EU lacks impact assessment for proposed electricity market design reform

In light of the ongoing electricity market design reform, a study showed that the European Union needs data and a mechanism to analyze the current settings and the impact of proposed solutions.

Spain’s Third Deputy Prime Minister and Minister for Ecological Transition and the Demographic Challenge Teresa Ribera is optimistic that an agreement can be achieved on the EU’s electricity market design reform on October 17. It is when the Transport, Telecommunications and Energy Council meets in Luxembourg, and her country holds the European Council presidency until New Year.

The need to adjust the system became evident during the energy crisis as the surge in gas prices spilled over into electricity and hurt households and corporate consumers. With its guidance at the time, the European Commission wasn’t able to offer comprehensive solutions. Member countries rolled out a range of different measures, which highlighted the necessity of a systemic approach to ensure fair and efficient markets.

After lengthy discussions between the administration in Brussels and state governments, the bloc’s executive body officially launched the initiative for reform in March of this year. The European Parliament adopted a negotiating position three months ago.

Solid electricity market implies more than bunch of individual new instruments

Constantly experimenting with individual design elements to figure out a functioning market design will not convince investors, according to the findings of a group of experts. They produced a study on behalf of the Policy Department for Economic, Scientific and Quality of Life Policies of the EU’s Directorate-General for Internal Policies.

The document was requested by the European Parliament’s Committee on Industry, Research and Energy (ITRE). It is called The design of the European electricity market: Current proposals and ways ahead’.

Neither the expected mode of impact of individual reform elements, let alone their interaction, is clearly spelled out by the legislators

Investors in the electricity sector are required to deploy hundreds of billions of euros into generating, storing, transporting and consuming assets, the authors pointed out. Earlier, the framework for longer-term contracts was adjusted with a view to allow producers to better hedge and hence more easily invest and to protect consumers from price spikes, the group explained.

Neither the expected mode of impact of individual reform elements, let alone their interaction, is clearly spelled out by the legislators, the study reads. The authors noted that the proposed reform maintains crucial elements of the existing system to ensure continued efficient operation.

Energy crisis led to substantial shifts in wealth

From a fairness perspective, the size of the shock led to unexpected and substantial shifts in wealth, particularly hurting consumers who were not hedged against price fluctuations, the paper adds. The system had developed too little generation capacity, too little interconnection, too little maintenance, and too high reliance on individual fuel supplies, the experts stressed.

“The European Commission proposal for reforming electricity market design does not propose a radical overhaul of the existing system, but rather a fine-tuning of existing market instruments on a case-by-case basis. This includes proposals concerning contracts for difference, hedging obligations, the design of an intervention framework for future price crises, an additional product for peak shaving (reducing consumption during existing hours of high demand), and energy sharing. A fundamental and concerning conclusion of our paper is that Europe lacks the necessary assessment framework for objectively analysing the impacts of proposed adjustments to such isolated market instruments,” the authors concluded.

Any protection offered to customers against future price increases should not interfere with short-term price incentives, they said. As a near-term priority, experts pointed to increasing transmission capacities to lower electricity costs.