Two weeks before the end of the year and, with it, the rotating presidency of Spain in the Council of the European Union, and after a marathon 10-hour meeting, the Council and the European Parliament have reached a provisional agreement for the reform of the electrical market. One year and four months after its announcement by the European Commission, Europe will launch new mechanisms with which it hopes reduce price dependency of electricity from fossil fuels to avoid its volatility and accelerate the deployment of renewable energy.

“With this agreement, Europe has a electrical market design fair system that will better protect citizens, especially the most vulnerable, with measures that will guarantee affordable prices for citizens and companies and accelerate the energy transition”, celebrated the European Parliament rapporteur in charge of negotiating the agreement, the socialist Spanish Nicolás González Casares, on his social network X (formerly, Twitter). The text must now be formally endorsed and adopted by both institutions.

In the absence of knowing the details of the final text, the reform does not touch the marginalist system current pricing system by which the most expensive technology (gas now) will continue to be taken as a reference. But he advocates foment the forward markets through two instruments: the power purchase agreements (PPA), which are signed between the generator and the consumer, and the so-called ‘contracts for differences’. The latter have been, precisely, the main obstacle in the negotiations in recent months due to pressure from France to include existing nuclear ones in the scheme. The final version states that they can be used in the “new power generation facilities based on wind, solar, geothermal energy, hydroelectric energy without reservoirs and nuclear energy,” according to a statement from the Council.

“The agreement reached last night by the European Union It is excellent news. It is in line with what we proposed at the Energy Council on October 17, it offers the possibility of stable prices and representative of the costs of the electric system, with a new right for each of the 450 million Europeans and for our competitiveness. At the same time, it provides us with the means to guarantee long-term financing for the transformation of our electrical system, in order to face the challenge of tripling renewable energy and nuclear energy affirmed at COP28,” celebrated the Minister of French energy Agnès Pannier-Runacher.

‘Contracts for differences’ or CFDs, for their acronym, are contracts between the energy producer and a Government that serve to support investments in electricity generation, by supplementing the market price when it is low and asking the generator to return an amount when the market price is higher than a certain limit, in order to avoid excessive profits for the generators. In this way, if prices are high, the different governments receive income which they can then redistribute. To satisfy Germany, the other point of friction in the negotiations of recent months, the final agreement provides “flexibility” when it comes to redistribute this income by being able to allocate them to end customers, but also to “finance the costs of direct price support plans or investments to reduce electricity costs for end customers.”

Furthermore, the pact gives the twenty-seven EU countries, gathered in the Council, “the power” to declare a crisis, on a proposal from the Commission, and establishes the “criteria” to do so, which will be related to the average wholesale price of electricity or with a sharp rise in retail prices. The objective is that in the case of situations such as the one that occurred two years ago after Moscow’s pressure on the gas tap between Russia and Europe, Know how to proceed and do it quickly. Thus, the possibility of “further reduce electricity prices for vulnerable and disadvantaged customers.

No cuts to electricity

The text does not include a limit on excessive income of electricity produced by generators with lower marginal costs, such as renewable energy and nuclear energy (so-called ‘inframarginal generators’). The Council proposed maintaining this measure “until June 30, 2024“, while Parliament proposed making it structural in its initial proposal but finally eliminated it. The final text does not include it either, according to the Spanish rapporteur in charge of the negotiations for the European Parliament, Nicolás González Casares, at a press conference this Thursday.

The point of greatest interest for Spain in the text is the capacity markets, after the rest of the reform has fallen far short of the original proposals of the Ministry for the Ecological Transition. According to the Council’s statement, the pact includes “making the capacity mechanisms a more structural element of the electricity market”, but it remains to be known how. Until now, this mechanism required the authorization from the European Commission as state aidwhich greatly slowed down a procedure – according to the Spanish Government and some sources point to a duration of about 10 years – that appears to be essential to remunerate the combined cycle plants to be available to be used. This mechanism cannot be used to emitting technologiesalthough European legislators agreed to introduce a “potential and exceptional exception” for already authorized capacity mechanisms, “where duly justified”, at the request of Poland and its coal.

“This agreement is great news as it will help us further reduce the EU’s dependence on Russian gas and boost fossil fuel-free energy to reduce greenhouse gas emissions”, stated the third vice president of the Government and minister for the Ecological Transition and Demographic Challenge, Teresa Ribera. Likewise, he has indicated that, thanks to the agreement, markets will be stabilized in the long term, accelerate the deployment of renewable and fossil-free energy sources, offer more affordable electricity to EU citizens and improve industrial competitiveness. Promoting this reform has been one of the priorities of the Spanish Presidency of the Council of the EU, which expires in January 2024.

The Council and Parliament also agreed to “strengthen” the measures that member states must implement to ““protect vulnerable customers with energy problems”including the addition of the definition of energy poverty, as well as the obligation for companies to offer contracts at fixed prices to their clients. The European Consumer Association (BEUC) has positively valued the reform because it guarantees “protection against disconnection for vulnerable and energy-poor consumers if they cannot afford exorbitant electricity bills, allowing them to keep the light on in winter.”

The proposal It is part of a broader reform of the design of the electricity of the EUwhich also includes a regulation focused on improving protection against market manipulation through better supervision and transparency (REMIT), which the Twenty-seven agreed in June.