As part of its European Energy Union strategy announced in February 2015 and subsequently confirmed by the European Council, the European Commission (the “Commission”) recently published a set of energy-related laws, legislative proposals and communications (the “Commission’s Summer Energy Package”), namely:

  1. Communication from the Commission on a New Electricity Market Design (the “Communication on New Market Design”)
  2. Communication from the Commission on Delivering a New Deal for Energy Consumers;
  3. Commission legislative proposal to implement the structural reform of the EU Emissions Trading System (EU ETS);
  4. Commission legislative proposal for the revision of the Energy Labelling Directive; and
  5. Commission Regulation on establishing a guideline on capacity allocation and congestion management.

Together with the publication of the Commission’s Summer Energy Package, the Commission also launched a public consultation on the new electricity market design and a proposed regulation on security of electricity supply.

The adoption of the Commission’s Summer Energy Package is an important step towards the implementation of the Energy Union. One of the most important pieces of the package is the Communication on New Market Design, in which the Commission reveals for the first time its ideas about the future EU electricity market design.

Regional regulatory zones and regional system operation, regional and EU-level harmonisation of national energy policies, possibility to conclude long-term contracts between generators and consumers, harmonisation of support schemes for renewable energy, consumers as active participants on the energy markets and the changing role of the distribution system operators – these are but a few examples of the Commission’s ideas relating to the new electricity market design.

These examples suggest that the implementation of the Commission’s proposals may result in significant changes for players in the CEE EU Member States energy market, and therefore, the timely preparation for these changes is essential.

The aim of this newsletter is to draw the attention of the market players in the CEE EU Member States to the recently launched public consultation and to summarise the main elements of the Commission’s proposal for the new market design.

Why a new electricity market design is needed?

In the current model, electricity supply is organised primarily at a Member State level and the electricity generated by large scale and centralised conventional power plants using mainly fossil or nuclear fuel is delivered via the transmission and distribution systems to all customers (industrial, household and business) of a geographically limited area (typically a Member State). In this model, the customers are conceived as passive participants (energy consumers) in the system.

Recent events affecting the European electricity markets, particularly the massive increase in the deployment of decentralised renewable electricity generation and changing customer habits, have triggered these trends in the operation of the electricity markets, the handling of which, according to the Commission, necessitates a complete reconsideration of the current electricity market design.

The Commission envisages a market design:

  • organised, in essence, on a regional and European level;
  • based on real market operation;
  • which supports the further spread of renewables; and
  • in which electricity customers and other market players will have to some extent a different role.

Operating at a regional and Union level

In accordance with the various energy policy documents published last year, the Commission makes the establishment of the single energy market and regional and Union level cooperation between Member States a focus of the new electricity market design.

  • Under the new market design, the regional and Union level markets rather than national markets are the foundations of the system. Accordingly, energy market coupling and strengthening of cross border energy flows are priority objectives for the Commission.
  • Regarding system operation and transmission network development, the Commission clearly goes beyond regional cooperation by contemplating regional decision-making competences. The Commission proposes to gradually grant decision-making powers to regional system operation centres (referred to in the Communication on Energy Union strategy of February 2015). The Commission proposes the reinforcement and reorganization of ENTSO-E’s competences and the re-regulation of network tariffs.
  • The Communication on New Market Design also envisages a uniform regulation of short-term markets, primarily the intraday and the balancing markets. In connection with system regulation, the Commission suggests creating cross-border regulatory zones, which boundaries are to be set by the network’s technical characteristics rather than national borders.
  • The Commission’s general centralisation objectives have their strongest impact on the proposed regulation of the capacity mechanisms. In this area, the Commission recommends that the assessment of generation adequacy and system reliability be conducted on the basis of methodologies harmonised at Union level. Furthermore, the Commission also aims to harmonise the rules of operation of capacity mechanisms. In practice, the implementation of these proposals would limit substantially a Member States’ room for manoeuvre.

Operation on the basis of real market principles

According to the Communication on New Market Design, real market forces should play a central role in the functioning of the new market design.

