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Brussels has revealed its electricity market reform plan, the effect of gas prices on utility bills may decrease

This is the background to the announcement of the plan

After the gas prices in Europe jumped to extreme heights in August last year and this also caused electricity prices to rise to incredible heights due to the influence of flexible gas power plants, the president of the European Commission promised a comprehensive, in-depth electricity market reform in his September annual review speech until March this year. As time passed and gas prices fell, including electricity prices, and as it became increasingly apparent that the member states were divided into two camps regarding the depth and content of the intervention, the chances increased that instead of a comprehensive reform, a less marked, but important and useful the Commission will propose measures, and this is exactly what happened on Tuesday.

Apparently, the Commission also sensed from the Council, which brings together the member states – who invited it to develop the official proposal – that there is a great division, and thus rather proposed such steps the Brussels body, which are more likely to pass the Council. In addition, the proposed measures can really help ensure that the jerky effect of gas prices prevails in wholesale electricity prices as little as possible, and that there is a distribution mechanism that helps soften the effects of possible rising market electricity prices on consumers.

In any case, before giving a brief description of the specific committee proposals, it is important to emphasize that the committee’s Q&A he admitsthat

the Brussels board did not make a proposal to intervene in the electricity price formation model, so the gas power plants entering as the last flexible capacity and the price of their raw material will continue to play a decisive role in the formation of the wholesale electricity price.

Proposals aimed at improving the predictability and stability of energy costs

The Commission does not want to break this relationship by changing the pricing model, but it tries to weaken the effect of gas prices on electricity prices with several proposals, such as:

  • Encouraging two-way contracts for difference (CfD). The essence of this is that it would provide renewable energy producers (mainly solar and wind) with predictable income, but at the same time it would also promote predictable electricity prices. If the market acceptance prices were to fall below the specified price, then the state contracting partner would finance the difference to the producer, and if the market price were to run high, then the extra profit generated in this way could be taken from the renewable producer and given to the consumers.
  • Encouraging the conclusion of long-term power purchase agreements (PPAs). Within this framework, the renewable electricity producer sells the (green) electricity directly to the user at a predetermined price (according to the contractual framework), and thus both parties can calculate the income and costs in advance.
  • Development of forward electricity markets. A transaction shorter than the time frame of the PPA, typically a few months/years in advance, which would also provide predictability and security to the producer and consumer.
  • New obligations to facilitate the integration of renewable energy sources into the system and increase the predictability of production. These include transparency obligations for system operators regarding network congestion and closer to real-time trading deadlines.
  • Greater capacities to investigate cross-border trading abuses and a more uniform system of fines. To this end, the Agency for the Cooperation of Energy Regulators (ACER) and the national regulatory authorities will be given greater capacities to monitor the integrity and transparency of the energy market, for which more data will be required for those concerned.

The above and the following measures aim to renewable-based power producers should receive a predictable, safe financing framework for their investments, which increases the supply of cheap renewable-based power, and obviously also aims to adjust the market price of electricity to this relatively low production cost as much as possible. And the ever-increasing volume of green electricity produced in this way will increasingly be able to suppress the influence of the gas price in wholesale pricing (and it would increasingly have an important effect “only” in the regulatory market, when the fluctuating production of weather-dependent people has to be regulated).

Corporate Energy Procurement 2023
On April 18, the conference entitled Portfolio Corporate Energy Procurement 2023 will discuss the above topics, including the legal and practical side of the PPA construction. More details:

Protection of consumers and enforcement of their interests

The Commission’s package of proposals also includes steps aimed at strengthening consumer protection and asserting their interests, such as:

  • Electricity consumers should be able to contract with (renewable) producers according to as many types of contracts as possible, and this should be as flexible as possible. As the Commission puts it, it is crucial that consumers have a wide choice of contracts and are given clearer information before signing contracts, so that they can contract for safe, long-term prices to avoid excessive risks and volatility. However, they will also be able to decide to enter into dynamic pricing contracts in order to take advantage of price volatility and use electricity when it is cheaper (e.g. to charge electric cars or run heat pumps).
  • Reduction of supplier bankruptcy risks and provision of a last resort service. Here, the goal is, on the one hand, to reduce the risk of supplier bankruptcy, because this can also make electricity prices more predictable. The proposal therefore requires service providers to manage their price risks at least to the extent of the volumes according to the fixed contracts in order to be less exposed to price increases and market volatility (in Hungarian, to cover their exposure on the stock exchange to the extent of the volume of electricity sold at a fixed price, so as not to run into price changes risk). In addition, the proposal obliges the member states to establish service providers of last resort in order to ensure that no consumer is left without electricity. (This is a category that exists in Hungary, and from last summer, starting with the transformation of the utility reduction system, many companies were forced to join the state MVM, and then, following legislative changes, from this system, from January this year, they were transferred to the emergency supply category, under which they receive electricity at monthly changing prices and the gas)
  • The protection of vulnerable consumers can also be significantly improved. In this regard, within the framework of the reform proposed by the Commission, the member states will protect vulnerable arrears consumers from being disconnected. It also becomes possible for member states to extend regulated retail prices to households and SMEs in the event of a crisis.
  • The proposal also modifies the rules for the sharing of renewable energy. Consumers can invest in wind or solar farms and sell the excess energy produced by roof-mounted solar panels not only to their service provider, but also to their neighbors. For example, tenants will have the opportunity to share the excess energy generated by roof-mounted solar panels with their neighbors.
  • Improving the flexibility of the electricity system in order to, after the adoption of the reform, member states must assess their needs, define objectives in order to make the use of non-fossil fuels more flexible, and they will have the opportunity to implement new support systems, especially for demand response and storage. The reform also allows system operators to reduce demand at peak times. In addition to this proposal the Commission also issued recommendations today Member States regarding the promotion of storage innovation, the development of technologies and capacities.

The commission package officially proposed today will now go before the competent committee of the member states and the European Parliament, which will form their negotiating position in the first round. After that, the inter-institutional negotiations start as part of the normal legislative process, and finally both the Council and the Parliament, which brings together the member states, have to accept the system of rules and only then it becomes a law.

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