On 21.05.2024, the European Council approved updated rules for the structure and functioning of the European electricity market. Consumers across the EU will now be able to benefit from more stable energy prices, less dependence on the price of fossil fuels and better protection against future crises on the way to a carbon-free European Union. The electricity market reform was first presented by the European Commission in March 2023. It amends the 2019 Electricity Regulations and the 2018-2019 Directives, as well as the Regulation on protection against wholesale market manipulation energy (REMIT).

Measures for stable and predictable market

The reform of the electricity market design reduces the risk of high and volatile prices faced by the European electricity sector impacting households, companies and industry by introducing measures that promote energy sharing agreements, power purchase agreements and two-way contracts for difference. These are all key tools to enhance the stability and predictability of energy costs for both households and businesses.

The reform also introduces prudential obligations on electricity suppliers to ensure the availability of fixed-price and fixed-term contracts for consumers, and includes new measures to minimise the risk of bankruptcy of suppliers and enable consumers to opt for multiple electricity supply offers. Consumers will also be able to benefit from low-cost renewables by sharing the electricity they produce themselves.

As a result of these measures, electricity prices are expected to stay at a more stable level and to be more independent from volatile fossil fuel import costs. Overall, this will have a positive impact on energy bills of European households and businesses. 

Contracts for difference (CfD) and power purchase agreements (PPA) as main instrument

The reform of the electricity market design introduces measures that promote the use of power purchase agreements (PPAs) as long-term tools to guarantee price stability to both suppliers and consumers. However, it does not oblige market participants to enter into such agreements.  Member States will be obliged to ensure the availability of instruments to reduce financial risks linked to PPAs, thereby expanding the access to these contracts. For this purpose, Member have the possibility to set up market-based State guarantees. These guarantees scheme cannot support fossil generation but can support any carbon-free technology. In addition, Member States will have the possibility to limit these State guarantee schemes to support renewable generation only, in line the Member State's decarbonisation policies.

With regard to contracts for difference, there is a new obligation for Member States to use two-way contracts for difference or other equivalent schemes with the same effects when they grant public support in the form of direct price support schemes for investments in new renewables and low carbon, non-fossil fuel power plants, notably powered by wind energy, solar energy, geothermal energy, hydropower without reservoir and nuclear energy. Public support for extension of existing capacity could also be subject to two-way contracts-for-difference. Similarly, the participation of market participants in two-way contracts-for-difference or other equivalent schemes with the same effects is voluntary.

Strengthening the integration of RES

The reform will help to integrate renewables in several ways. Overall, it will facilitate the participation of renewables, demand response, storage and flexibility in the wholesale electricity markets by increasing their liquidity and the conditions for trading in these markets.

It will also help connecting more renewables and storage solutions in congested parts of the grid and those areas awaiting network reinforcements through non-firm, flexible connection agreements which could, for example, take into account energy storage or limit the times in which a generation power plant can inject electricity to the grid, enabling its partial connection. Energy sharing organisers, such as aggregators or energy communities, can help alleviate grid congestion by shifting energy demand to off-peak hours.

The reform also features new provisions to integrate large new offshore renewable energy projects connected to more than one market, by compensating the risks that these projects face in relating to access to markets.

 Improving Europe's energy security

In line with European Green Deal and REPowerEU goals, the reform will play an important role in phasing out Europe's dependence on fossil fuels for electricity generation. This will be achieved partly by improving the markets for long-term contracts, such as power purchase agreements (PPAs) and two-way contracts for difference, and by facilitating the integration of renewables across the power system.

PPAs and two-way contracts for difference not only provide consumers with stable prices. They also provide renewable energy suppliers with reliable revenues. This lowers their financial risk and greatly reduces their cost of capital, acting as a push factor for investment. This creates a virtuous circle where stable revenues effectively lower costs and boost demand for renewable energy.

