Key issues at stake as EU electricity market reform nears finishing line

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.

To Serve Everyone, IRA’s Climate Grants Need Inclusive Participation

As expansive and even overwhelming as the Inflation Reduction Act (IRA) seems to be, it is important to remember that the IRA authorizes a number of different programs that will benefit states — programs, for example, that may come out of the Department of Energy to state energy offices, or from the Environmental Protection Agency (EPA) to state environmental agencies.

The EPA’s Climate Pollution Reduction Grants program (CPRG) is likely to be some of the first IRA funding that states will see. The CPRG will provide states with a significant springboard to reduce their carbon emissions. Before suggesting how states can make the most of this, let’s take a moment and outline the program.

What Is Clear: An Opportunity for States

The CPRG is a two-part program. Part 1 ($250 million) provides formula grants to every state. This will support states to develop a carbon reduction plan. Part 1 is on its way; the announcement and guidance will be coming out on March 1, and a Notice of Intent to Participate from states will be due March 31.

Part 2 ($4.6 billion) sets out a program of additional grants, funding for states to carry out elements of their plans and will probably roll out in early 2024. While Part 1 provides every state money for planning, Part 2 will require states to compete for funding to support the implementation of their carbon reduction programs.

For states that have yet to develop climate plans, this is an opportunity to use federal funding to explore ways to modernize your state’s economy. More specifically, this is a chance to look at the ways that your citizens, for example, manufacture products, grow crops, transport themselves, and heat and cool their homes — all sectors of your economy that produce significant carbon emissions.

In case a state doesn’t think that GHG planning is important, the CPRG provides for political subdivisions within a state, such as municipalities or local air agencies, to participate. Even where states have already developed climate action plans, these federal dollars could be very useful in updating and improving existing plans.

What Is Not Clear: Support for All Communities

While the CPRG will support states in developing carbon reduction plans, it is not clear the degree to which the program will support improving the outreach and public engagement necessary to ensure that a plan is equitable and that it will serve all communities.

This is a challenge for even successfully developed state plans. For example, in 2021, the Vermont Climate Council, spent over 10 months developing the Vermont Climate Action Plan. This was a significant undertaking by state agencies and citizens and the plan is an admirable start. However, the plan’s authors acknowledge in its preface that robust marginalized community representation was missing from the stakeholder participation:

This initial Climate Action Plan represents one of the first public processes in the State of Vermont to acknowledge and try purposefully to incorporate equity and the principles of a just transition in both its development and outcome — but we know we fell short. During our meetings and outreach, too few Vermonters had their voices lifted up to join the voices of those who have also participated in similar endeavors in the past. In our development of pathways, strategies, and actions, we faced challenges creating programs and policies organically in partnership with marginalized communities and individuals in Vermont and to envision new ways to ensure a just transition for all of us. As we continue forward, we have a strong desire to engage more Vermonters deeply and equitably in this transition, recognizing the historical and present harms and systemic injustices that are at work here in Vermont and elsewhere.

In developing its 2021 Climate Action Plan, Vermont saw first-hand that these working Vermonters did not have the time or capacity to participate and engage. This was not because they weren’t notified or encouraged to participate. People are busy earning a living. And their representatives are also challenged to participate because they work on many other pressing equity-related topics besides climate mitigation, including housing, transportation, policing, food, racism, and education. Frontline advocates generally recognize the importance of this work, but simply don’t have the bandwidth or the means to meaningfully participate.

Hearing from and consulting with marginalized communities isn’t just a matter of equitable inclusion — it’s essential to achieve the goals of climate policies, period. We need programs that are able to deliver GHG savings in all communities and to all income levels. Greater inclusion in planning will yield better, more comprehensive initiatives, in addition to more equitable program designs and benefits.

Will the EPA’s CPRG planning grants be helpful in this respect? It is not clear. The CPRG seeks to transition America to a clean energy economy that benefits all Americans, a goal that logically would incorporate the views of historically marginalized communities.

So, hopefully the EPA will recognize this need and enable states to provide direct support for community participation in CPRG-funded state planning efforts. The agency will have to make that determination.

