Brussels, Berlin In the future, electricity customers should no longer be exposed to such high price increases as they were last year. There should also be more incentives to expand wind and solar power. The EU Commission has taken a first step towards changing the rules of the electricity market. On Monday, she began a consultation process by sending out 65 questions and several pages of statements to stakeholders. The survey runs until February 13. The Commission intends to present a legislative proposal in the course of March.
The goals of the reform contradict each other in parts: high electricity prices should be avoided in order not to burden consumers excessively. On the other hand, the expansion of wind and solar power plants should become more attractive, which requires high prices. The Commission sees two ways of resolving this contradiction. Both aim to limit fluctuations in market prices.
On the one hand, there are contracts in which major customers buy their electricity at a fixed price over a period of five to 20 years (“Power Purchase Agreement”, PPA). Today, 15 to 20 percent of new wind and solar power is sold through these PPAs, according to the commission. In her questionnaire, she asks for information on which hurdles for PPAs could be removed.
On the other hand, there are contracts with the state in which a constant electricity price is fixed (“Contracts for Difference”, CfD). As long as the market price is below this reference price, the state pays the difference to the electricity producer. The electricity producer has to pay for this if the market price is above the reference price. This makes the market more predictable, not only for electricity producers, but also for electricity customers. The state takes the risk.
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“Market reform can reduce fluctuations in market prices. That would help investors and consumers,” says Ingmar Schlecht, electricity market expert at the School of Management and Law in Zurich.
Industry sees danger for wind power expansion
However, the eco-industry clearly warns against CFDs. Simone Peter, President of the Federal Association of Renewable Energies (BEE), speaks of a “planned economy model”.
>> Read here: Economics Minister Habeck demands European industrial electricity price
This is due to the following mechanism: the more complex the electricity system becomes and the more fluctuating amounts of electricity come into the grid from renewable energies, the more important price signals are. They mean that flexible generators such as gas-fired power plants start up exactly when they are needed. This also enables lower electricity prices to be achieved.
“We need price and market signals to balance the electricity market, and therefore a market design that encourages flexibilities,” says Peter. The CFDs, on the other hand, capped the price signals.
An analysis by the European electricity market regulator (Acer) from April 2022 was therefore critical of CFDs. At the time, the experts came to the conclusion that there were good reasons to retain the previous market design and that improvements to it should be addressed in the long term rather than in the short term.
could become electricity in Europe from 2024 to 2028. This is currently indicated by the prices for futures transactions.
However, the EU Commission wants to bring the issue to a conclusion as far as possible before it is recomposed in spring 2024. Some Member States are also pushing, especially with regard to the introduction of CFDs. Even before the consultation phase, Spain and France tried to influence the Commission proposal accordingly.
Commission is considering continuing emergency interventions in the electricity market
Your calculus could be short-term, because CFDs can be used to reduce electricity prices in the short term. This is because prices are very high right now and markets are expecting lower prices going forward, as reflected in futures prices. From 2024 to 2028, the price will fall by a good 40 percent.
CFDs for existing wind and solar systems would anticipate this price drop, but would lead to higher than expected prices in the future. “This is a different kind of national debt,” says the energy expert Schlecht. “We live cheaper today and pay for it in the future.”
>> Also read here: EU under pressure: Spain and France want to reform the electricity market
In its questionnaire, the EU Commission also explores the possibilities of continuing the emergency interventions in the electricity market that are still in force. As a result of these interventions, the price for electricity from most producers is limited to 180 euros per megawatt hour at all times.
“Deliberations by the Commission on the long-term continuation of the revenue skimming are counterproductive with regard to investments in renewable energies and should not be pursued further,” said Kerstin Andreae, Chair of the Executive Board at the Federal Association of Energy and Water Industries (BDEW). In general, the Commission is too fixated on prices and needs to focus more on investments.
More: Spain’s economy minister on energy costs: “Our approach was very different from the German one”