The energy crisis in the wake of Russia's war of aggression against Ukraine revealed major weaknesses in the design of the EU electricity market. To quickly cushion the effects of rapidly rising electricity prices, short-term measures in the form of corresponding emergency regulations were already proposed in autumn 2022. The long-announced draft law on the reform of the electricity market now followed on 14 March 2023.

The starting point for the original request for a comprehensive redesign is the sharp increase in energy costs, which are hardly influenced by the continuous cost reductions in the renewable energy sector (especially wind and solar energy). The reason for this is the EU electricity market design. This stipulates that the most expensive power plant still needed always determines the prices for all generation technologies. This is very often a gas-fired power plant. Due to the sharp rise in gas prices, this so-called merit order system also leads to a sharp rise in electricity prices. Although the production costs for almost 60% of EU electricity production have not changed (renewables and nuclear), the price of electricity has risen almost one-to-one with the price of gas. Commission President von der Leyen therefore announced a fundamental reform last summer. However, the EU Commission is now clearly distancing itself from this. The formulated goal is no longer to lower high prices, but only to reduce price fluctuations. With that in mind, EU Energy Commissioner Kadri Simson wants to reduce the dominance of short-term markets. Hence, the EU Commission proposes to orient the contractual landscape more towards long-term contracts, especially Power Purchase Agreements (PPAs). Public subsidies for investments in low carbon energy generation are to be awarded via two-sided Contracts for Difference (CfDs). The EU Commission does not plan to continue the so-called revenue cap for skimming off excess profits.

EU Commission takes only insufficient measures

Therefore, the EU Commission's restructuring proposal does not envisage any significant changes in the current price formation process on energy markets. The real problems are not solved. The prices for gas and thus also for electricity are still high. Despite lower prices in recent weeks, wholesale gas and electricity are still much more expensive than the long-term average. Hence, trade prices have completely decoupled from actual production costs. The gigantic redistribution from energy consumers to energy companies continues. The currently volatile and high prices are not only a massive financial burden for consumers, but also harm the entire economy.

Only a far-reaching reform of the electricity market design can lead to sustainably competitive electricity prices. Only by decoupling electricity prices from gas prices can redistribution be slowed down and prices stabilised. The latter is also necessary to create investment security in renewable energies.

Affordable electricity is a decisive factor for the energy transition in particular: the use of heat pumps, the switch to e-mobility or, for example, electric blast furnaces in the steel industry, the production of green hydrogen, but also the affordability of rail transport depend on whether sufficient affordable renewable electricity is available.

The so-called “Iberian model” has shown that there are possibilities to reform the European energy market even in the short term if the political will is there. Studies also show that an EU-wide implementation of the Iberian model would be significantly more efficient than a purely regional implementation and would not - as is often argued - lead to significantly higher gas consumption.

However, in the medium and long term, the Iberian model is only the second-best solution. What is needed is a fundamental revision of the price mechanism in the electricity market design. Several options come into question for this. For example, a decoupling of the electricity price from the gas price can be achieved by dividing the electricity market into commodity-dependent and commodity-independent systems. The market price for consumers would then be the weighted average of the two prices. Alternatively, a reform of the so-called Euphemia mechanism, i.e. the algorithm that technically implements price formation, is conceivable.

New rights for consumers

The EU Commission has proposed a series of measures to improve the position of end consumers. These include the right to a long-term supply contract with fixed prices. In addition, the ban of disconnection in the winter months and the "supplier of last resort" are intended to ensure that a secure supply of electricity is guaranteed at all times. However, without concrete regulations regarding the level of the price, these regulations become dead law. So further improvements are needed here.

From AK’s point of view, it is clear that ensuring affordable basic energy supply and sustainability is a high priority and must definitely be taken into account in the reform of the EU electricity market. Finally, the relevance of energy supply for everyday life must be emphasised in this context: “Energy is not a commodity like any other, it is an essential basis of our economic and social system. A new electricity market design must take this into account. The Commission proposal does not do this.“, said AK Vienna Director Silvia Hruška-Frank.

Further information

AK: Electricity market design: fundamental reform necessary (German only)

AK EUROPA: EU Commission proposes new measures against high energy prices

AK EUROPA: The energy market must be reformed

AK EUROPA: New emergency regulations shall rein in energy prices

EU Commission: Factsheet - Revision of the EU Electricty Market Design

EU Commission: Reform of the EU electricity market design to boost renewables, better protect consumers and enhance industrial competitiveness