An electricity market redesign is under way, aimed at shielding consumers from price spikes and boosting the rollout of renewables.
After almost two years of big energy bills dropping onto European doorsteps, the EU has proposed changes to its electricity market to ease pressure on consumers and boost renewable power production.
The proposed reform - unveiled on 14 March - introduces new protections for households and small businesses as well as giving them more choices around their electricity contracts.
It also supports more stable, long-term contracts between EU industries or EU governments and renewable power producers to boost cheap, green power production and limit volatile prices caused by fossil fuels.
"The current electricity market design has delivered an efficient, well integrated market over many decades, but tight global supply and Russia’s manipulation of our energy markets has left many consumers facing massive increases in their energy bills,” EU energy commissioner Kadri Simson explained last week.
“We are today proposing measures that will enhance the stability and predictability of energy costs across the EU. Driving investment in renewables will help us reach our Green Deal goals and make the EU the powerhouse of clean energy for the coming decades.”
How does Europe’s electricity market work?
The European Union has an integrated electricity market with small differences in prices between regions depending on the weather, what energy producers are online and other factors.
The system uses something called the “merit order” to decide which producers come online. The cheapest producers are used most often while the more expensive ones - often coal and gas - are only used when demand is high.
But the price is set by the most expensive power producer. Because of the surge in gas prices following the invasion of Ukraine, power prices have been dragged up by pricey gas-fired power plants.
To address this, the proposed reform aims to decouple power prices from volatile fossil fuel prices by reducing their role in electricity production. This should help lower bills for consumers and prevent another energy price crisis.
“The Commission’s proposal introduces a set of measures that aim to cushion the effects of price hikes like the one that we saw last autumn, but also - crucially - to reduce the risk of such price hikes or crisis situations occurring again through a structural response,” says Frauke Thies, executive director of the Agora Energiewende think tank.
“The latter would be done primarily through accelerating investments in renewables and, at the same time, leveraging demand side flexibility and storage.
“This is paramount as renewable energy is not only the cleanest but also the cheapest form of power generation and makes us independent from fossil fuel imports with volatile costs,” she tells Euronews Green.
How will the electricity market redesign protect consumers?
One pillar of the reform focuses on increasing protection for households and small businesses, and giving them more control over their bills.
Under the law, consumers will be able to choose between contracts with stable prices or more flexible ones where they can play the system and use electricity when demand, and therefore prices, are low. Consumers could also mix and match contracts.
“We will allow consumers to have more than one meter and different contracts to serve their electric vehicle, heat pumps or domestic consumption,” said Simson.
“They can, for example, cover their consumption with a fixed price [contract], but charge their electric vehicle at these hours when prices are low, based on a flexible contract,” she added.
Households with renewables, like solar panels, will also be able to sell power to their neighbours, something that could boost rooftop solar and reduce demand on the grid.
Alongside this, the reform introduces new protections for households and small businesses, including preventing disconnections and creating a supplier of last resort for consumers in case their one goes bankrupt.
It also includes ways for EU countries to cap prices for households and small businesses in times of crisis. In order to incentivise demand reduction, this will be limited to 80 per cent of usual usage for households and 70 per cent for businesses to incentivise demand reduction.
"The set of consumer protection measures in the proposal would provide a welcome safety net in crisis situations while keeping the market principles intact,” says Thies.
Why boosting renewables will lower prices
Another way the European Commission is looking at slashing bills is by introducing more renewables into the system. These are cheap, home-grown sources of power, less impacted by geopolitics.
“Renewables today are the most competitive form of electricity generation, so the more renewables we get into the system, the lower the prices will become,” says Sebastian Schulte-Derne, head of the EU office at Danish energy company Ørsted.
The proposal includes measures to accelerate the deployment of renewables and comes alongside the Net-Zero Industry Act that aims to speed up permitting and provide access to finance for clean tech, like renewables.
The market reform also promotes long-term contracts that would create a more stable price for consumers and guaranteed revenue for renewable energy companies.
This includes the need for governments to remove financial risks faced by those entering into power purchase agreements - contracts struck between industry and renewable energy producers to provide power for a certain price - to increase their uptake.
It also means that any public money for new projects has to be in the form of two-way contracts for difference: an agreement that would provide renewable energy companies with guaranteed revenues no matter the market price for electricity.
In return, producers would surrender excess revenues made when prices are high, which would then be redistributed to consumers.
“We see long-term contracting as the key to enabling households, but obviously even more industries, to hedge for themselves, to make them less dependent, less affected by short-term price peaks,” said Schulte-Derne.
“Long-term contracts also play a role in so far as they alleviate the volatility element for consumers because it decouples the direct impact of short-term markets on the end consumer price,” he adds.
The proposed law also contains several ways to displace volatile fossil fuels from the system, including new measures to lower and manage demand so that expensive power producers, like coal and gas, don’t have to come online.
But it could be a while before these measures take effect. The proposed reform will now be debated by the European Parliament and EU countries, who will both have to agree on their position before hashing out a deal between them.
The European Commission has suggested this could be done before the end of the year.