The electricity market reform was the culmination of efforts prompted by Russia’s full-scale invasion of Ukraine, which caused severe spikes in energy prices across the EU in 2022. The electricity market redesign aims to avoid such price shocks in the future and can be seen as the EU’s long- term response to the 2022 energy crisis.
Despite a large share of renewables in EU power generation, big spikes in fossil fuel prices (especially gas) have caused a steep increase in EU electricity prices.
This is due to the functioning of the EU electricity market, where the price of power is based on the cost of the fossil fuels used in power generation, the merit order principle.
When high prices hit consumers in summer 2022, EU countries acted immediately to ease the burden on citizens with short term measures such as grants and the suspension of VAT.
The market reform focuses on long term solutions aimed at avoiding similar situations in the future.
The new rules aim to make electricity prices less dependent on the price of fossil fuels, creating a buffer between markets and the electricity bills paid by consumers.
The reforms aim to ensure better protection for consumers, more stability for businesses and an increased share of green electricity in the energy mix.
Electricity consumers will have more options when signing an electricity contract. This means: increased availability of fixed price and fixed term contracts; flexibility to choose dynamic pricing, with multiple or combined contracts possible; and clearer information before signing up.
Access to renewable energy will be easier thanks to the trading of electricity generated from renewables locally (for instance power from solar panels can be sold to neighbours).
Vulnerable consumers will be better protected, with governments ensuring that there are sufficient suppliers of last resort so no consumers remain without electricity and better able to regulate retail prices for households and SMEs.
Business consumers will have more stable prices thanks to long-term contracts (such as power purchase agreements whereby the power generator agrees to sell energy directly to energy consumers at a certain price).
The reformed market should also see power producers enjoying more stable revenue streams.
Investments in new power generating facilities based on wind, solar, geothermal, hydropower (without reservoir) and nuclear energy will be executed in the form of two-way contracts for difference (CfDs). On the one hand, this secures a minimum return on such investments and on the other, it prevents excessive costs in the event of another crisis.
In a two-way contract for difference regime, the generator sells electricity in the market but then settles the difference between the market price and the strike price agreed in advance with the public entity. Any excess revenues are distributed to final customers, with some flexibility for member states.
As already noted, a main objective of the new rules is to make it easier to integrate renewables into the system. Moreover, renewables generation will be easier to predict (through new transparency obligations placed on system operators and enhanced ability to monitor the energy market).
This will make it possible to both keep prices under control and meet ambitious climate targets that the EU set out in the Fit for 55 package.
The mechanics of reform
With the stated aim of boosting renewables, better protecting consumers and enhancing industrial competitiveness, March 2023 saw presentation of initial proposals from the European Commission for reform of the EU electricity market rules, as part of the Green Deal Industrial Plan.
The new electricity market design rules consist of the amending Directive EU/2024/1711 and the amending Regulation EU/2024/1747, which were adopted on 21 May 2024 and entered into force on 16 July 2024.
The new rules amend the following pieces of EU legislation:
Electricity Directive and Electricity Regulation
The Directive on common rules for the internal market for electricity (EU/2019/944) and the Regulation on the internal market for electricity (EU/2019/943) put the consumer at the centre of the clean energy transition, enabling active participation, with a strong framework for consumer protection. The rules allow more flexibility to accommodate the increasing share of renewable energy in the grid and contribute to the creation of green jobs and growth.
The ACER Regulation
Regulation EC/713/2009 established the Agency for the Cooperation of Energy Regulators (ACER), and it was recast with Regulation (EU) 2019/942 as part of the Clean energy for all Europeans package. ACER acts as an independent body to foster the integration and completion of the European internal energy market for electricity and natural gas. The agency’s tasks include, among others, the co-ordination of actions of national energy regulators at European level (including taking binding decisions in case national regulators cannot agree), the development of common network and market rules, the participation in regional and cross- regional initiatives, the monitoring of market activities (including supervision to combat market manipulation to the detriment of other market participants and consumers), or advice to the EU Institutions on trans-European energy infrastructure development or security of supply. The reformed market will include an enhanced role for the Agency for the Cooperation of Energy Regulators (ACER) in cross-border investigations, allowing it to pursue cross-border cases with the most significant impact on the markets.
REMIT Regulation
The Wholesale energy market integrity and transparency (REMIT) Regulation (EU/1227/2011) ensures that consumers and other market participants can have confidence in the integrity of electricity and natural gas markets, that prices are fair and competitive based on supply and demand, and that no profits can be drawn from market abuse.
Revised Renewable Energy Directive
The more flexible the energy system is, with generation that can rapidly turn on or off, storage that can absorb or put power onto the system, or responsive consumers who can increase or decrease their demand for power, the more stable prices can be and the more renewable energy the system can integrate. The Renewables Directive (EU/2018/2001) was already amended by Directive (EU/2023/2413) which entered into force on 20 November 2023.
The Regulation on risk preparedness in the electricity sector (EU/2019/941) is also part of EU Electricity Market Design, but is not affected by the reform. It requires EU countries to prepare plans for potential future electricity crises, putting the appropriate tools in place to prevent, prepare for and manage these situations. It also requires that EU countries – using common methods – identify all possible electricity crisis scenarios at national and regional levels and prepare risk preparedness plans based on these scenarios. Above all, this preparation requires EU countries to co-operate and co-ordinate in a spirit of solidarity. It further establishes a framework for more systematic monitoring of security of supply issues via the Electricity Coordination Group.
EU electricity generation greener than ever before
Europe’s power generation is decarbonising at an unprecedented pace, according to Eurelectric. The latest estimates from its Electricity Data Platform (ELDA), show that in the first half of 2024, renewables accounted for more than 50% of all power generation in Europe while nuclear power provided 24%. This 74% contribution from low carbon sources represents a significant increase compared to the 68% share in 2023. The main reasons cited by Eurelectric for what it calls “this remarkable result” were an unprecedented influx of renewables into the grid combined with the “stabilisation of the nuclear fleet.”
“The pace of change is impressive. These figures document that the decarbonisation efforts of electricity companies are years ahead of any other sector,” said Kristian Ruby, Secretary General at Eurelectric.
While the numbers on the supply side are promising, the same cannot be said for electricity demand, though, Eurelectic observes. In the first half of 2023 power demand in the EU decreased by 5.1% compared to same period in 2022 and has continued to remain low in 2024 – 4.8% lower than in H1 2022. This trend is mainly due to industry relocating outside the EU, warmer temperatures, energy savings and slow economic growth.
“Years of stagnation in electricity demand have now turned into a regular decline. Policymakers must urgently support the uptake of electricity to provide the necessary investment signals for clean generation,” Kristian Ruby argues.
Accordingly, Eurelectric is calling on the new Commission to propose an Electrification Action Plan within the first 100 days of its mandate, with a 35% indicative target for 2030 and a clear electrification indicator to be introduced in the national energy and climate plans (NECPs) of EU countries to monitor and deliver progress on the ground. Inaction could result in missing the EU climate targets, curtailment of renewable production and slowing down investments in the leading sector of the energy transition, warns Eurelectric.
Eurelectric describes ELDA as the “industry benchmark for reliable electricity data.” Collecting over 16 million individual data points annually from a number of independent sources, including ENTSO-E as well as EU official statistics, the data is processed by the Eurelectric intelligence team and validated by industry experts. Thus, “the platform provides unmatched timeliness and accuracy for electricity data.”
