EU’s key energy market reforms coming into force

The Council of the European Union enacted electricity and gas market reforms and a framework to boost the production and use of hydrogen and other so-called decarbonized gases. The legislation is aimed at facilitating the clean energy transition while enhancing the security of supply and consumer protection and building on the lessons learned from the energy crisis.

Consumers will now be able to benefit from more stable energy prices, less dependency on the price of fossil fuels and better protection from future crises, on the way to a carbon-free EU, the European Commission said. Energy market reforms are finally coming into force as the Council of the EU signed off on the legislation.

The administration in Brussels wrapped up the package two weeks before the European elections, after more than a year of negotiations about the electricity segment. It took two and a half years for the directive and regulation on fossil gas and hydrogen and other decarbonized gases.

Future-proof energy markets will stimulate investments in clean energy and facilitate lower and more stable prices, which are key to making European industry more competitive on the global stage, the commissioners pointed out. The updated gas market framework gives member states the possibility to stop or limit imports of both piped gas and liquefied natural gas (LNG) from Russia and Belarus, in line with the REPowerEU objectives, the executive body explained.

The European Commission stressed that consumers would be able to switch suppliers more easily. “With the adoption of the electricity market reform, we are empowering consumers, ensuring security of supply, and paving the way for a more stable, predictable, and sustainable energy market,” Belgian Minister for Energy Tinne Van der Straeten stated.

The reforms are part of the Green Deal Industrial Plan, which the European Commission formally launched in February of last year. It includes the controversial Critical Raw Materials Act – CRMA and the Net Zero Industry Act (NZIA).

More stable, predictable energy market prices

Power purchase agreements (PPAs) are long-term contracts that provide stability for customers and investors, the Council of the EU said. The updated rules promote their uptake and cut unnecessary red tape and charges, it added. In line with their decarbonization plans, member states may further support investment in renewables under power purchase agreements, including by setting up guarantee schemes.

Moreover, member states will use two-way contracts for difference (CfDs), or equivalent schemes with the same effects, for their direct price support mechanisms, in order to support new investments in electricity generation and make sure electricity prices are less affected by price volatility of fossil fuel-based markets.

Under a two-way contract for difference with a public entity, energy generators are protected with minimum remuneration while it should be ensured that they operate and participate efficiently in the electricity markets and react to market circumstances, the Council of the EU said. In high price periods, they would have to pay back excess revenues, which can then be distributed to final customers (while avoiding distortions to competition and trade in the internal market), be invested to reduce electricity costs for final customers or used to develop distribution grids.

Two-way contracts for difference can apply to investments in new power-generating facilities based on wind energy, solar energy, geothermal energy, hydropower without reservoir and nuclear energy.

Protecting, empowering consumers

The new rules give the Council of the EU the power to declare a crisis, on the basis of a commission proposal, in the event of very high prices in wholesale electricity markets, or if there is a sharp increase in electricity retail prices.

Actions to be taken by member states in case of a declared electricity crisis include existing measures under the EU rules. Among them is the further reduction of electricity prices for vulnerable and disadvantaged customers, and price regulation for households and small and mid-sized enterprises.

Member states are obligated to reinforce their measures to shield vulnerable and energy-poor customers, including banning disconnections of power and gas. The reform also further encourages energy-sharing schemes, complementing the existing provisions on renewable energy communities (RECs) and citizen energy communities (CECs).

Governments will have to establish suppliers of last resort so that no consumer ends up without electricity or gas.

Ensuring security of supply

On the way to a carbon-free system, so-called capacity mechanisms – measures introduced by member states to address capacity adequacy concerns – will become a more structural element of the electricity market design and will no longer be temporary. It will improve the security of supply and enhance flexibility, as the share of renewables will gradually increase, the council noted.

The new rules are envisaged to help the shift to renewable and low-carbon gases, in particular hydrogen, in the energy system. The gas package establishes a framework for the development of the hydrogen market, including for dedicated infrastructure. It contains transportation, supply and storage rules.

They call for integrated and transparent network planning across the EU, under the energy-efficiency-first principle.

Switching to renewable gas

In order to ensure the phaseout of fossil fuels, long-term contracts for fossil gas will no longer be concluded as of 2049. The new rules promote the penetration of renewable gas and low-carbon gas, in particular hydrogen in coal and carbon-intensive regions.

The commission will pilot a five-year project to bring together demand and supply of hydrogen to enhance market development and transparency under the European Hydrogen Bank.