After a nearly two-year period in which European citizens had to pay high energy bills, the EU has proposed changes to the electricity market to reduce pressure on consumers and boost the production of renewable energy.
The proposed reform, unveiled on 14 March 2023, introduces new protection mechanisms for households and small businesses, while also giving them more options regarding electricity contracts.
It also supports more stable long-term contracts between EU industries or EU governments and renewable energy producers to encourage the production of cheap, environmentally friendly electricity and limit price fluctuations caused by fossil fuels.
“The current electricity market structure has provided an efficient, well-integrated market for many decades, but limited global supply and Russia's manipulation of our energy markets have caused huge increases in energy bills for many consumers,” EU Energy Commissioner Kadri Simson explained last week. “Today we are proposing measures that will boost the stability and predictability of energy costs throughout the EU. Encouraging investment in renewable energy will help us reach our Green Deal goals and make the European Union a clean energy powerhouse for decades to come.”
How does the European electricity market work?
The European Union has an integrated electricity market with small price differences between regions depending on weather conditions, energy producers that are online, and other factors.
The system uses the so-called “merit order” to decide which producers will be online. The cheapest producers are used most often, while more expensive ones – often coal and gas – are used only when there is high demand. However, the price is set by the most expensive electricity producer. Since gas prices soared following the invasion of Ukraine, expensive gas power plants have driven up electricity prices.
To address this problem, the proposed reform aims to decouple electricity prices from volatile fossil fuel prices by reducing their role in electricity production. This should help lower bills for consumers and prevent a new energy price crisis.
“The Commission’s proposal introduces a set of measures aimed not only at mitigating the impact of the price spikes we experienced last autumn, but also – and this is crucial – at reducing the risk of such price spikes or crisis situations recurring through structural responses,” says Frauke Thies, Executive Director of the think tank Agora Energiewende.
“The latter could mainly be achieved by investing more rapidly in renewable energy while simultaneously using demand flexibility and storage. This is extremely important, as renewable energy is not only the cleanest but also the cheapest way of producing energy, which makes us independent of fossil fuel imports with volatile costs,” Frauke Thies explains to Euronews Green.
How will the electricity market overhaul protect consumers?
One of the pillars of the reform is aimed at 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 contracts where they can take advantage of the system and use electricity when demand, and therefore prices, are low. Consumers will also be able to combine contracts.
“We will allow consumers to use more than one meter and sign different contracts to service their electric car, heat pumps, or household consumption,” said Kadri Simson. “They can, for example, cover their consumption with a fixed-price [contract], but charge their electric car during the hours when prices are low, based on an adaptable contract,” she added.
Households that have renewable energy sources, such as solar panels, will also be able to sell electricity to their neighbours, which could boost the use of solar energy on rooftops and reduce demand on the power grid.
The set of consumer protection measures included in the proposal would provide a necessary safety net in crisis situations.
Alongside this, the reform introduces new protections for households and small businesses, including preventing electricity disconnections and establishing a supplier of last resort for consumers in case their provider goes bankrupt.
It also provides ways for EU countries to cap prices for households and small businesses during a crisis. To stimulate demand reduction, this will be limited to 80% of normal consumption for households and 70% for businesses to incentivise demand reduction.
“The set of consumer protection measures included in the proposal would provide a desired safety net in crisis situations while keeping market principles intact,” emphasised Frauke Thies.
Why boosting the use of renewable energy sources will reduce prices
Another way the European Commission is trying to reduce bills is by introducing more renewable energy sources into the system. These will be cheap, local energy sources that are less affected by geopolitics.
“Renewable energy sources are currently the most competitive way of producing electricity, so the more renewable energy sources are introduced into the system, the lower prices will become,” says Sebastian Schultheiss-Derni, Head of the EU Office at the Danish energy company Ørsted.
Renewable energy sources today are the most competitive way of producing electricity, so the more renewable energy sources are introduced into the system, the lower prices will become.
The proposal includes measures to accelerate the deployment of renewable energy sources, and it is being submitted alongside the Net-Zero Industry Act, which aims to speed up permit issuing and ensure access to financing for clean technologies such as renewable energy sources.
“We believe that signing long-term contracts is key, as it will allow households, and of course even more so industries, to hedge themselves so that they are less dependent and less exposed to short-term price spikes,” emphasised S. Schultheiss-Derni. “Long-term contracts are also significant because they reduce the volatility element for consumers, as they decouple the direct impact of the short-term market on the final consumption price.”
The proposed legislation also includes several ways to exclude volatile fossil fuels from the system, including new measures to reduce and manage demand so that expensive energy producers, such as coal and gas producers, do not have to be involved in electricity generation.
However, it may take a long time before these measures enter into force. The proposed reform will now be discussed by the European Parliament and EU countries, both of which will have to agree on their position before they reach a common agreement. The European Commission has stated that this could be done by the end of the year.