Member States Make Limited Progress on EU Electricity Market Reform

Energy - November 25, 2023


Back in March, the European Commission presented its much-awaited legislative proposal to overhaul the European electricity market to offer structural solutions that would, according to the Commission, make the EU more resilient in the face of future energy crises like the one the EU has been suffering since 2021. Specifically, the Commission aimed to “make consumer bills less dependent on volatile fossil fuel prices, better protect consumers from future price spikes and potential market manipulation”, and “accelerate a surge in renewables and the phase-out of gas”.

As we covered at the time, the reform proposed measures like allowing consumers to combine fixed and flexible pricing for electricity with several suppliers, requiring energy retailers to inform households on the advantages and risks of different types of available contracts, facilitating the deployment of ‘Power Purchase Agreements’ (PPAs) for companies to establish their own direct supplies of energy, as well as implement ‘Contracts for Difference’ (CfD) for future EU funding of renewable electricity generation with a price ceiling and a price floor, to compensate producers when prices fall below the floor, and channel excess profits when they exceed the limit, as well as harmonising the EU subsidy system.

Nonetheless, as we predicted at the time, the legislative reform process is facing significant hurdles due to conflicting interests between the Member States. At the recent Energy Ministers Council meeting on the 19th of June, the Member States made some progress and agreed its stance in the ‘general approach’ it approved, which will now serve as the basis for negotiations with the EU Parliament.

The measures that the Council agreed on mainly concern the REMIT proposal (proposal for regulation on wholesale energy market integrity and transparency), part of the wider EU reform. The REMIT reform seeks to ensure open and fair competition in the wholesale energy market by banning trading based on inside information and deterring market manipulation. In this regard, the Council agreed to implement stricter requirements for market participants who live in third countries, increase the role of the Agency for the Cooperation of Energy Regulators (ACER) to investigate cross-border cases of breaches, and strengthened the role of National Regulatory Authorities.

Nonetheless, looking at the bigger picture, Member States have thus far not been able to make progress to reach an agreement on the more substantive parts of the electricity market reform proposal (the Electricity Regulation and the Electricity Directive), leaving important aspects like the dependence of electricity prices on volatile fossil fuel prices, consumer protection from price spikes, or the deployment of renewable energies in the air for now.

Indeed, at the time, we predicted that there would be thorny issues that would hamper Member States’ ability to reach an agreement, chiefly nuclear energy. Indeed, this issue was present at the June Council meeting.  As we explained in our previous piece, there is a deep chasm between nuclear friendly countries like France and Poland on the one hand, and antinuclear countries like Germany and Sweden on the other. In the June Council, Member States fought over allowing state aid to extend the lifetime of nuclear power plants via CfDs. While France supports the use of CfDs to invest in the extension of its nuclear plants, the antinuclear states found all sorts of excuses to oppose this measure.

According to Luxembourg’s Energy Minister, this measure would create an “enormous distortion in the EU’s internal market”. Germany’s Economy and Climate Minister supported the use of CfDs for existing energy assets, but vehemently opposed the inclusion of nuclear. Therefore, Member States have a lot of sticking points that they need to iron out, such as the derogation of coal subsidies, or the more fundamental difference between countries like Spain and France who want a profound transformation of the marginal pricing system, and countries like Germany and the Netherlands who want a targeted reform.

What is certain is that we won’t be seeing a reform of the electricity market reform anytime soon, and the negotiations will drag on into the current Spanish Presidency of the Council, the Belgian Presidency, and possibly beyond. As the Swedish Presidency conceded during the June Council, the bulk of issues in the reform will have to be “agreed at a later stage”.

All we can hope is that the negotiations extend until the Parliament elections next year, so that Europeans can elect a conservative parliament that will put their interests first. If current leaders have shown anything it’s that energy policy is solely driven by ideology. Therefore, European consumers and our energy security desperately need a dose of pragmatism to solve the deficiencies of the current electricity market design, but without leaving Europe vulnerable, dependent and energy insecure.