European Parliament Votes to Approve Reform of Electricity Market

Energy - April 25, 2024

Last week, the European Parliament voted to approve the reform of the electricity market. For context, the European Commission presented a package to reform the EU electricity market in March 2023, motivated by the effects of the 2021-2022 energy crisis caused by the post-pandemic economic recovery and the Russian invasion of Ukraine that led to volatile and soaring energy prices and afflicted European customers and industry. As a result, the Commission presented a package comprising a revision of several key pieces of legislation, including the Electricity Regulationb, the Electricity Directive, the Renewable Energy Directive and the REMIT Regulation, with the overarching objective of addressing shortcomings in the design of the European electricity market, make energy bills less dependent on fossil fuel prices, and shielding consumers and industry from electricity price volatility. It also sought to incentivise the acceleration of the deployment of renewable energies.

The legislative file was allocated to the European Parliament’s Committee on Industry, Research and Energy (ITRE), which voted to adopt its position on July 2023. Subsequently, the Plenary of the European Parliament voted to adopt its position in September 2023. For its part, the Council of the EU adopted its ‘general approach’ (its negotiating mandate as it is known in Brussels jargon) in October 2023. Subsequently, representatives from the Spanish Presidency of the Council of the EU, the European Parliament, and the European Commission were able to begin interinstitutional negotiations (‘trilogues’ as they are known in Brussels) in order to reach an agreement on a common text. The trilogue negotiations concluded in December with an agreement, which was now subject to formal approval by the two co-legislators.

It is in this context that the European Parliament voted last week to ratify the agreement that had been reached in the trilogues. MEPs voted to approve the agreed text for the new Regulation with 433 votes in favour, 140 votes against, and 15 abstentions, and in the case of the new Directive, with 473 votes in favour, 80 against, and 27 abstentions. The next step is for the Council to also ratify the legislation.

Below is a summary of the most relevant provisions of the new legislation. According to the rapporteur of the legislation, Spanish S&D MEP Nicolás González Casares, the reform “puts citizens at the forefront of electricity market design”, in a way that “democratizes energy”, “protects citizens”, accelerates the “deployment of renewable energy sources”, and creates a “market design that responds to the failures exposed by the energy crisis”.

One of the main ways that the electricity market reform addresses these issues and protects consumers from volatile prices is by giving them a greater range of contracts, such as fixed-price contracts and dynamic price contracts, as well as requiring that information is provided to customers on the different options before signing them. As an example that is relevant for industry, the legislation foresees facilitating the deployment of more stable long-term contracts between customers and suppliers like Power Purchasing Agreements (PPAs), which enable companies to establish their own direct supply of energy in order to benefit from more stable prices of renewable and non-fossil fuel power.

Furthermore, the legislation establishes measures to encourage investment in energy, in a way that guarantees power producers have revenue stability while also shielding industry from price volatility. One way the legislation seeks to achieve this is through the use of two-way also Contracts for Difference (CfDs) for public investments in new renewable and non-fossil electricity generation. Under CfDs, public institutions would compensate energy producers if market prices fall sharply, but if prices rise excessively, part of the revenues would be collected and redistributed (including to final customers or to finance direct price support schemes or investments to reduce electricity costs).

Furthermore, the legislation would give the Council the power to declare an electricity price crisis, on the basis of a Commission proposal, which would enable Member States to adopt temporary measures to set electricity prices for SMEs and for energy intensive industrial consumers.

The reform has some interesting proposals which will contribute to stabilising electricity bills and preventing huge spikes if Europe is ever struck by another energy crisis of the magnitude of the 2021-2022 crisis. Nonetheless, it is much less ambitious than what many had originally hoped. Indeed, many voices like the Spanish Minister for the Ecological Transition (who was involved in much of the negotiations during the period of the Spanish Presidency of the Council) had hoped to change the so-called ‘merit order system’ and decouple electricity prices from fossil fuel prices. The agreed legislation is far from a fundamental overhaul as Spain and France had pushed for. Furthermore, the European Union will have to continue to work to ensure a secure, sustainable and diversified supply of natural gas.