Commission’s proposal on the electricity market reform (Part 3): liberals score a point

Following the public consultation held from 23/01/2023 to 13/02/2023, and during which Member States positioned themselves between two clearly defined sides, with radically opposed views (see our Newsletter from March: Electricity market reform (Part 2) : liberals strike back), on March 14th 2023, the European Commission published its initial proposal for the reform of the electricity market[1]. In the light of this first paper, it seems that the liberal side emerges victorious. The Commission’s proposal, which we shall describe below, rejects a deep structural change of the market, and merely focuses on proposing some improvements to reduce the volatility of prices borne by end-consumers and promoting the deployment of renewables.

In response to the energy crisis that the European markets have been experiencing in 2021 and 2022, the European Union has been implementing transitional measures such as:

  1. In October 2021, an energy prices toolbox to address high prices with income support, tax breaks…
  2. In March 2022, temporary state aid regimes to allow certain subsidies to soften the impact of the high energy prices.
  3. In May 2022, the REPowerEU, with a set of measures deemed to reduce our dependence from Russian fossil fuels by enhancing energy efficiency and speed up the deployment of renewables (see our Newsletter from June 2022: REPowerEU: “green” and economic cost at stake?)

However, several shortcomings of our electricity market had already been exposed. The European Commission refers to the main ones as being (i) electricity prices with an extreme influence from fossil fuels prices and low presence of low-cost renewable energy prices in the bills, (ii) lack of protection to final consumers against price volatility, (iii) distortion in investments generated by high volatility and interventions. Additionally, there is a lack of: (iv) non-fossil flexibility, (v) supply contract choices for customers, (vi) access to energy sharing and (vii) quality monitoring of the market against market abuse.

To face some of these deficiencies of the current market design, the EU Commission, in its paper “Electricity Market Design revision: Proposal to amend the Electricity Market Design rules (COD: 2023/0077)” proposes the following:

  1. For the extreme influence from fossil fuel prices in consumer bills:
  • In the intraday market, the gate closure time should be set closer to the time of delivery to increase liquidity and better integrate variable renewables.
  • In the short-term electricity markets, lower the minimum bid size to allow the participation of small-scale flexibility service providers.
  • Enable TSOs (Transmission System Operators) to procure peak shaving products so as to maximise the integration of the demand side response.
  • Implementation of regional virtual hubs, each with its own reference price index that ensures an adequate correlation of prices from different bidding zones, to increment liquidity and improve against market fragmentation.
  • Offer long-term transmission rights, allocate cross-zonal capacity on a regular basis, and offer trading of the financial transmission rights with frequent maturities (from month-ahead up to at least 3 years ahead).
  • Allow market operators to offer forward hedging products accessible to market participants.
  • Offshore renewable energy plants shall have priority to access revenues from congestion income.
  1. For the lack of protection to final consumers against price volatility:
  • Enable consumers to have more than one contract simultaneously (fixed and/or dynamic), increase consumer choices and clarity in contracts.
  • Encourage energy sharing among consumers (collective consumption of self-generated or stored electricity injected into the grid by more than one jointly acting active customer).
  • Ensure that suppliers implement adequate hedging strategies to limit risks of volatility in their contracts and protect final consumers.
  • Member States should be obliged to appoint a supplier of last resort for consumers to protect them against disconnections in case of supplier failure.
  • Allow public interventions in price setting during periods of crisis. The European Commission should determine when such a crisis exists, and the interventions shall have specific restrictions or constraints.
  1. For the distortion of long-term investments:
  • Enable access to long-term PPAs for smaller customers thus protecting them against its associated financial risks.
  • For new investments[2] in wind, solar, geothermal, hydropower with reservoir and nuclear, implement public support schemes in the form of 2-way contracts of differences, where the revenues from a surplus are distributed between final customers based on their share of consumption.
  1. For the lack of non-fossil flexibility:
  • In the absence of smart metering systems, allow TSOs to use data from dedicated metering devices for the observability and settlement of demand response and flexibility services, including from storage systems.
  • Add features to capacity mechanisms to enhance the participation of non-fossil flexibility such as demand response and storage. Where there is not a capacity mechanism, implement payments for the available capacity of non-fossil flexibility.

The reform of the electricity market is undoubtedly needed. Even though this initial proposal is far from being the ultimate solution, it sets its focus on some key points which the market had to regard sooner or later.

Our electricity market, as it currently stands, was designed at a different time, in a context of overcapacity that required the correct short-term signals in a stable prices’ environment with low fixed costs technologies. The current situation is far from the initially designed situation. The energy mix is rapidly shifting towards low marginal cost renewable generation, while reserve margins are disappearing. The current crisis has provided a snapshot of the extreme volatility of the electricity market. In the future, with a higher share of renewables, we will be constantly moving from zero, even negative prices to very high values. To avoid this stress on both consumers and producers, efficient long-term mechanisms should be implemented without affecting short-term price signals, which otherwise work well. This is exactly what the Commission is looking for with its proposal.

The next step is an agreement between the Member States, the European Parliament, and the Commission itself. Discussions have already begun and, as was expected, reaching a consensus among the different countries will not be a piece of cake.

