According to the EC, the design of the electricity market no longer suits current market developments with high gas prices on the one hand and a growing supply of renewable electricity on the other. Commission President Ursula von der Leyen already summarized the essence of the reform in her speech on the State of the European Union in September 2022: "We must therefore ensure that the pricing of electricity is no longer so dependent on gas."
Merit order
The current design of the electricity market is based on the merit order. According to the merit order, demand for electricity is met by ranking the output of power plants based on marginal cost (cost incurred by one additional product). Currently, gas power plants have the highest marginal costs in the merit order, so they determine the market price for electricity. The EC wants to get rid of this very linkage in order to bring the benefits of relatively cheap renewable energy to the customer. However, the formation of the market price based on the merit order is a consequence of market forces. Moreover, at present there is simply not enough renewable generation capacity to meet the minimum electricity demand.
"So we need to make sure that electricity pricing is no longer so dependent on gas."
- Ursula von der Leyen during the State of the European Union.
Long-term contracts
The EC is considering encouraging the use of two types of long-term contracts, which should ensure that electricity customers are better protected from the vagaries of the short-term market. They are "Power Purchase Agreements"(PPAs) and "Contracts for Difference"(CfDs). PPAs are long-term contracts where the purchase price is agreed upon in advance between provider and demander. CfDs are contracts where the difference between the prevailing market price and a pre-agreed off-take price is paid by the buyer or seller depending on a positive or negative difference between these prices. The precise details of the use of these long-term contracts are currently uncertain.
Consultation
The consultation began on Jan. 23 and continues through Monday, Feb. 13, 2023. According to insiders, the EC has set Tuesday, March 14, for its long-awaited electricity market reform proposal. The EC plans to adopt the electricity market reform proposal, with any relevant amendments, by the end of the first quarter of 2023.