If the EPA determines that the IRA does not allow for this, then hopefully the agency will still recognize the need and identify any other resources that it might have to help states to support this critical piece of carbon planning. The EPA may have available other funding for communities that are disproportionately impacted by air pollution and climate change. For example, there is air monitoring funding, along with environmental and climate justice block grant opportunities, that may support this work and can be stacked with CPRG funding. Finessing support for intermediaries like civic organizations or faith-based groups might also be helpful in incorporating the voices of frontline communities.

Apart from the question of the federal funding for state carbon planning, states agencies could still ask whether or not their public engagement is as thorough as it might be or whether it needs to be more welcoming to the public to be truly representative. RAP’s Public Access and Participation Plans: A Starter Kit for State Agencies is a document that outlines simple steps that state agencies can take to improve their outreach, and public participation.

Public Access and Participation Plans: A Starter Kit for State Agencies

State government agencies are becoming aware that there is more that they can do to reach communities that may be underserved by agency programs — communities of color, indigenous communities, and low-and moderate-income communities. This policy brief describes steps that agencies can take to engage these communities more meaningfully as partners and stakeholders in government decision-making.

This “starter kit” looks at the typical aspects of government agency contact with the public and provides suggestions for how agencies can take simple steps to improve their engagement. Specifically, it discusses ways to improve public meetings, how to make agency websites more accessible, elements of staff training, and the importance of ongoing improvement. Two appendices look at mission statements and equity statements. In each section, a summary and notes on the topic are followed by model language an agency’s public access and participation plan might include, along with useful resources.

Getting the hydrogen network we need for decarbonisation

Clean hydrogen provides a tool that can open up new opportunities for decarbonisation. But it is just one tool, and an expensive one at that. If policymakers allow, or even support, continuation of the current ‘hydrogen rush,’ we will end up with a larger hydrogen network than needed — with high costs for consumers.

Policymakers have the right tools in their toolbox — including unbundling, transparency requirements and regulatory oversight — to ensure that hydrogen supports rather than hinders decarbonisation efforts. The regulation of the fossil gas sector provides important lessons to be considered for hydrogen regulation. Megan Anderson and Andreas Jahn explain how independent, unbundled ownership can allow for the hydrogen network to be efficiently planned, developed and operated.

The clash with gas: Should it stay or should it go?

Europe’s stated goal of achieving a net-zero power system by 2050 is inherently replete with enormous opportunities and challenges. High energy prices and Russia’s invasion of Ukraine have now ratcheted up the urgent need for action to emergency levels. Policymakers are facing the challenge of a lifetime to secure the supply of energy and protect disadvantaged consumers while maintaining momentum towards long-term climate goals. The events of 2022 have made evident to many experts that the transition away from fossil gas will figure prominently in all of these objectives.

To support policymakers and the numerous stakeholders in planning for a deliberate reduction in the use of fossil gas in the coming years, RAP has developed five fundamental guiding principles. The principles are general in nature due to the breadth of this gas transition and the various policy instruments that governments will need to reform such a large part of our energy economy. In light of the current crises, the authors have also applied these best practices specifically to the European Commission’s proposed Hydrogen and Decarbonised Gas Market package and Hydrogen Strategy, as well as to the hydrogen strategies of selected Member States.

To achieve an efficient and cost-effective transition away from fossil gas, we offer policymakers the following recommendations:

Levelling the playing field: Aligning heating energy taxes and levies in Europe with climate goals

Taxing energy in line with its environmental harm aligns the prices facing consumers with policy objectives. Energy taxes and levies encourage energy efficiency and raise revenues for governments, which can then dedicate them to energy transition projects. Not all energy sources are equal, however, when it comes to their environmental-damage costs. Adding taxes and levies disproportionately to electricity encourages the continuation of an emissions-intensive status quo and discourages investments in key decarbonisation technologies, such as heat pumps. This paper shines a light on the imbalance in energy taxation across almost all European markets and makes the case for reform.

The authors explain the current structure of energy taxes and levies in five key European countries where reform would be beneficial: Italy, Spain, the United Kingdom, Belgium and Germany. All five countries overtax electricity — in three cases by more than 200% — and undertax oil and fossil gas while not taxing wood use at all. Only in Italy is the tax rate on heating oil close to the value of the environmental costs caused by its use.

The European Commission’s proposals in the Fit for 55 Package would go a long way towards addressing the taxation issue. But these proposals would need to be implemented and there’s no guarantee they’ll survive the upcoming negotiation process. Member States wishing to align their tax and levy policies with their climate targets can act now to begin the process of rebalancing.