  • It is an important pre-condition of the market-based operation that prices be determined by supply and demand and not by regulatory interventions: the Commission is clearly against price regulation.
  • According to the Commission, real competition has emerged in the wholesale markets resulting in significant price reductions. But they have not had an impact on the retail markets. Therefore the Commission wants to strengthen the links between the wholesale and retail markets, so that price changes on the wholesale markets have a more direct impact on the retail markets, either positively or negatively.
  • With respect to long-term electricity markets the Commission emphasises their price-signal role and importance in making investment decisions, while noting that long-term markets can currently only partly fulfil this role. Given that the realisation of the new market design requires substantial new investments, including in energy infrastructure and new generation capacities, regaining investor’s confidence is a top priority for the Commission. In order to facilitate investments, the Communication on New Market Design specifically mentions long-term contracts between generators and customers, recognizing their risk mitigation effect. Nevertheless, the Commission does not elaborate on this, or on whether it has reconsidered the state aid and competition law assessment of these practices. The legislative proposals to be drafted by the Commission may provide more guidance.

Support of renewable generation

The Communication on the Energy Union strategy sets the ambitious goal of making the European Union the world leader in renewable energy. Therefore, in the new market design the Commission puts a distinct emphasis on the production of renewable energy.

  • The system integration of renewable energy generation constitutes an important prerequisite for further increasing the share of renewable electricity generation. According to the Commission, this requires more flexible grids, as well as multi-player and liquid markets capable of accommodating large-scale weather-dependent renewable production. The Commission also emphasises the importance of changing customers’ roles, demand-side actions and electricity storage.
  • Another important prerequisite for the increase of renewable energy generation is the availability of low-cost financing sources, which requires a stable and predictable regulatory framework. In connection with the new market design, the Commission repeatedly confirms that the renewable generators will need to operate primarily on the market and under the same conditions as conventional electricity generators. It follows that renewable electricity generation may remain eligible for state aid support only while the technical limitations prevent it from a full market-based operation. The Communication on New Market Design references the Commission’s New State Aid Guideline relating to the energy sector, which provides the new EU legal framework to grant state aid for renewables. In addition, the Commission sees regional support schemes for renewable energy as more effective than national schemes, and therefore raises the necessity of establishing a harmonised regulatory framework for a regional support scheme.

Changing market roles

On the basis of the Communication on New Market Design, the roles of electricity market players may change considerably.

  • The most significant change concerns the role of the customers. Under the current model customers are perceived as passive market players, whose primary role is to consume electricity. This customer role is undergoing a fundamental transformation: in the new market design, customers will become active players, taking part in the operation of the market and formulating adjustments. This change is demonstrated by the Commission’s expectation that consumers may become self-sufficient or even, through the increasing role of demand-side response, competitors of the current electricity producers. A separate Communication was released on this issue as part of the Commission’s Summer Energy Package, showing the importance of the changing role of the customers.
  • In addition to existing market players, the Commission mentions new ones who will act as intermediaries or providers of innovative energy services. The Commission expects that these mostly small and flexible market players will play an important role in the new electricity market design.
  • In the new market design the role of the distribution system operators (DSOs) has also been reconsidered, primarily due to their pivotal role in the cost-effective system integration of small, decentralised renewable generation. In addition, according to the Commission, the DSOs will have an important new function, acting as independent mediator of sorts between customers and companies providing market-based services to them. The increasing importance of DSOs is also demonstrated by the fact that the Commission intends to assess whether they are sufficiently involved in European regulatory bodies and in the effective governance of the Energy Union.
  • Other than market players, the changes are likely to affect the energy regulatory authorities. The Commission had already proposed to strengthen the Agency for the Cooperation of Energy Regulators (“ACER”) in its Communication on the Energy Union strategy. In the Communication on New Market Design the Commission goes further and clearly recommends conferring to the agency a EU-level regulatory competence. ACER would thus be entitled to make binding and directly applicable decisions in Member States and to initiate proceedings and impose sanctions in the case of a breach of a EU regulation.

Next steps

Wide-ranging legislative work is needed for the realisation of the new electricity market design. Several elements of the current electricity regulatory framework will have to be amended or replaced. The development of the new market design will affect the Electricity Directive, the Electricity Regulation, the Renewables Directive, the Energy Efficiency Directive and numerous other EU laws. Furthermore, the regulatory changes relating to the new market design will also have an impact on the EU Electricity Network Codes.

The Commission plans to publish the draft legislation concerning the new market design in the course of 2016.