On March 14, the European Commission presented a proposal to reform the electricity market with the aim of boosting renewable energies, strengthening the guarantee of supply, avoiding price volatility and protecting consumers, especially the most vulnerable. After months of negotiation, the European Parliament and the EU Council have agreed on the new regulation. Ekhi explains its main features:
Power Purchase Agreements (PPAs)
The reform aims to stabilize the long-term electricity markets (PPAs) by promoting power purchase agreements (PPAs). These long-term contracts are electricity purchase contracts signed between the electricity producer and the consumer at a fixed price. Although the use of PPAs is now commonplace, the European Commission is seeking to mitigate some of the current problems associated with them. Among these are the high credit quality requirements needed from participants. This results in a concentration of buyers of these types of contracts, which negatively affects investment in renewable assets and thus hinders the achievement of the Energy Transition objectives.
To this end, Member States are obliged to remove barriers and discriminatory procedures, as well as to promote state-backed guarantee systems at market prices, private guarantees and instruments or structures that pool demand for power purchase contracts.
Bidirectional contracts for difference (CfD)
The reform introduces a second figure, already common in energy derivatives, which are contracts for difference (CfDs), consisting of a stabilization mechanism whereby a range is fixed in the price of energy between a producer and a public body. In this case, unlike the usual CfDs (Over The Counter or OTC and financial futures), the counterparty is the public agency.
If the market price is below the marked range, the State compensates the producer by providing the difference. On the other hand, if the price is higher, the State has the right to capture the surplus obtained by the producer and use the extra money to help households and companies. The agreement provides for this model to be mandatory for long-term contracts involving public financing, with some exceptions.
These contracts, however, would not be applied automatically to existing plants, but - as up to now - will have to be approved by the European Commission, which will analyze them under the State aid regime, but with simplified criteria. The final agreement only adds that "equivalent measures" to CfDs with the same effect can be used to support nuclear or renewables.
The rules for bi-directional CFDs will only apply after a transition period of three years after the entry into force of the Regulation, in order to maintain legal certainty for ongoing projects, as indicated in the text, which also introduces a potential exception to the application of the CO2 limit for already authorized capacity mechanisms, when duly justified.
Consumer protection
The text includes several measures to strengthen consumer protection and establishes criteria that will allow the Council, on a proposal from the Commission, to declare an energy crisis. In this regard, the States will have to adopt measures to lower prices for vulnerable and disadvantaged customers. In addition, companies will not be able to unilaterally change contracts and, as stipulated in the text of the new regulation, Member States will ensure that consumers are fully protected against disconnections.
