Proposed Reform of the EU Electricity Market: Use of Power Purchase Agreements

On 14 March 2023 the European Commission proposed to reform the EU’s electricity market design that accelerates the surge in renewables and the phase out of gas. The energy crisis has underlined the need to quickly adapt the electricity market to better support the green transition and offer energy to consumers. The proposed reform foresees revisions to several pieces of EU legislation, such as the Electricity Regulation, the Electricity Directive, and the REMIT Regulation. It introduces measures that incentivize longer-term contracts with non-fossil power production and brings cleaner, flexible solutions — such as demand response and storage — into the system to compete with gas.

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Over the past year, many companies have been severely affected by excessively volatile energy prices. To enhance the competitiveness of industry in the EU and to reduce its exposure to volatile prices, the Commission is proposing to facilitate the deployment of more stable long-term contracts such as power purchase agreements (PPAs), through which companies establish their direct supplies of energy and thereby can profit from more stable prices of renewable and non-fossil power production. To address the current barriers such as the credit risks of buyers, the reform obliges Member States to ensure the availability of market-based guarantees for PPAs.

To provide power producers with revenue stability and to shield the industry from price volatility, all public support for new investments in infra-marginal and must-run renewable and non-fossil electricity generation will have to be in the form of two-way contracts for difference (CfDs), while Member States are obliged to channel excess revenues to consumers. In addition, the reform will boost liquidity of the markets for long-term contracts that lock in future prices (so-called “forward contracts”).

There will also be new obligations to facilitate renewables integration into the system and enhance predictability for a generation. These include transparency obligations for system operators as regards grid congestion and trading deadlines closer to real-time. Finally, to ensure competitive markets and transparent price setting, the Agency for the Cooperation of Energy Regulators (ACER) and national regulators will have an enhanced ability to monitor energy market integrity and transparency. In particular, the updated Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) will ensure better data quality as well as strengthen ACER’s role in investigations of potential market abuse cases of cross-border nature. Overall, this will step up the protection of EU consumers and industry against any market abuse.

The proposed reform will now have to be discussed and agreed upon by the European Parliament and the Council before entering into force.

Click here to read the original article published by Ally Law member firm KCG Partners.