After Russia's attack on Ukraine, gas and electricity prices rose to record levels in the summer of 2022. Above all, France and Spain called for a fundamental reform of the EU electricity market in order to decouple the price of electricity from the price of gas. EU Commission President Ursula von der Leyen did not want to know anything about it for a long time. However, she finally gave in to the pressure and announced reform proposals for the EU summit in March. Now a draft has been leaked that shows that there can be no question of a fundamental reform. The Commission wants to tackle excessive fluctuations in the price of electricity by strengthening long-term contracts.
Hendrik Kafsack
Economic correspondent in Brussels.
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It is about a "buffer between the short-term markets and the electricity bills of consumers," according to the draft. It is available to the F.A.Z. However, the Commission is sticking to the merit order system, which will be much discussed in 2022. It states that the most expensive energy source used determines the price. As long as this is wind or solar power, electricity is cheap. If coal or gas-fired power plants have to be started, electricity becomes expensive. This, however, creates exactly the right incentives. It is only because of the high prices in the meantime that investments in green electricity are worthwhile.
Contracts for difference to promote investments in green electricity
The Commission now wants to prevent large price fluctuations in two ways: with contracts for difference and long-term purchase agreements between private customers and producers ("Power Purchase Agreements" or PPAs). With agreements for difference, the EU member states are to promote investments in green electricity and nuclear energy in the future. In a contract for difference, the state and producers agree on a fixed price or price corridor for about twenty years. If the market price is lower, the state pays the difference to the producer, if it is higher, it is the other way around. In the second case, the difference is then to be distributed to the end customers depending on consumption.
The model is similar to Berlin's ideas on the EU electricity market reform. France and Spain, on the other hand, had called for contracts for difference to be made mandatory for almost all plants, including existing ones – i.e. not on a voluntary basis for new investments, as in the Commission draft. That would be a much stronger intervention in the market. It would in fact be the continuation of the temporary skimming of "surplus profits" introduced in 2022. The big question is therefore likely to be whether the advocates of more far-reaching interventions will be satisfied with this. The European Parliament and the Council of Ministers must approve the reform in order for it to enter into force. The idea is also not well received by German green electricity producers, as it is intended to replace the previous system of feed-in tariffs, which provides for minimum but no maximum prices.
With PPAs, producers and customers stipulate prices and/or purchase quantities for five to twenty years. So far, industrial customers have used this to protect themselves from price fluctuations. For contracts with smaller customers, the credit default risk for producers is too great. According to the draft, the state should help with guarantees to enable PPAs for all customers. States should also actively promote PPAs in other respects.
For consumers, the reform provides for a right to fixed-price contracts. "Risk-averse consumers can thus set safe, long-term prices to avoid surprises," the draft states. They should also be able to conclude contracts with several providers in parallel. This would enable them, for example, to conclude a fixed-price contract for their apartment and, in parallel, a contract with flexible prices, for example to charge their electric car in the garage during periods of cheap electricity.
In times of exceptionally high prices, the Commission can declare a price crisis. This then allows EU countries to limit electricity prices for consumers and small and medium-sized enterprises by the state. In order to prevent this from leading to an increase in consumption, however, this should be limited to 80 percent of consumption – as with the German electricity and gas price brake.