Governments have given the final rubber stamp to new rules on the functioning on the EU’s internal market for electricity, which aim to limit the dramatic price surges and windfall profits seen during the 2022 energy crisis.
The pricing model used for spot sales of electricity meant power prices tracked the soaring cost of gas in the wake of Russia’s invasion of Ukraine, leading to high prices for end users and huge profits for electricity firms, especially for renewable wind, solar or hydro power where marginal costs are close to zero.
Under a revised market regulation, the essential model remains in place, but the European Commission is empowered to declare European or regional prices crises, allowing governments to temporarily cap prices for SMEs, energy intensive industries and vulnerable consumers.
Such interventions are permitted when wholesale prices rise to two and a half times the average for the previous five years, at least €180/MWh, and are forecast to remain high for six months or more. Commission data showed average retail prices roughly doubled towards the end of 2022, on the back of average wholesale prices surging beyond €400/MWh, as much as ten times those seen in previous years.
The legislation also allows for the use of two-way contracts for difference to incentivise investment in renewables and nuclear power. While such schemes have previously guaranteed a minimum wholesale price for generators through national subsidies, the two-way model also imposes a cap with revenue in excess of the maximum to be repaid to the state.
A separate EU directive focuses on consumer protection, guaranteeing free choice of supplier and a choice between fixed-term, fixed price agreements or dynamic contracts where end-user prices track the wholesale market price. Governments should also ensure that vulnerable or low-income households are protected from market turbulence, for instance by banning disconnection or implementing support schemes.
The new rules were endorsed unanimously by EU governments except for Budapest, which said in a statement ahead of the vote that declaring an energy crisis should be a national prerogative, and that the legislation “fails to provide Hungary sufficient flexibility to ensure affordable prices and to apply a below-cost price regulation to protect household consumers”.
The EU executive welcomed the new regulatory regime, which should be fully in place within six months. “Under this updated framework, European households and businesses will benefit from more security, affordability and transparency on the European energy markets,” European Commission Vice-President Maroš Šefčovič said.
Electricity companies, represented by the Brussels-based trade group Eurelectric, were also broadly positive about the new market rules, with secretary-general Kristian Ruby welcoming the continuation of a “truly universal European internal market”.
“Through maintaining short-term wholesale markets based on marginal pricing, we preserved also an efficient functioning power system,” Ruby said in an email exchange with Euronews, welcoming a focus on “improving long-term hedging and contracting opportunities” on the energy markets.
“We now have the right market design in place to do the massive build out needed to reach our climate neutral objectives,” Ruby said. “The key challenge we foresee is securing the necessary financing to make the transition happen."
