on the price of fossil fuels and better protection from future crises. We will also accelerate the deployment of renewables, a cheaper and cleaner source of energy for our citizens.

Teresa Ribera Rodríguez, acting Spanish third vice-president of the government and minister for the ecological transition and the demographic challenge

The reform aims to make electricity prices less dependent on volatile fossil fuel prices, shield consumers from price spikes, accelerate the deployment of renewable energies and improve consumer protection.

The proposal is part of a wider reform of the EU’s electricity market design which also includes a regulation focused on improving the Union’s protection against market manipulation through better monitoring and transparency (REMIT). A general approach on REMIT was agreed during the Transport, Telecommunications and Energy Council (energy) on 19 June 2023.

Long-term electricity markets

The reform aims to steady long-term electricity markets by boosting the market for power purchase agreements (PPAs) generalising two-way contracts for difference (CfDs) and improving the liquidity of the forward market.

The Council agreed that member states would promote uptake of power purchase agreements, by removing unjustified barriers and disproportionate or discriminatory procedures or charges. Measures may include among other things, state-backed guarantee schemes at market prices, private guarantees, or facilities pooling demand for PPAs.

The Council agreed that two-way contracts for difference (long-term contracts concluded by public entities to support investments, which top up the market price when it is low and ask the generator to pay back an amount when the market price is higher than a certain limit, in order to prevent excessive windfall profits) would be the mandatory model used when public funding is involved in long term contracts, with some exceptions.

Two-way contracts for difference would apply to investments in new power-generating facilities based on wind energy, solar energy, geothermal energy, hydropower without reservoir and nuclear energy. This would provide predictability and certainty.

The rules for two-way CfDs would only apply after a transition period of three years (five years for offshore hybrid asset projects connected to two or more bidding zones) after the entry into force of the regulation, in order to maintain legal certainty for ongoing projects.

The Council added flexibility as to how revenues generated by the state through two-way CfDs would be redistributed. Revenues would be redistributed to final customers and they may also be used to finance the costs of the direct price support schemes or investments to reduce electricity costs for final customers.

Capacity mechanism

Capacity mechanisms are support measures that member states can introduce to remunerate power plants in order to guarantee medium and long-term security of electricity supply. The Council agreed remove the temporary nature of such measures.

The Council introduced a derogation from existing requirements regarding CO2 emission limits for generators to receive support from capacity mechanisms, under strict conditions and until 31 December 2028.

Member states also concurred that the approval procedures for capacity mechanisms need to be simplified. The Council proposed changes focussing on streamlining the procedure in the current capacity mechanism framework. It also asked the Commission to submit a detailed report assessing further possible ways to simplify the process of applying capacity mechanisms. The report would be followed by proposals for simplifying the process three months after the entry into force of the regulation.

Consumer protection

The Council introduced clarifications to the provisions on customer protection. It agreed to strengthen consumer protection by establishing a free choice of a supplier and the possibility of accessing dynamic electricity prices, fixed-term, and fixed-price contracts, unless suppliers do not offer fixed contracts and provided that this does not reduce the overall availability of fixed contracts.

The Council agreed to stricter rules than previously for suppliers in their price-hedging strategies to shield customers from variations on wholesale markets. It agreed to protect vulnerable customers from disconnections by putting in place ‘supplier of last resort’ systems to ensure the continuity of supply at least for household customers, if such systems do not already exist.

It was also agreed that all customers would have the right to energy sharing schemes (using, sharing and storing self-generated energy) and that all consumer rights  would be extended to final customers involved in energy-sharing schemes.

Affordable energy prices during a crisis

Under the current rules, member states can apply regulated prices for energy poor and vulnerable households, and as a transitional measure for households and micro-enterprises whether or not there is an electricity price crisis. The reform adds a temporary option to apply regulated prices, even below cost, to small and medium sized enterprises (SMEs) in times of crisis.

Member states strengthened the role of the Council in declaring a temporary regional or Union-wide electricity price crisis. They also amended the conditions for declaring an electricity price crisis so that a crisis may be declared when very high average wholesale electricity prices are expected to last at least for six months, and sharp increases in electricity retail prices are expected to continue for at least three months.

The Council agreed that member states may apply a cap on the excessive market revenues from electricity produced from generators with lower marginal costs such as renewables, nuclear and lignite (‘inframarginal generators’) until 30 June 2024, subject to the same conditions as the emergency measure on inframarginal revenues adopted on 6 October 2022.

Next steps

The general approach will serve as a mandate for negotiations with the European Parliament on the final shape of the legislation. The outcome of the negotiations will have to be formally adopted by the Council and the Parliament.

The text of the general approach will be made available at a later stage.

Background

The reform of the electricity market design proposes to amend the relevant electricity market legislation and to improve the Union’s protection against market manipulation through better monitoring and transparency (REMIT).

The Commission adopted the proposals on the reform of the EU’s electricity market design on 14 March 2023.

• Council reaches agreement on parts of electricity market reform (press release, 19 June 2023)
• Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to address high energy prices
• Electricity market reform (background information)
• Energy prices and security of supply (background information)
• Impact of Russia’s invasion of Ukraine on the markets: EU response – Energy prices and security of supply (background information)

Visit the meeting page