Energy Central Professional

 

Reform Of EU Electricity Market Design: Consultation Underway And Proposal Expected By End Of Q1 2023


By Ms Katrina Donnelly, Fiona Egan, Niall Donnelly, Trainee and James Downey  

 

    The European Commission is consulting until 13 February 2023 on policy proposals that would lead to amendment of the Internal Market in Electricity Regulation and Directive, as well as the REMIT Regulation.

    Background

    The impact of the war in Ukraine on gas prices led to higher electricity market clearing prices, with non-gas powered generators potentially receiving higher inframarginal rents (subject to contract structures, as we commented here). Concerns around upward pressure on retail prices and potential failure to pass through the low cost of renewables to customers led to Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices. We looked at the Regulation here and the implementing legislation in Ireland is listed as a priority.

    Nearly a year ago, ACER provided a broadly positive assessment of the functioning of the market, albeit that it listed suggested measures to future-proof market design. While these included a temporary relief valve for rapid wholesale price rises, there was also a call for prudent consideration of the need for market interventions and tackling of root causes (such as gas prices and the need for energy efficiency) while preserving the benefits of market functioning.

    Proposed Measures

    The Commission considers that current market design has many benefits but is concerned that consumers faced high bills in spite of a growing share of renewables, and notes there are limits to emergency intervention. It also wishes to prevent ad hoc intervention in price setting leading to uncertainty, and to ensure that market incentives for investment are preserved.

    The consultation sets out the following measures which broadly pursue the objectives of the Clean Energy Package and Fit for 55.

    Making electricity bills independent of short-term markets

    • PPAs: The Commission wants to increase the share of PPAs in the market. It suggests that demand could be pooled among smaller final customers by providing State guarantees. Harmonisation of contracts could help to aggregate a larger volume of demand and enable cross-border contracting. Public tendering is also suggested. Stakeholders are also invited to describe the barriers that currently prevent them from entering into PPAs.
    • CfDs: The Commission notes that two-way CfDs (underpinned by public subsidy) can provide some protection against high prices and volatility, and channel the upside difference in market reference price and strike price back to customers or suppliers (as happens with RESS in Ireland). Several questions seek feedback on whether this is an efficient way to mitigate the impact of short-term markets on prices and the optimum design for such contracts. Note the questions around whether Member States should be allowed to offer, or indeed impose, two-way CfDs on existing inframarginal generation.
    • Forward markets: It is argued that liquidity in many organised forward markets is insufficient and that the time horizon for hedging (usually up to one year) is short. A suggestion is to establish virtual trading hubs for forward contracts (as exist in some regions), which would need to be complemented with liquid and accessible transmission rights to hedge remaining risk between the hub and each zone.

    Driving renewable investments

    • Accelerating renewables: The requirements of the Clean Energy Package, Fit for 55 and REPowerEU need to be accompanied by appropriate regulatory and administrative action. For example, a transmission access guarantee could secure market access for offshore renewable energy assets interconnected via hybrid projects, where the relevant TSO(s) would compensate the renewable operator for any hours in which TSO actions lead to insufficient transmission capacity being available. Questions invite views on how the necessary investment in network infrastructure should be ensured.
    • Limiting revenues of inframarginal generators: Questions here focus on whether, and in what circumstances, caps on revenue of inframarginal generation should be retained beyond the current expiry date.