New EU procedure for declaring an electricity prices crisis

The Commission continuously monitors electricity prices in wholesale and retail markets. Under the revised electricity market design, the Commission can submit a proposal to the Council to declare a regional or EU-wide electricity price crisis, if the circumstances justify action. Notably, two conditions need to co-exist:

• Very high average prices in wholesale electricity markets of at least two and a half times the average price over the previous 5 years, and at least 180EUR/MWh, which is expected to continue for at least 6 months, excluding from the average price during the previous 5 years periods where a regional or Union-wide electricity price crisis was declared;
• Sharp increase in electricity retail prices in the range of 70%, which is expected to continue for at least 3 months.

When the Council adopts a decision declaring such a crisis, Member States can apply temporary targeted public interventions in price setting for the electricity supply to small and medium-sized enterprises (SMEs) (for up to 70% of their consumption) and to households (up to 80% of median household consumption and up to 100% for vulnerable and energy poor households).

Boosting the EU industry's competitiveness

The reform would promote more stable prices for energy use and make lower-cost renewable energy sources more available.

To improve the competitiveness of EU industry and to reduce its exposure to volatile prices in particular the revised electricity market design includes measures to deploy more stable long-term contracts such as Power Purchase Agreements (PPAs). Through PPAs, companies establish their own direct supplies of energy and can thereby profit from more stable prices of renewable and non-fossil power production. To address the current barriers to PPAs, such as the credit risks of buyers, the reform obliges Member States to ensure the availability of market-based financial instruments.

Direct price support schemes introduced by Member States for new investments in infra-marginal and must-run renewable and non-fossil electricity generation, will have to be in the form of two-way contracts for difference or equivalent schemes with the same effects.  Member States are furthermore obliged to channel excess revenues to final customers. This serves to provide power producers with revenue stability while shielding industry from price volatility.

In addition, the reform will boost market liquidity for long-term contracts that lock in future prices, so-called “forward contracts.” This will enable more suppliers and consumers, including the EU's industry, to protect themselves against excessively volatile prices over longer periods of time.

Empowering consumers

One way to increase the resilience of consumers to the effects of high and volatile wholesale market prices is to make them proactive players in the energy market. The new Electricity Market Design empowers consumers to do so, including those who otherwise do not have the option of becoming an active customer due to financial or spatial constraints, notably vulnerable customers and those affected by energy poverty.

Through energy sharing, consumers can self-consume off-site generated or stored electricity. This not only provides consumers with direct access to low-cost renewables, but it also unlocks additional incentives for active customers to invest in the deployment of renewables and engage in demand response.

Consumers can share self- or collectively-generated electricity with friends, families, neighbours, communities, vulnerable consumers or those affected by energy poverty. For example, low-income families living in social housing could benefit from renewable energy from the solar panels on public buildings.

Another important change is the possibility for consumers to conclude more than one electricity supply contract or energy sharing agreement, under the same connection point for their premises. In other words, they will be able to conclude a fixed-price contract to have predictable costs for their main household needs and, in parallel, a dynamic price contract specifically to power their heat pump or charge their electric car at those times of the day when electricity is cheapest, that is to say when renewable energy is most plentiful. Metering arrangements are left to Member States to decide, while smart metering systems could be used where this is technically feasible.

Improving market integrity and transparency

As part of the electricity market reform, the revision of the Regulation on Wholesale Energy Market Integrity and Transparency (‘REMIT') strengthens the framework for preventing and protecting consumers and business against market abuse in the European electricity and gas markets.

More specifically, the revised REMIT introduces a new enforcement regime with a stronger role for the European Union Agency for the Cooperation of Energy Regulators (ACER) in cross-border investigations. As a result, it would be possible to more effectively pursue cross-border cases that strengthen protection against any market abuse and increase the integrity and oversight of the wholesale energy market.

In addition, the revised REMIT tightens the supervision of market participants that are subject to reporting obligations such as Registered Reporting Mechanisms (RRMs) and Inside Information Platforms (IIPs), and strengthens the enforcement systems at national and EU level, including towards external market players, namely market participants that are not resident or established in the EU. Such strengthened enforcement and supervision of market participants aims at protecting energy wholesale markets from market manipulation and abusive actions.