To Market, To Market: Further Electricity Market Reform?

The European Commission has launched a rapid-fire consultation on electricity market design reform. Energy partner, Peter McLay considers the process, and the prospect for new market design proposals.

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High and volatile wholesale electricity prices across the EU have become a fact of life since the commencement of hostilities in Ukraine. This is due to the persisting price-setting role of natural gas and uncertainties over the security of the gas supply. With the goal of building a more “resilient” electricity market, and with surprisingly little fanfare, the European Commission launched a consultation (23 January 2023 – 13 February 2023) on EU electricity market design. The consultation document focuses on measures which, according to the press release, “are meant to be implemented quickly and on a permanent basis”.

The consultation focused on four main areas:

• Making electricity bills less dependent on short-term fossil fuel prices and boosting the deployment of renewables. The high prices faced by consumers are to a certain extent directly correlated to the price of fossil fuels. The consultation considers measures to stabilise prices through the use of power purchase agreements (PPAs) or two-way contracts for difference. In the case of PPAs, the consultation notes that the market share of projects marketed under renewable power purchase contracts still covers only 15-20% of the annual deployment. Questions included requests for stakeholder feedback on the efficiency of PPAs and the barriers that currently prevent the conclusion of PPAs.
• Improving market functioning to ensure security of supply and fully utilise alternatives to gas, such as storage and demand response. Measures to incentivise improvement of conditions for flexibility solutions including demand-response – i.e. shifting or shedding electricity demand to provide flexibility in wholesale or ancillary power markets, helping to balance the grid – energy storage and demand curtailment. The consultation asks stakeholders whether some demand response requirements should be introduced into the Electricity Regulation.
• Enhancing consumer protection and empowerment. The consultation considers various options to protect consumers. One interesting idea suggested is collective self-consumption whereby consumers are able to invest in offside generation and become “prosumers”, reducing bills as if the renewable energy production installation were installed on their own roof. The consultation notes that this model has been implemented quickly and cost effectively in Member States such as Belgium, Austria and Lithuania. Additional measures are suggested which could protect consumers from supplier failure and ensure access to necessary electricity at an affordable price during crises.
• Improving market transparency, surveillance and integrity. The consultation discusses Regulation 1227/2011 on wholesale market integrity and transparency (REMIT). The below areas are specified for consideration:
  • The alignment of the Agency for the Cooperation of Energy Regulators (ACER) powers under REMIT with relevant powers under the EU financial market legislation including relevant definitions, in particular the definitions of market abuse, insider trading and market manipulation.
  • The adaptation of the scope of REMIT to current and evolving market circumstances including new products, commodities and market players.
  • The harmonisation of the fines that are imposed under REMIT at national level and the strengthening of the enforcement regime of certain cases with cross-border elements under REMIT.
  • Increasing the transparency of market surveillance actions by improved communication of the market-related data by ACER, regulators and market operators.

Are they serious?

One justification given for the consultation is that “EU energy markets have been subject to increased ad hoc regulatory intervention in price setting giving rise to increasing uncertainty on future regulatory developments”. That is fair enough.

However, is the solution to run a three-week consultation process and then to implement the resulting measures “quickly and on a permanent basis…by the end of Q1 2023.”? Whatever the answer, the consultation has now concluded. The Commission intends to present its proposal for amendments to the electricity market design in March 2023.

It is also questionable whether any of the areas of focus, in the consultation, have the capacity to address what is effectively an external supply shock – or whether this would even be desirable. By translating this supply shock into high and volatile electricity prices, it is arguable that the market is performing as per its design. Left untouched, these price signals should eventually incentivise investment in alternative forms of generation – particularly those with marginal costs below those of gas-fired plant.

Indeed, the recent efforts of various member state governments to claw back certain renewable generator revenues point very clearly to at least one destination of these incentives!

Conclusion

The Irish electricity sector has already digested one significant wholesale market redesign – the I-SEM project – within the past five years, and that exercise required at least five years of intensive industry consultation.

It is difficult to detect any local appetite for further wholesale market reform, or the extensive administrative burden that this involves. One gets the distinct impression that the various problems identified by the EU – high consumer electricity prices, persistence of natural gas as a price-setting fuel – can be solved by tailored measures that sit outside the market, and do not tamper with the market itself.

However, it is vital for participants in the Irish electricity market to remain aware of the latest EU market reform exercise, and to prepare for any reopening of existing market-facing arrangements that may be required as a consequence.

For more information and expert advice on the proposed reforms, contact a member of our Energy team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.