Reaching net-zero: Eurelectric's three pillars for Europe's electricity market reform

BRUSSELS, March 29, 2023 /PRNewswire/ -- Today, the European Electricity trade association Eurelectric releases its landmark study on how to make the EU electricity market design fit for a net-zero future. The conclusion is clear: Europe's power market needs an evolution that builds on the existing structure which has been refined over more than two decades. The study proposes to add three new pillars to empower consumers, incentivise clean energy investments, and ensure security of supply in a changing energy system.

Following the historical price spikes in August 2022, an intense political debate has played out over the design of the EU internal energy market. The debate is set to continue on the basis of the legislative proposal tabled by the European Commission on 14 March 2023. The outcome could have major implications for customers as well as investors.

To inform the decision-making process, Eurelectric has commissioned the internationally renowned consultant Compass Lexecon to develop pragmatic political options.

"With this study, we contribute to the market design debate with very tangible solutions. For consumers to limit their exposure to the most extreme price volatility. For investors to benefit from higher certainty and long-term visibility. And for public authorities to inform their decisions on how to steer the development of the energy system" – says Eurelectric's President and E.ON CEO, Leonhard Birnbaum.

Giving customers choice

A key element in the debate over the electricity market is the impact of the supply shock on customers.

The Eurelectric study demonstrates how a revised market design could benefit customers by establishing a new balance between long-term and short-term price signals. The tools: enhanced use of long-term instruments – power purchasing agreements (PPAs) and contracts for difference (CfDs) – combined with improved liquidity in forward markets.

The study highlights the importance of financially robust suppliers, but it also underlines the economic efficiency of a market-led approach. Rather than politically imposed hedging obligations, a flexible resilience framework implemented by Member States should therefore help ensure supplier robustness.

Eased collateral regulations and enhanced cross-border hedging opportunities can further develop forward markets and stimulate liquidity, thus making hedging more manageable - to the benefit of customers.

A market-compatible investment framework

Long-term instruments are also critical for capital-intensive investments in low-carbon and renewable technologies, as they provide price stability and long-term visibility on returns. De-risking such contracts could help bolster the massive investment rates needed to deliver on 2030 targets, which must reach around €80 billion per year in order to achieve the political objectives. 

To ensure the proliferation of long-term instruments it is critical to remove legislative barriers hindering their use. This is especially the case for private PPAs.

Public authorities can play a complementary role when investment signals do not come from the market. State-backed CfDs, for instance, are often successfully used for large-scale renewable projects. However, CfDs should not be applied retroactively, and their use should remain voluntary to avoid hampering small-scale projects and constricting the private initiative.

The study also points out the critical need to ensure a balance between the different long-term instruments. It devises innovative, technical options for calibration mechanisms and CfDs designs.

Eurelectric's Secretary General Kristian Ruby details in a video how to strike a careful balance between the State and the market to prevent the cannibalisation of private initiative.

A security of supply framework

A final addition to an electricity market fit for net-zero is one that allows better anticipation and coordination of power system needs and safeguards security of supply.

As the energy system changes with increased electrification and decentralised generation, a more granular view of the changing dynamics is needed, particularly in the medium and low-voltage grids. This can help inform decisions on grid reinforcements and buildout of flexible and firm capacity. The study details how adequacy assessments and network plans can be detailed in terms of timeframes and suggests that they elaborate further on climate impacts on the energy system.

The study is launched at an event today with more than 1000 registered participants and the EU Commissioner Kadri Simson as keynote speaker.

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Video - https://www.youtube.com/watch?v=DfHUEM91AX8