EU to review its electricity market to curb future price increases

By Kate Abnett

BRUSSELS, Mar 14 (Reuters) - The European Commission will propose an overhaul of EU electricity market rules on Tuesday to extend the use of fixed-price power contracts to protect consumers from future price hikes like those experienced last year.

The European Union pledged to overhaul its electricity market after Russian gas cuts following last year's invasion of Ukraine sent prices in Europe soaring to record highs, forcing downsizing in some sectors and driving up household electricity bills.

Drafts of the EU proposal, the contents of which have been consulted by Reuters, outline measures designed to make consumers less exposed to short-term swings in fossil fuel prices, pushing countries to use more contracts that lock in stable, long-term electricity prices.

Future state support for new investments in wind, solar, geothermal, hydro and nuclear power, for example, should be through a bilateral contract for difference (CFD).

Bilateral CFDs offer generators a fixed "strike price" for their electricity, regardless of the price in short-term energy markets.

Countries would also need to do more to encourage power purchase agreements-another type of long-term contract to buy electricity directly from a generator-for example by offering government guarantees for such contracts.

Fossil-fuel-fired generators would not receive this support. The aim is to direct support towards the huge investments in renewables that EU countries need to move away from Russian fossil fuels and meet climate change targets.

Other elements aim to push gas out of the European energy mix more quickly, for example by requiring countries to expand energy storage and other alternatives to replace the role of gas-fired power plants in balancing the electricity grid.

Currently, electricity prices in Europe are set by the last generator needed to meet global demand. This is often a gas-fired power plant, so gas price spikes - such as those caused last year by Russia's reduction in gas deliveries - can trigger electricity prices.

Although Brussels presented the reforms last year as an opportunity to "decouple" gas and electricity prices, the draft proposal - which could still change before publication - avoids the deep reform of the electricity market that countries such as Spain and France have called for, opting instead for more limited adjustments to stabilize prices.

Another group of countries, including Germany, Denmark and Latvia, has warned that major changes could scare off investors.

EU countries and the European Parliament must negotiate and approve final rules, with some advocating an agreement by the end of the year.

Marco Foresti, director of market design at the European Network of Transmission System Operators for Electricity (ENTSO-E), said the draft proposals had been greeted with "some relief" by those who feared disrupting the functioning of energy markets in the short term.

(Reporting by Kate Abnett; edited in Spanish by Benjamín Mejías Valencia)