A quick side-by-side of the positions in Parliament and Council

Reform of the European electricity market design should enter the final stages ahead of next year’s elections. Will the racers be able to cross the finish line in time? This largely depends on how far removed the positions of team Parliament, Council, and Commission are from each other.

Although political motivations are, as usual, a big factor in the fate of the file, we will not speculate about them here.

The triple whammy of scarce Russian fossil pipeline gas, low hydropower reservoirs in a summer drought, and defect-crippled French nuclear plants pushed energy prices in 2022 to uncharted territory, causing many to call for rethinking the design of European energy markets.

The European Commission eventually presented proposals in March 2023 to improve the electricity market’s functioning. These are not revolutionary but build on the 2019 ‘clean energy package’ to better protect vulnerable consumers, support non-fossil flexible resources and stabilise prices over the long term.

The clock is ticking. Ideally, negotiations between the three institutions start in September, allowing them to finish before the end of 2023. Some parliamentarians are trying to disrupt the next step of plenary adoption as a last-ditch effort to weaken the compromise, but it seems unlikely this will have a substantive impact.

Regardless, the Belgian presidency begins in January, and they effectively only have a few months before attention turns to the European and Belgian national elections.

Tracking the different positions

There are many minor and major differences between the Parliament and Council positions.

For starters, the Parliament made specific additions to the Commission’s stance on grid operator governance in support of demand-side flexibility and increased transparency. They mention locational price signals and propose a detailed framework to assess the need for flexibility in the Member States.

All of this should support the transition to a clean energy system. Parliament is also very expansive about energy sharing, adding lots of detail. This should enable owners of solar installations to distribute production among other consumers.

The Council doesn’t go into the same level of detail on grid governance, flexibility and energy sharing, but the differences don’t seem insurmountable. Parliament also suggests important additional consumer protection clauses, including a ban on disconnections.

The Council has reportedly settled on most of the issues in their position. They tend to be more cautious than Parliament, asking the Commission to analyse positive new elements like regional hubs and long-term transmission rights.

The Commission proposes to give transmission system operators the option to procure peak-shaving services directly in the market to limit the need for fossil-gas peaker plants — similar to a product National Grid offers in the UK. The Council would strictly limit this option to times when there is a price crisis to prevent such a product from interfering with the existing regular market and keep the power system in balance.

A much more controversial aspect of the reform is the Commission’s proposal to reinforce long-term contracts between private actors (defined as PPAs – power purchase agreements) or with a public entity (defined as CfD – contracts for difference).

The Commission proposes that if investments in clean energy need support, the go-to tools are ‘double-sided’ contracts for difference. Double-sided, because they have a floor, below which the public pays the project for the difference, but also a ceiling, above which the project owners have to pay the public entity back. This is considered the most cost-effective support mechanism, lowering financing costs and acting as a buffer against windfall profits.

The Council has not finalised its position on long-term contracts yet. Parliament, for its part, is lukewarm on double-sided contracts for difference as best practice for investment support. It also created a very broad — and therefore probably not very useful — list of how the costs and revenues involved with CfDs can be distributed among different consumer classes.

For instance, more focus would probably be advisable to support low-income households and those at risk of energy poverty. Distributing costs and revenue to businesses risks distorting intra-European competition. It may also shield industry from the price signals that should incentivise them to change their energy and production processes.

We understand that the design and the distribution of costs and revenues of CfDs is also what the Council is still debating. As usual, a lot of energy is being spent on treating nuclear energy in this file. More focus on smart CfDs and vulnerable consumers would be most aligned with the original intention of the reform proposals.

The biggest gap between the Council’s position and that of Parliament, along with the original Commission proposal, is on capacity mechanisms. The standing regulation considers these temporary patches to resolve security of supply concerns. They come with a risk of over-procurement, especially from large fossil power plants. This may lead to higher costs to consumers than necessary and risk locking in polluting fossil fuel power plants.

The Council seems intent on making capacity mechanisms permanent. They are even considering a derogation for coal and lignite plants to allow them to receive capacity subsidies beyond the current deadline of 2025. Considering the time and effort that went into the 2019 clean energy package capacity mechanism discussion, there is a real risk that re-opening this discussion under tight time constraints could derail the whole file.

The sprint to the finish

There is still room to finalise the new legislation before the 2024 elections — by refocusing the long-term contract sections, accepting safeguards to diminish the risk of peak shaving services distorting markets, and moving deliberations on capacity mechanisms to another file altogether.

The electricity market reform is meant to achieve better consumer protection, more and cheaper renewables and a financial return for people making the flexibility in their heat pump or electric vehicle available to the grid.

The finish line may seem elusive, but it’s close.

A version of this article originally appeared on Euractiv.