The Covid-19 lockdown and the subsequent steep economic recovery around summer 2021 led to important supply chain bottlenecks that ended up increasing the cost of materials and equipment across the whole economy.

Prices rose for silicon (used for semiconductors), copper (for power lines), lithium (for batteries), and steel (for everything), among many others. Such pressure on the supply chain led to higher electricity prices in Europe. The situation was then exacerbated by the European decision to reduce dependency on Russian oil and gas (RepowerEU strategy) and forcing gas operators to fill in 90% of the gas reserves before the winter. Since then, European energy consumers have faced high energy prices for both heating and electricity.

Amid those record-high electricity prices, European policy makers embarked into a discussion on whether todays’ electricity market is fit for purpose. And the answer is clear: Yes, the current electricity market, which was recently improved (Clean Energy Package 2019) doesn’t need a full reform. However, stronger long-terms signal for investments into low-carbon generation technologies, flexibility options and demand response are still needed, as well as stronger safeguards to protect electricity consumers from volatile and high prices.

This is what the European Commission presents in the electricity market reform, which will see changes into both the electricity regulation and the electricity directive. Those will have to be discussed by the Council and European Parliament, so we expect the final legislation to only be ready by early 2024.

The following are the key elements of the proposal by the European Commission:

• If members states want to support renewable electricity generation and/or nuclear, they must do so through two-sided contracts for difference. And if market prices are above the strike price, the collected money should be redistributed proportionally among all electricity consumers in order to reduce their bills.

This seems a very sensible approach because it reduces risk for the investment and helps keep electricity prices down.

• Renewable electricity producers might opt to combine CfDs with long-term power purchase agreements (PPAs). This way, part of their electricity output (and their revenues) will be secured from the government (for which there will be likely fierce competition) and another part can be secured through a long-term offtaker (where there is more risk linked to the offtaker’s economic health in the long term).

The possibility of combining both revenues in a single project is quite important for the hydrogen sector because Renewable Fuels of non-Biological Origin (RFNBOs), which are required under the Renewable Energy Directive, depend on PPAs with renewable electricity producers.

• Member states will need to introduce instruments to support the uptake of PPAs including guarantee schemes, to reduce the financial risks associated to offtaker payment default.

This is quite relevant and helpful for all those future RFNBO producers who would need to secure PPA with the electricity suppliers. And it would be equally important for future RFNBO consumers, who would need to secure Hydrogen PPA with the producers.

• Members states will have to prepare a 5-year long flexibility assessment report at national level, every two years from around 2026. The report will focus on the potential need for demand side response and storage at transmission and distribution levels to help integrating renewables. The methodology to do these reports will be prepared in Brussels by ENTSO-e and EU DSO and approved by ACER. Based on the assessment, Member States will have to set an indicative national objective for demand side response and storage, to be reflected in their National Energy and Climate plans.

These assessments will be very helpful in highlighting the power system flexibility needs as more renewables are integrated. Storage needs, especially for longer periods (weeks, months) will highlight the value of storing energy in the form of hydrogen, that could then be used for electricity generation.   

• Members states can introduce new market-based support schemes to promote storage and demand response, or they might adapt their existing capacity markets to also highlight value from storage and demand response.

These might evolve into mechanisms that also incentivize investment into storage of hydrogen for power generation, a very relevant element.

Some other important aspects of the proposal:

• The European Commission might intervene in the market and allow Members States to apply a price cap for electricity supply to protect businesses (SMEs only). Members States might apply this cap for up to one years if prices are very high and for a long period (over six months).
• Transmission system operators will be allowed to procure peak shaving services (from consumers), through a competitive auction, to reduce demand at times when not enough renewable and low-carbon sources are available. The activation of these mechanisms will need to be clearly justified and be activated only within the last 48hours.