The authors detail four approaches to rebalance energy taxes and levies, drawing on examples from around the continent.

• Option 1: Lower tax on electricity for heating
• Option 2: Environmental taxation
• Options 3 and 4: Shift levies to public budget or fossil fuels

Price shock absorber: Temporary electricity price relief during times of gas market crisis

European policymakers are weighing possible responses to the extraordinary surge in energy prices and the consequences for citizens and industry. The European Commission expects to issue additional guidance in May, following analysis due in April from the Agency for the Cooperation of Energy Regulators. Targeted relief to vulnerable consumers should be undertaken in any case. Whilst RAP would urge caution in considering possible broader interventions in the electricity markets, if such a course of action is under serious consideration, we offer this proposal of a ‘price shock absorber’ for reflection as a measure best fit for purpose, designed to acknowledge and address the essential aspects of the current crisis:

• This is a gas market crisis — it is an extraordinary event that is adversely affecting all sectors of Europe’s economy. The priority for the electricity sector must be measures that allow the electricity market to ride through this shock to the system, and similar future shocks, preserving its functionality whilst avoiding undue harm to consumers.
• The midst of a crisis is the wrong time to take decisions with long-term implications that will be difficult to walk back once the crisis has passed. Our proposal acknowledges that the fundamental design of the electricity market is sound; whilst improvements are certainly needed, they have no direct bearing on the causes of or remedies for this crisis.
• This crisis has revealed in stark terms the true cost of dependence on a volatile fossil gas market, including the risks inherent in the prominent position Russia will continue to occupy in global supply.
• Consumers and industry have the power to contribute to the response to these risks, by procuring the energy services they need more efficiently and flexibly.

When responding to the crisis, policymakers should preserve and even intensify the electricity market’s role in mobilising and empowering consumers rather than concealing the true cost of ‘business as usual.’ The value of the only durable response — an accelerated transition away from fossil fuels — must remain visible to consumers in an equitable fashion.

The authors outline this price shock absorber mechanism as an additional market feature to bring consumers some measure of relief whilst preserving the market’s essential functions. These include valuing energy efficiency, rewarding beneficial demand and resource flexibility and ensuring a ‘normal’ level of expected inframarginal rent to incentivise and compensate investors in the energy transition for the value of their investments. If a decision is taken to intervene broadly in the electricity market, we suggest this approach offers a significant measure of relief whilst doing the least harm.

Ensuring the EED energy savings obligation is Fit for 55

In late 2020, we recommended that the European Commission align the Energy Efficiency Directive’s energy savings obligation with the 2050 climate goal. It took a first step towards achieving this objective in summer 2021. In its proposal, energy savings derived from the installation of technologies that directly combust fossil fuels are excluded for the purposes of compliance with the Directive. From 2024, energy savings from new coal, gas and oil boilers will no longer be eligible.

This policy brief explains why this provision is so important. We also lay out how Member States can benefit under the Energy Efficiency Directive by ramping up policy measures that support the beneficial electrification of heating in buildings.

‘Inaccurate’ EU energy labels for buildings up for review

Responses to fossil gas price volatility

The first ten months of 2021 have seen dramatic increases in energy prices in Europe and elsewhere. Experts now agree that the surging international demand for liquified natural gas and the rise in gas prices are driving electricity prices to seldom-seen heights. The fact that fossil gas accounts for 45% of household energy for heating is real reason for concern, with winter just around the corner.

Governments around Europe are scrambling to find ways to help families struggling to pay their energy bills this winter. The European Commission has now issued a toolbox of short-term recommendations to mitigate the effects of this crisis. RAP also offers guidance on this dynamic situation, with a focus on the current circumstances. Authors Bram Claeys, Michael Hogan and Dominic Scott explore near-term relief measures for Europe’s most vulnerable consumers as well as long-term solutions to ensure this crisis does not repeat.

Analysis of the root causes of the electricity price ‘roller coaster’ shows that the best and most durable solution to alleviate the social and economic impact of volatile fossil fuel prices is tackling the demand for fossil gas. Reducing Europe’s appetite for this fuel requires prioritising energy efficiency, ensuring a massive rollout of solar and wind, electrifying end uses currently served by natural gas, and limiting the use of hydrogen to green hydrogen solutions devoted strictly to hard-to-reach applications.