During a meeting held on March 29th by Member States’ energy ministers, some countries have already expressed their disagreement with the Commission’s proposal of having 2-way CfDs (Contracts for Difference) with the prices fixed by public entities as the sole direct public aid to investments in renewable energies. On the one hand, Spain, the Netherlands, Belgium, Denmark, and Luxembourg see a problem in bearing the resulting deficit when market prices do not reach the reference levels of the CfDs, especially considering that, when prices are higher, the surplus is redirected to final consumers. For its part, Germany believes that using these CfDs could add rigidity to the market. Finally, Austria, in opposition to French interests, is against the possibility of nuclear generation participating in this type of remuneration scheme. In the light of these first impressions, it seems that the Commission should allow more freedom to public entities in the implementation of support measures for investments in renewables.

While we can only wait and see what the final outcome of the market reform will be, we can already conclude that the balance leans more in favour of the liberal faction. The Commission’s proposal rejects crossing some limits, such as modifying the marginal structure of the electricity markets, which seems adequate for the short-term, and prefers to focus on enhancing consumer protection and long-term market improvement to provide better investment signals and reduce volatility.

It will be interesting to see how future discussions develop, what the final official form of this initial proposal will look like and how the different Member States will decide to comply with it. From Haya Energy Solutions, we will keep you updated on this matter.

Guillermo Llanos Macias

[1] Proposal for a regulation of the European parliament and of the council

[2] These new investments would include investments in new power generating facilities, repowering existing ones, extending them, or prolonging their lifetime.

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Profesional Experience & Education

Diego graduated in Political Economy at King’s College University (London – 2021). He started his professional career in a family business in Madrid as an operations manager. Diego then studied a Master in Management and Master in Computer Science at IE University (Madrid – 2022), during which he participated as an Information Technology (IT) intern in a startup. In May 2023, Diego joined the HES team as an intern specialised in programming models. In his first project, he developed a software tool for modelling the unavailability of the French nuclear fleet. Afterwards, Diego has also participated in the development of new software tools for modelling price curves, generation asset performance and other topics related to the energy market. 

Diego Marroquin

Junior Consultant

Diego Marroquín

Profesional Experience

Céline joined Haya Energy Solutions in November 2021 as marketing and administration manager. She had a first professional experience in the tourism sector as a social media manager. At HES, her activities are focused on the development of the company’s visibility at European level through: commercial actions, content marketing and development of brand strategy. Céline is also involved in the management of the company’s communication: optimisation of the website (WordPress & Elementor), LinkedIn, publication of the monthly newsletter and the organisation of conferences. Céline participates in energy projects with the clients and acts as coordinator and project manager. Finally, she is in charge of administration (accounting, expenses management, invoicing).   

Education

Céline graduated in Spanish and English Philology at La Sorbonne (France – 2018) and holds a Master’s degree in Project Management and Cultural Tourism (Clermont-Ferrand/ Buenos Aires – 2021). 

Céline Haya Sauvage

Marketing Responsible

Céline Sauvage

Investment Advice

“Decarbonization of the Energy and Transport sectors is arguably today’s main economic driver for the industry.”

Profesional Experience

His career started in civil engineering as a Project Manager in France, Martinique and Australia. Afterwards, he became the General Manager of a subsidiary in Venezuela. In 1992, he established Dalkia in Germany (district heating, cogeneration, and partnerships) and represented Véolia in Thailand. In 2000, he opened the commercial office of Endesa in France to take advantage of the liberalized retail market. From 2006, as a development Manager at Endesa France, he led Endesa’s plan for Combined Cycle generation in France and developed the wind and PV portfolio of Snet at the same time. Philippe Boulanger worked for 3 years at E.ON’s headquarters coordinating the company´s activities in France. He was strongly involved in the French hydro concession renewal project. As a Senior Vice President – Project Director at Solvay Energy Services from April 2012 to February 2014 he was in charge of the H2/Power to gas and European direct market access deployment projects. Philippe has been an HES expert since 2014.

Education

Philippe Boulanger holds engineering degrees both from the Ecole Polytechnique and the Ecole Nationale des Ponts & Chaussées (France) and has a combined experience of more than 25 years in energy and infrastructure. In addition to English, Mr. Boulanger is fluent in French, German & Spanish.

Philippe Boulanger

Electricity Expert

HES-Philippe-Boulanger

“The world is changing. New investors pay particular attention to the energy sector while historical actors adapt their position to the market.”

Profesional Experience

Antonio started his career in the electricity sector in 1991 working as a member of the General Manager’s team at Sevillana de Electricidad (Spain). In 1997, he was appointed head of commercial regulation at Endesa Distribución. In 2000, he joined the mergers and acquisitions (M&A) department of Endesa Europe. He was appointed Managing Director of Endesa Power Trading Ltd (UK) in 2003. A year later, he became responsible for energy management at SNET (France). In 2008, he was appointed Managing Director of SNET (France). In 2009, he became Director of Corporate Development at E.ON France. In 2011, he founded Haya Energy Solutions (HES), a consulting firm focused on optimising the energy management of consumers, producers and retailers of gas and electricity. From 2015 to 2018, Antonio combined the consulting activity at HES with the general management of 2 production facilities in France (2 CCGTs x 410MW), owned by KKR. At the end of 2018, he joined Asterion Industrial Partners, an infrastructure investment fund, as an operating partner. Antonio currently devotes most of his efforts to the Asterion Portfolio, while advising through HES companies in the energy sector in France, Italy, Germany, UK and Spain. 

Education

Antonio graduated from the Escuela Técnica Superior de Ingenieros of Seville (Spain) and holds an MBA degree from Deusto University (Spain). 

Antonio Haya

CEO