Written by Thomas Lewis, Energy Policy Expert at CAN Europe.
In June this year, the revised Electricity Market Design Regulation and Directive came into effect, introducing a host of new provisions to tackle energy prices and speed up the roll-out of flexibility. While the text sets up timelines for member states to enact many of these proposals, EU countries need to move ahead of schedule, in order to reap early benefits, exceed the EU 2030 renewable energy target of 45%, and reach for 50% to align with a Paris Agreement-compatible pathway as shown in CAN Europe’ energy scenario.
Flexibility: Set targets early, align with EU later
Under flexibility provisions, a lengthy timeline has been set up to first develop a common EU methodology to assess their flexibility needs. Only then, member states will need to enact these assessments, and from 2027 – propose objectives for flexibility, energy storage and demand response, as well as support schemes to meet these objectives. But while this timeline runs, nothing is stopping EU countries from proposing initiatives today, and realigning with EU processes when necessary.
The Pentalateral Energy Forum, consisting of Austria, Belgium, France, Germany, Luxembourg, the Netherlands and non-EU Switzerland, conducted a flexibility needs assessment for the region back in early 2023, before the EU Commission even published its proposals for market design reform. Spain already has a 22GW target for energy storage, whereas Ireland has a 1.7GW objective for long-duration energy storage, without having conducted initial flexibility assessments. Late last year, France successfully received state aid approval for a non-fossil flexibility support scheme, open to energy storage and demand response, before the electricity market design even came into effect. To EU countries we say: move now, benefit early, adjust later.
Contracts for Difference: Future-proof designs
The Electricity Market Design revision aims to better harmonise direct price support schemes for new power-facilities under Contracts for Difference (or equivalent schemes), securing needed investment in renewables. These could benefit consumers during periods of high prices if state revenues from CfDs are redistributed. However, CfDs as stated in the EMD revision do very little to ensure solar and wind plants are incentivised to react to short term fluctuations in prices. Renewables would inject into the grid whenever they are able to produce, even if the grid is congested or there is little demand, as they collect stable revenues irrespective of when would be best to produce. If these contracts were well designed, revenues would be linked to when production is needed, incentivising developers to include energy storage or demand side response alongside renewables to better control renewable electricity injection.
With these contracts typically lasting between 5 and 20 years, it’s important to lock in the best designs.
A EU Commission leak indicates possible future market reform to factor in locational and temporal dimensions to investment signals, which would imply, among many things, the need to smarten the design of CfDs. Here, to move faster than Brussels, EU countries should ensure their CfDs designs are future proof, and ahead of the curve of potential market design changes and create a flexible energy system.
Capacity mechanisms: Set ambitious emissions caps to phase out fossil fuels
Capacity mechanisms, used to pay power-assets to wait idle until required for back-up generation, have been a massive source of fossil fuel subsidies in the EU. The Electricity Market Design revision made light reference to decarbonising these mechanisms, however allowed them to be permanent features of the energy system, and opened up a derogation to support coal-fired power plants beyond the 2025 deadline, at the request of Poland.
Moving faster than Brussels is very simple here. While the maximum amount of emissions a capacity mechanism asset can release is set at the EU level, EU countries can set national caps far below that. Member states should either opt for a transitional approach of rapidly reducing the emission cap year by year, replacing coal and fossil gas units with energy storage and demand response, and shrinking the overall procured capacity, or simply scrap capacity mechanisms altogether.
Conclusion
There are many ways for member states to use the implementation of the Electricity Market Design reform to maximise the benefits for energy consumers, delivering the affordable prices that households and industry are waiting for. First and foremost, they need to increase the flexibility of their energy system, so that cheap renewables can come online. Secondly, the design of Contracts for Differences needs to be optimised, so that renewable energy producers are incentivised to respond to wholesale price fluctuations and ensure the redistribution of revenues to consumers. Thirdly, capacity mechanisms must no longer hand out expensive subsidies to fossil fuel producers and instead channel financial resources into building the flexible and fully renewable energy system of the future that will benefit us all.
