EC proposed changes to the electricity market, wants more long-term contracts

EC proposed changes to the electricity market, wants more long-term contracts

EC proposed changes to the electricity market, wants more long-term contracts< /p> European Commissioner for Energy Kadri Simsonová (pictured on March 14, 2023).

Strasbourg/Brussels – Electricity suppliers will be obliged to offer clients in the European Union different contract variants, including a contract with a fixed electricity price. The proportion of long-term contracts contributing to price stability should also increase. The proposal to adjust the energy market, presented today by the European Commission (EC), takes this into account. Its goal is to prevent a repeat of last year's record high electricity prices.

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The impact of price fluctuations on residents and companies is to be prevented by the mandatory conclusion of so-called contracts for difference in the public support of investments in the production of electricity from renewable sources and the core. This step should also reduce the effect of the price of gas on the price of electricity, without changing the principle of its creation, which is criticized by some states. For the proposal to enter into force, it must be approved by the member states and the European Parliament.

The European bloc began preparing for market reform last summer, when gas prices and related electricity prices hit record highs as a result of the Russian invasion of Ukraine and other factors. Since then, some countries, including France, Spain and Greece, have been pushing for a change in the calculation of electricity prices and their adaptation to the growing share of renewable sources. However, a number of other countries, led by Germany and the Netherlands, speak only of short-term price fluctuations and warn against significant interventions in the market, which has been functioning for many years.

“As in all our proposals, we also want to open up greater possibilities for replacing fossil fuels with renewable energy sources. And here we come to the need to separate the prices of electricity from gas. The moment we replace gas with renewable sources, the problem will cease to be urgent,” said the EC Vice-President Věra Jourová.

Today's proposal by the commission does not directly exclude gas or another fossil resource, coal, from the pricing system. However, it expects to strengthen the influence of cheaper sources – such as solar, wind or nuclear energy – through long-term contacts. In addition to contracts for the purchase of electricity known by the English abbreviation PPA between private entities, these will mainly be two-way contracts for difference (CFD). These are concluded by the state or another public entity with the electricity producer, which claims public support. The contract will provide customers with a long-term fixed electricity price. If its market price increases, the state can distribute the excess income among consumers, if, on the other hand, it falls, it will pay the producer the difference from the price specified in the contract.

“These two instruments will be the key to increasing the stability and predictability of energy costs throughout the EU, they will therefore play a fundamental role in strengthening the EU's competitiveness,” said European Commissioner for Energy Kadri Simsonová.

The EU countries last year under the Czech presidency agreed on a set of temporary crisis measures, including capping gas prices. The commission now wants to give states the option to limit electricity prices at a time of critical growth. This state of emergency should be declared by the Union executive itself.

Among other things, the proposal envisages that clients will be able to choose from multiple contract variants with all suppliers and will always have a contract with a fixed price at their disposal. They should also be given the right to sell unused electricity to the grid, which is produced, for example, by their solar panels. States should also designate suppliers of last resort to provide electricity to customers in an emergency.

“The measure will specifically benefit the Czech Republic in situations such as the fall of Bohemia Energy. It took the state a long time to react. Our proposal today foresees such a situation and suggests what member states can do to limit the risk to consumers or small companies,” Jourová added.

Analysts: More long-term contracts will stabilize the energy market, but increase prices

A higher proportion of long-term contracts with fixed energy prices, which the European Commission wants to enforce in the reform of the electricity market, will certainly contribute to greater market stability, but in the end it will probably increase average energy prices. This is according to analysts contacted by ČTK. He also sees in the proposed system an effort to ensure long-term financing of new sources of electricity.

Today, the European Commission presented a proposal for the regulation of the energy market, through which it wants to prevent a repeat of last year's record high electricity prices. According to the proposal, electricity suppliers will be obliged to offer clients in the European Union various variants of contracts, including a contract with a fixed electricity price. The proportion of long-term contracts contributing to price stability should also increase.

The commission's effort to prevent further extreme situations is understandable, according to XTB analyst Jiří Tyleček, but it comes too late, according to him. “I don't see significant reasons for interventions in the electricity market. It has worked well for many years and even if the environment has changed, regulation may not be the right answer,” he said.

According to him, the proposed measures will probably prevent significant price fluctuations. On the other hand, he pointed out that long-term contracts are more expensive under normal market conditions, and thus consumers can ultimately expect higher energy prices. “By design, they will have more choice, but as a result of regulation, the desired product may be more expensive than it would be without the obligation of a greater proportion of long-term contracts,” he said. According to Tyleček, the energy market will be less flexible and the new regulation may bring additional costs. analyst Radim Dohnal also expects higher prices than the market price average in the long-term setting. “Consumers and industry will get a higher degree of certainty, but for those subjects who would otherwise be able to make a correct and timely decision on a fixed price agreement, the final price will ultimately be higher. For blind consumers, another aid from the state or regulation and a reduction in vigilance and more limitations of the market and market principles,” he said. According to Dohnal, the proposed system is a kind of concession to the populists who want to leave the Leipzig Stock Exchange. According to him, it will lose the necessary liquidity through the changes. At the same time, he pointed out that the higher price of electricity may lead to a higher demand for gas heating in the future, which will then be the subject of further efforts to regulate.

Dohnal also sees the long-term price system as an effort to facilitate financing and building new sources of electricity , both from renewable sources and from the core. He pointed out that energy sources that would be inefficient under normal circumstances can, however, gain ground. “This way we get a higher total supply of electricity, but at the cost of higher prices,” said Dohnal. According to him, in the case of implementation, it should only be a temporary solution for the period of return on investment in new energy sources. “Because if in a few years Europe becomes a place for cheap gas from countries not dangerous for the EU, then it would be a shame to miss this advantage,” he added. . In the summer, the price per megawatt-hour of electricity reached 1,000 euros (CZK 24,700). Currently, a megawatt hour of electricity costs 150 euros (3705 CZK).