Brussels has presented this Tuesday its proposal to reform the electricity market six months after the president of the European Commission, Ursula von der LeyenI will announce it. Roughly the changes are minimal –the approach is limited to reduce barriers to long-term contracts of energy– and outlines some measures to increase consumer supply contract offers. The approach is much more aligned with the ‘non-reform’ of Germany and seven other countries, as well as the European electricity employer Eurelectric, who advocated hardly making any major changes; that with the Spanish proposal to intervene in the price of nuclear and hydraulic power plants to avoid the ‘benefits from heaven’ of these technologies and thus lower the customer bill.
Despite this, the Spanish government seems to see the glass half full welcoming “with satisfaction” a Community proposal that “is inspired” and includes “a good part of the solutions proposed by Spain”, according to sources from the Ministry for Ecological Transition. He change of tone agrees that the country will hold the Presidency of the Council of the European Union in the second half of 2023, six key months for the negotiation between the Twenty-seven, with the aim of approving a text before the European Parliament elections in mid-2024. The employers of Iberdrola, Endesa and EDP (Aelec), for their part, also values ”positively” the proposal and stresses that “does not include structural or retroactive intervention measures”. These are some of the keys to reform.
What does Brussels propose?
The European Commission fundamentally advocates encourage long-term contracts energybut without hardly regulating anything. It does so through the promotion of Bilateral contracts between power generator and consumer (what is known in energy jargon as PPA, for the acronym in English of Power Purchase Agreement) when proposing public aid to endorse these contracts or that developers who participate in public tenders (auctions) can reserve a part for sale to through PPAs. Curiously, Spain is the country with the most contracts of this type has, and according to sources in the sector, most occur between vertically integrated companies (distributor and generator of the same group) for which it is unknown whether or not they transfer prices to customers.
It also proposes the establishment of prices regulated through auctions (what is called Contracts for Difference) but limited to the new investments of renewables (something that is already done in Spain) and nuclearas well as for repower the existing ones, what supports the extension of the useful life of this technology in the future.
“does not incorporate nothing new that the Member States cannot do now”, summarizes the Professor in the Department of Economics of the Carlos III University and one of the architects of the Spanish proposal, Natalia Fabra. Spain advocated setting regulated prices for nuclear and hydraulic existing, to cut windfall profits from these technologies and favor consumers, something the European Commission overlooks despite acknowledging that these technologies have posted “consistently high revenues.” “We cannot agree that hydraulics can be paid at 200 euros per megawatt-hour when its cost is 20 euros per MWh, it is a public resource and they have recovered their investments. That the Commission consents to that is a scandal,” Fabre adds.
Is the marginalist system then maintained?
Yes. In September of last year, a few days after the President of the European Commission, Ursula von der Leyenannounced that Brussels would implement a reform of the electricity market, the president of the Spanish operator OMIE, Carmen Becerrilamended the High Representative of the European Union, Joseph Borrel, when he celebrated in an act that “the (marginalist) system of pricing” had come to an end. “The electricity market has to evolve, but Mr. Commissioner will it allow me to make one bet to the fact that marginalism will continue after the reform model proposed by the European Commission”, Becerril said then. Time has proved him right: The proposal of the European Commission maintains that design and, furthermore, that is practically the single point in which there is absolute consensus in Europe considering that it is the best way to have a objective price reference. “The design of intraday markets continues to be the more effective in order to ensure that the cheapest technologies are used first to produce electricity and guarantee that there will be trade between the member states”, the energy commissioner, the energy commissioner, stated during the presentation of her proposal. Kadri Samson.
Advocates creating capacity markets, but without changing the current rules
Another of the issues that the European Commission addresses, but halfway, is the creation of a capacity market that rewards availability, as well as new schemes for optimize the flexibility of renewable energy such as demand response mechanisms (reducing consumption in exchange for a price during peak hours) and storage. Brussels encourages countries to design capacity mechanisms but within the existing regime, in which this mechanism is considered as a tool of last resort very difficult to use in practice.
These are two of the issues defended by the Spanish Government that asked to modify the internal market directive for standardize and generalize these services, which are also defended by the large electricity companies. “We consider that the most efficient thing is that all the resources that can contribute firmness or flexibilityincluding the demand response and storageare integrated into the energy markets and capacity mechanismsinstead of establishing separate and non-harmonized mechanisms that can discriminate between different technologies or resources”, highlights the employers’ association of the large electric companies Aelec, in a statement. The European commissioner has defended making an “enormous effort” to consider all the concerns and has encouraged countries to use negotiation to make changes. “With this proposal the Council can table amendments that deal with these national issues beyond what is covered by our proposal,” Simson added.
More weight for consumers
Consumers gain some autonomy. The European Comission sets the obligation for power companies offer fixed price ratesas well as the right of users to have several offers within the same contract to take advantage of the volatility of daily prices at times when electricity is cheaper (at night) to recharge the electric car. In Spain, all electricity companies already offer fixed-price rates and, since June 2021, it is even allowed to have two different powers.
It also establishes the right of consumers to share surplus energy with its neighbors without the need to create energy communities, which could encourage self-consumption, as well as encourage the weight of consumers in the management with demand reduction mechanisms once they have smart meters installed, although for that these devices will have to be generalized.
Would this reform prevent a new price crisis?
It seems difficult. “The proposed reform will not give a firm response to the electricity price crisis that we have been suffering since the summer of 2021”, stressed the socialist MEP, Nicholas Gonzalez Casares. The point is that nothing changes with respect to what currently exists, beyond establishing as an exceptional measure if there is a circumstance of high prices such as that of recent months, they can be established regulated prices for households. “If the price reaches 500 euros and a limit of 100 euros is set, someone has to pay the difference. That is a tariff deficit and it is not the solution to the problem. The European Commission should not allow the electric companies obtain unjustified returns at the expense of the Europeans”, insists the professor of economics Natalia Fabra, which acknowledges that if the price of electricity were to drop once this reform came into force, it would be “for exogenous reasons”. “Not by measures contained in the proposal. We are exposed to a repeat of the history of recent years“, alert.