Casares’ report on the electricity market reform: the good, the bad, and the ugly
Early on Sunday morning, Nicolás González Casares – Spanish MEP from the Socialist & Democrats – released his draft report on the review of the European Commission’s electricity market reform proposal tabled last March.
Much has changed since von der Leyen’s early call for structural reform and market decoupling. The proposal has positively steered toward an evolution rather than a revolution of the market and Casares’ draft report seems to follow in those footsteps. All in all, the outcome is a glass half full rather than half empty. Yet the devil is in the details.
Repowering the EU’s enhanced climate ambition means deploying hundreds of gigawatts of renewables, installing millions of heat pumps, and charging millions of EVs across the continent by 2030 and beyond. All these new assets will need to be connected to the electricity grid and reliably powered by a weather-resilient smart infrastructure.
“This is why we need massive grid investments, and they need to be made in anticipation of what’s coming, not the other way around. Otherwise, the electricity grid will always be a bottleneck to the speed of decarbonisation”
– affirms Eurelectric’s Secretary General Kristian Ruby.
The report recognises the need for anticipatory investments which is a most welcomed amendment to the Commission’s reform.
On a similarly positive note, Casares’ amendments watered down some of the proposal’s most experimental ideas – ideas which would have left several open questions as to their functioning and implementation, causing uncertainty among investors. The establishment of regional virtual trading hubs to allegedly increase forward markets liquidity, for instance, is left to a more reasonable impact assessment prior to adoption. Potentially market-distorting flexibility tools, such as peak shaving products are also limited to crisis situations and subject to a cost-benefit analysis.
Additional perks of the revision are the higher clarity and transparency in the functioning of long-term contracts, such as power purchase agreements (PPAs). Facilitating PPAs’ trade via a common database is a welcomed first step that enhances long-term hedging opportunities and increases liquidity in the PPA market. It is now paramount that such instruments remain voluntary and non-retroactive.
On a less positive note, the draft report reinforces the proposal’s mandatory requirements for energy suppliers to hedge a certain percentage of their energy. While the robustness of retailers is key to ensuring security of supply and customer protection, so is safeguarding competition, affordability, and free choice for consumers. Mandatory hedging would limit the possibility for retailers to tailor their offers to consumers based on their profile and risk appetite.
To strike a balance between these overlapping needs, competent authorities could instead perform stress tests on retailers and regularly report on their robustness without having to impose hedging obligations.
When it comes to fostering flexible energy sources in the system to complement variable renewable generation, the EU approach must be technology-neutral and market-based. Incentives for flexibility should consider all options, beyond demand side response and storage, and should be embedded in existing markets and capacity mechanisms where they exist. But beyond flexibility, the system requires a more holistic planning exercise and infrastructure analysis which factor in multiple parameters such as extreme weather and cyber risks.
Here comes the ugliness: the institutionalisation of a dysfunctional inframarginal revenue cap whose patchwork implementation is currently fragmenting the internal energy market.
The revenue cap was originally introduced in October 2022 via Council regulation to tackle high energy prices. The threshold was set at €180 / MWh, but a flexibility mechanism envisioned in Article 8 of the regulation gave member states a lot of leeway on how to implement the cap. EU countries therefore, started introducing an ensemble of different caps spanning from €61 / MWh in Italy to €85 / MWh in Greece, to €130 / MWh in Belgium, just to name a few.
As shown by our newly collected data, national implementations also targeted different types of markets, taxable bases, and technologies, with some countries opting to end the measure in June 2023 and others extending it to December 2023 or even March 2025.
Market distortions hurt. The cap has fragmented the electricity market and broken investors’ confidence at a time when investments in renewables and low-carbon infrastructures are most needed. In 2022 the EU invested only €17 billion in new wind projects, the lowest since 2009.
The measure also raised significantly lower revenues than expected. In Greece, out of the expected €590 million from the revenue cap, only €344 million were raised. Similarly, in Spain out of €3 billion of expected revenues from the Iberian Mechanism, only €346 million were collected.
While the report confines this measure to electricity crisis scenarios – whose definition remains unclear – it would still be counterproductive to perpetuate a measure that has proven to be ineffective.
As such Eurelectric calls on policymakers to weed this emergency measure out of the internal energy market to sow the seeds of fertile investment for a net-zero future.