    Alternatives to gas to keep the electricity system in balance

    • The Commission emphasises the importance of day-ahead, intraday and balancing markets in ensuring efficient dispatch and exchanges of electricity across borders. At the same time, it asks whether stakeholders consider that the short-term markets are functioning well and whether they see alternatives to marginal pricing as regards the functioning of short-term markets to ensure efficient dispatch. The issue of how marginal price markets should work for generators having a zero marginal cost is, unfortunately, not mentioned. The Commission also invites views on whether there should be mandatory participation in the day-ahead market for generation under CfDs or PPAs. It also seeks views on the adequacy of capacity mechanisms, in particular as regards storage and demand side response.
    • Flexibility assets: The Commission and ACER are working on rules to support demand response, including aggregation, energy storage and demand curtailment. It is also suggested that system operators could be more incentivised to procure flexibility services, particularly demand response, by a rule change to treat system operator OPEX the same as CAPEX for regulatory purposes. Given that smart meter roll-out is delayed and that smart meters do not always give the level of granularity required for demand response and storage, the Commission also proposes that system operators should be able to use sub-meter data for settlement and observability processes, to facilitate active participation in electricity markets. The Commission further proposes new products to foster demand reduction and shift energy at peak times. For example, a peak shaving product could be defined and considered as an ancillary service to be bought by system operators. It is also suggested that more coordinated demand response in periods of crisis would reduce the market clearing price and fossil fuel consumption. Views are also invited as to how the EU ETS and carbon pricing can incentivise flexibility and storage.
    • Intraday markets: The Commission suggests setting the cross-border intraday gate closure time closer to real time as an improvement to support wind and solar generators, whose forecasts are better closer to real time. There is also a proposal that local markets could be coupled after intraday gate closure.

    Better consumer empowerment and protection

    • Collective self-consumption & electricity sharing: The Commission is keen to replicate success stories of consumers investing in offsite generation and becoming 'prosumers', with output being deducting from their metered consumption. It suggests that provisions could allow energy poor or vulnerable customers to be given access to initiatives led by municipalities or housing associations.
    • Metering for demand response: Enabling suppliers and aggregators to offer contracts covering certain appliances, such as EVs, could help to increase demand response. The Commission suggests clarifying the legislation to ensure that customers have the right to have more than one meter (i.e. a sub-meter) installed in their premises and for such sub-metered consumption to be separately billed and deducted from the main metering and billing.
    • Contracts: The Commission notes that, while suppliers above a certain size must offer dynamic price contracts, the legislation is silent on fixed price contracts. It proposes that customers should have a choice between flexible or fixed price contracts. Fixed price contracts could still be based on time of use to maintain incentives to reduce demand at peak hours.
    • Consumer protection: Further measures are proposed to protect customers from supplier failure and ensure access to necessary electricity at an affordable price during crises without encouraging excess demand or fossil fuel-lock in.

    Stronger protection against market manipulation

    • The Commission proposes to review and update the REMIT framework to ensure it is robust in light of recent developments including new commodities, products and actors.

    Next Steps

    The consultation paper sets out 66 questions for stakeholders. Once feedback has been gathered, the Commission intends to publish in March 2023 a proposal for amendments to the legislation.

    This consultation seeks engagement on a wide range of areas but does not yet signal an overall policy shift. The focus is on how to achieve current objectives. It therefore represents an opportunity for market participants to raise awareness about current barriers and present solutions for progressing project delivery and ensuring optimal market functioning.

    Work is ongoing in Ireland to implement the Clean Energy Package and the emergency elements of REPowerEU, and soon the EU will finalise the Fit for 55 and REPowerEU packages. There is laudable ambition around climate goals and, in Ireland, timely delivery of infrastructure will require planning reform, investment in State infrastructure (particularly the grid), and fair risk allocation (and there is existing legislation designed to achieve this).

    The Commission's review may therefore also present an opportunity to clarify or strengthen current expectations and requirements. In this vein, it is interesting to note the questions around how necessary investments in network infrastructure might be ensured and the suggestion of providing a transmission access guarantee for offshore wind.

    Given the EU's emphasis on integration of renewables in wholesale markets, it would also be helpful to see some exploration of how marginal price markets should work for generators having a zero marginal cost.

    This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

    Ms Katrina Donnelly

    Arthur Cox

    Ten, Earlsfort Terrace,

    Dublin 2

    D02 T380

    IRELAND

    Tel: 1920 1000

    Fax: 1920 1020

    E-mail: mail@arthurcox.com

    URL: www.arthurcox.ie

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