Caution is needed to prevent the EU’s ongoing electricity market reform from creating regulatory uncertainty and hindering future investment in renewables, argue Christopher Jones and Klaus-Dieter Borchardt.
Christopher Jones is professor at the Florence School of Regulation and former Deputy Director-General for Energy at the European Commission. Klaus-Dieter Borchardt is professor at the Copenhagen Business School, visiting fellow at the Oxford Institute of Energy Affairs, and former Deputy Director-General for Energy at the European Commission.
The Commission’s proposal to reform the EU’s electricity market has a number of key objectives:
- making electricity bills less dependent on fossil fuel prices by incentivising longer-term contracts, in particular boosting the market for power purchase agreements (PPAs), stabilizing the prices of electricity notably by requiring the use of two-way contracts for difference (CfDs) for new investments in renewable energy and nuclear generation where public funding is needed, and by improving forward electricity markets.
- accelerating the deployment of renewables by further facilitating their integration in the electricity system and improving conditions for the use of flexibility solutions such as demand response, storage and low-carbon sources.
- protecting consumers from the price volatility of fossil fuels by empowering consumers with greater contract choice and more direct access to renewable energy, and
- providing secure, stable investment conditions for renewable and low-carbon energy developers by bringing down risk and capital costs by facilitating access to longer-term contracts for developers (both state-supported CfDs and private PPAs).
It is a balanced proposal that keeps competition and trade at the heart of the Internal Electricity Market, which has served the EU well for more than three decades, providing security, driving decarbonisation and affordable and competitive prices.
The marginalist system – whereby prices are set through wholesale markets where electricity is freely traded, combined with the freedom to contract bilaterally, remains at the heart of the Internal Market.
Thankfully, it is retained intact by the Commission’s proposal, fully maintaining forward-to-day-ahead, intra-day, and balancing markets.
In addition to providing additional rights and possibilities for consumers, it, therefore, seeks to ensure that renewable electricity is supported more cost-effectively and to improve the way that companies can trade electricity bilaterally.
Regarding support schemes (which should increasingly become unnecessary as wind and solar electricity becomes ever cheaper), the Commission proposes that two-way ‘contracts for differences’ become the only way that Member States should support future renewable energy and nuclear generation investments in future.
Investors would bid in to a tender, based on the guaranteed price they are willing to accept.
When the overall electricity wholesale price is lower than this, they receive a subsidy to cover the loss they would need to sell at, but when it is higher, the state captures the benefit which is then shared by electricity consumers.
This system has this ‘two-way’ benefit over many previous schemes, that simply provided a guaranteed price.
In addition, the Commission proposes to streamline the way that electricity is sold under bilateral contracts – power purchase agreements or ‘PPAs’.
These are becoming an ever more popular way to finance new renewable electricity investments, and for companies to decarbonise their activities, and are likely to continue to gain in importance.
However, some Member States have suggested that the Commission’s proposal should be amended in a manner that will re-regulate the market, stifle competition, and create regulatory uncertainty for new investors in renewable electricity projects.
Specifically, it has been proposed that Member States should be able to impose contracts for differences on existing generation at regulated prices set by the government, and even impose regulated price PPAs for existing power plants, with the resultant electricity then being allocated by the state.
In many respects these suggestions grandfather the emergency price claw-back mechanism which split the Internal Market and had many disadvantages, but was exceptionally needed during a price crisis.
However, we are now in a period when gas prices have returned to close to pre-crisis levels and, given the exceptionally high storage levels, show every expectation to remain that way.
The case for retaining such measures, let alone extending their scope and grandfathering them, no longer exists.
We, therefore, see two important problems with such suggestions.
First, they would undermine the whole basis of the Internal Electricity Market, replacing competition with state-regulated prices and markets.
Second, they would fundamentally change the investment rules and conditions applicable to existing generators compared to the ones on which they based the decision to invest.
This creates regulatory uncertainty for the future, which kills investment in a business based on up-front capital investment which must then be paid back over many years.
In the past, Member States changed the rules on renewables support schemes and thus changed the expected revenues for generators after investments were made. This effectively killed new projects and led the EU to ban such retroactive changes in future.
The suggestion to impose state-set regulated contracts for differences or PPAs on existing generation can be confidently predicted to have exactly the same effect.
The Commission’s proposal is a good one, but should not be used as a basis for Member States to roll back the clock and undermine the progress made over 30 years in creating the world’s ‘gold standard’ electricity market, which will continue to deliver benefits for citizens.
Nor should the EU fail to learn from the past, and permit short-sighted measures that will make it difficult, if not impossible, to catalyse the huge private investments in new renewable capacity that we will need to meet our Green Deal and climate commitments.
