EU Seeks to Cut Power Price Volatility in Draft Market Reform

(Bloomberg) -- The European Union plans to encourage governments and companies to use more stable, long-term power market contracts to avoid massive price swings as part of a reform demanded by member states following an unprecedented energy crisis

The EU’s executive arm wants to keep the marginal pricing model and avoid drastic changes to the market design in a bid to ensure predictability and keep electricity flowing freely across the region, according to a draft of the overhaul seen by Bloomberg News on Tuesday. The European Commission’s proposal is due to be unveiled on March 16.

Europe’s political agenda last year was dominated by soaring energy prices. The goal of the reform is to make the region’s energy market more resilient after the expiration of emergency tools adopted to shield the impact of gas supply cuts by Russia, which was formerly Europe’s biggest provider. Top objectives include shielding consumers from soaring prices, weakening the link between electricity and natural gas, and spurring the development of renewable energy.

“The proposal includes a set of measures aimed to create a buffer between short-term markets and electricity bills paid by consumers, in particular by way of incentivizing longer term contracting, to improve the functioning of short-term markets to better integrate renewables and enhance the role of flexibility and to empower and protect consumers,” the commission said in the draft, which may still change before publication.

Under the current EU electricity market design, gas sets the price for all power that’s sold into the market. That means consumers are bearing the brunt of Russia’s supply reduction after its invasion of Ukraine, and their bills don’t reflect the growing share of low-cost renewables like wind farms that get to sell at big margins. 

The commission is planning to weaken the link between gas and power by an increased use of power purchase agreements and so-called Contracts for Difference, where governments can guarantee investors a fixed price. 

Under the reform, public support for low-carbon energy projects would be structured as “two-way” contracts for difference, which set a minimum and a maximum price, so any revenues above the ceiling are paid back, according to the draft. The rule would apply to new investments in generation of solar, wind, geothermal, hydropower and nuclear energy.

“Moreover, the proposal will require that such money is then channeled to support all electricity consumers proportionate to their consumption based on their share of overall consumption to mitigate the effect of high prices,” the commission said. 

--With assistance from .

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.