EC's President Von der Leyen prepares for Sept 14 power market reform statement

European Commission President Ursula von der Leyen will present firm options for the reform of the EU's electricity market design on Sept. 14, DG Energy Deputy Director General Mechthild Worsdorfer told the European Parliament's Committee on Industry, Research, Telecoms & Energy Sept. 1.

On Aug. 30, Von der Leyen said power market design was no longer fit for purpose, and the EC would come forward shortly with both emergency and longer-term reforms to address the energy price crisis.

A widely leaked Brussels non-paper, meanwhile, indicates that the EC's emergency proposals will focus on power demand reduction, price caps on inframarginal (non-gas) generation, and the use of surplus revenues from inframarginal generators to subsidize consumer bills.

"The desired effect can only be achieved through a combination of these components, where the demand reduction helps to mitigate the [wholesale] price pressure and the revenues from the inframarginal cap help to finance consumer facing interventions," the EC said in the non-paper.

Save winter power

An EU-wide power demand reduction target would be "inspired by the mandatory demand reduction for gas" foreseen in the Save Gas for a Safe Winter initiative, the non-paper said.

On Aug. 5, the EU Council adopted a new regulation on the voluntary reduction of natural gas demand by 15% this winter.

The regulation foresees the possibility for the Council to trigger a "Union alert" on security of supply, in which case the gas demand reduction becomes mandatory.

Member states not interconnected to other gas networks are exempted from the mandatory gas reductions.

Further, member states whose electricity grids are not synchronized with the European electricity system and are more reliant on gas for electricity production are also exempted.

Marginal decoupling

A second intervention would introduce a price limit for inframarginal electricity generation technologies "which have lower operating costs and than gas-fired power plants," with the aim of decoupling the returns for these generators from the marginal electricity price, the non-paper said.

The third component of the EC's proposed package would see surplus wholesale market earnings gained from the inframarginal price cap used to finance retail bill subsidies.

Parallel lines

Industry proposals in the interconnected GB power market, meanwhile, have taken a similar approach to decoupling renewables and nuclear from the marginal gas unit.

On Sept. 1, industry group RenewableUK said new fixed-price contracts for older wind and renewable generation sources under the Renewables Obligation would cut bills and reduce exposure to volatile gas prices.

RO units trade their power on the wholesale market and get a fixed subsidy. A new scheme would see the market price replaced by a fixed price contract, it said.

In 2020-21, RO generators produced over 80 TWh of power, about 25% of the UK's electricity mix.

"The proposal for new contracts would reduce the risk of rising costs as future trading arrangements expire and gas prices continue to skyrocket," RenewableUK said.

The group noted that the RO closed in 2017 and had been replaced by the contract for differences scheme, "which has procured large amounts of cheap renewable capacity which generate power at fixed prices and any revenue above the fixed price is paid back to consumers."

The prices secured under CFDs were so low that these projects were expected to pay back over GBP3 billion this year, it said.

Auction timing

Noting a Financial Times report that fixed-price contracts for GB renewable and nuclear energy generators could save between GBP5 billion and GBP20 billion annually, JP Morgan utility analysts said Sept. 2 a large auction system for the vast majority of unregulated hydro, nuclear and renewables production in Europe "would be good news for generators."

Big auctions in 2023-24 would occur at a time of "strong demand for clients, which should be ready to pay higher long-term prices than assumed only six months ago," the investment bank said.

Existing supplier hedges might squeeze liquidity in the auctions but this could be addressed by including capacity with hedges expiring before, for instance, 2025, and compensating suppliers for the difference between the auction result and the hedged price, it said.