Europe is preparing to update its electricity market

The energy ministers of the European Union were discussing on 27.02 the upcoming reforms of the electricity market, reports Reuters. Brussels was ready to propose the overhaul next month but the countries are already divided on how to “fix” the energy system – or whether it needs fixing at all.

The European Commission promised last year to reform the rules of the electricity market in the EU . The decision comes after record high gas prices – caused by cuts to Russian gas flows – sent electricity prices soaring for European companies and citizens.
The aim is to reform the electricity market to protect consumers’ energy bills from short-term fluctuations in fossil fuel prices and ensure that Europe’s growing share of cheap renewable electricity is low-priced.

Currently, electricity prices in Europe are determined by the running costs of the plant that supplies the last part of the energy needed to meet total demand. It’s often a gas plant, so spikes in the price of gas can lead to spikes in electricity prices.

EU countries do not agree on how far the reforms should go. Spain, France and Greece are among those seeking deep reform.

In a document shared with EU countries seen by Reuters, Spain said the reforms should help national regulators sign longer-term contracts with power producers to pay a fixed price for their power.

Nuclear and renewable energy producers, for example, will receive a ‘contract for difference’ (CfD) from the government to provide power over their lifetime – potentially decades – at a stable price that reflects their average cost of production.

Similarly, France is proposing to require energy suppliers to sign long-term fixed-price contracts with power producers – either through a CfD or a private power purchase agreement (PPA) between the parties.

French officials say this will give the power plant owner predictable revenue while allowing consumers to have part of their energy bill made up of this more stable price.

Germany, Denmark, Latvia and four other countries oppose deep reform and have warned the EU not to remake a “crisis regime” of a complex system that took decades to develop.

They say Europe’s existing energy market works well and has fostered years of lower electricity prices, supported renewable energy and helped avoid energy shortages.

These countries only support limited settings, such as making it easier for users to choose between variable and fixed price power contracts.

The Commission initially presented the reform as a chance to “decouple” gas and electricity prices in Europe, proposing a redesign of the current system for setting electricity prices. But EU officials say Brussels now appears to be leaning towards more modest changes.

A public consultation on the reforms last month highlighted deep interference in the energy market. Rather, it proposes expanding the use in Europe of long-term contracts that give power plants a fixed price for their electricity, such as CfD or PPA.

The commission said this could be done by setting EU-wide contract rules, leaving countries to use them voluntarily, or by requiring new state-funded power stations to sign contracts for difference. The idea of ​​forcing existing power plants to sign up to CfDs was mooted, but said it could deter much-needed investment in renewable energy.

Pro-reform countries such as Spain say a revamped electricity market would lower energy prices for consumers by matching their bills more closely to the real cost of producing lower-carbon electricity.

France said the aim was to secure investment in low-carbon energy, including renewables, and nuclear plants like those Paris plans to build. Also that lowering electricity prices should be part of Europe’s response to massive industrial subsidies in the United States and China – helping European firms maintain a competitive edge.

But skeptics warn that drastic changes to the market could undermine confidence among investors, putting at risk hundreds of billions of euros in renewable energy investment that the EU says is needed to wean off Russian fossil fuels and meet climate goals.

Power companies including Engie ( ENGIE.PA ), Orsted ( ORSTED.CO ) and Iberdrola ( IBE.MC ) have said making CfD mandatory or retroactively imposing it on existing power plants could deter investment and trigger legal action disputes by energy companies.

EU energy ministers are discussing the reforms on Monday before formal negotiations begin.

The commission, which drafts EU laws, plans to propose the reforms on March 14. EU countries and lawmakers then negotiate the final law, which must win a majority of MEPs and a strengthened majority from at least 15 countries.

Negotiations on key EU legislation often take more than a year, but some countries are pushing for a quick deal. France wants the law to be completed this year.

This has already met resistance from countries such as Germany, which say deeper changes cannot be rushed and will need a “deep impact assessment” – something the Commission’s upcoming proposal is not expected to include as it is prepared so quickly.

The timetable is further complicated by European Parliament elections in 2024. This has raised concerns in reform-hungry countries that failure to reach a deal before the elections could significantly delay reforms if talks have to be halted until a new EU parliament is elected.

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