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EU seeks shift in power market to guard against further energy price spikes

European Commissioner for Energy Kadri Simson. Photo: Dursun Aydemir/Anadolu Agency via Getty Images

Kate Abnett

March 15 2023 02:30 AM

The European Commission has proposed changes to Europe’s electricity market rules to try to increase the use of fixed-price power contracts, shield consumers from price spikes and speed up the shift to renewable energy.

The European Union said last year it would overhaul its electricity market after cuts to Russian gas supplies drove European power prices to record highs, forcing industries to close and hiking household bills.

“The energy crisis spurred by Russia’s attack on Ukraine exposed a number of shortcomings in the current system,” EU Energy Commissioner Kadri Simson said.

“The current framework has focused too much on short-term markets,” she added.

The proposals stopped short of changes some countries had sought at the height of last year’s price spikes.

The front-year German baseload power contract, a European benchmark, reached a peak above €1,000/MWh last August, when gas prices also reached record highs.

With the German power contract much lower at €140/MWh, the pressure for reform has eased, although the Commission said it needed to protect consumers from future volatility.

The proposals leave in place the current system of setting energy prices in Europe’s wholesale markets, which the Commission said had helped to prevent shortages during last year’s energy crisis.

But the EU executive put forward ways to reduce the impact of short-term market volatility on consumer bills.

If energy prices spike to extreme levels – defined as wholesale power price spikes of more than 70pc, among other conditions – the European Commission said governments would be allowed to temporarily fix the price for up to 80pc of consumers’ electricity.

Other proposals would give billpayers the right to request fixed-price contracts from large electricity suppliers, and countries would be obliged to prevent suppliers cutting off vulnerable consumers who cannot pay their electricity bills.

After soaring energy prices led to insolvencies and forced governments to prop up companies this winter, the proposals presented on Tuesday require countries to appoint a “supplier of last resort” so consumers have a back-up if their energy supplier fails.

The proposals also aim to push gas out of Europe’s energy mix faster, by supporting investments in renewable energy, energy storage, and more local, flexible energy sources to enable the bloc to quit Russian fossil fuels and meet climate change goals.

In addition, the Commission proposed incentives for long-term contracts that lock in stable power prices.

For example, EU countries’ state support for new investments in wind, solar, hydropower, geothermal and nuclear electricity must be done through a two-way contract for difference (CfD).

CfDs pay generators a fixed “strike price” for their electricity, regardless of the price on short-term energy markets.

Countries would also offer state guarantees to encourage power purchase agreements – another type of long-term contract that would allow consumers to buy electricity directly from an electricity generator, rather than relying on the market.

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EU seeks shift in power market to guard against further energy price spikes

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