Electricity Market Design
The EU electricity market is structured to promote the transition to clean energy while ensuring energy security and affordability. An integrated EU energy market achieves these goals most cost-effectively by enabling secure, sustainable, and affordable energy supplies for all EU citizens.
Key aspects include:
Key aspects include:
- Common Energy Market Rules and Cross-Border Infrastructure: These facilitate the production of energy in one EU country and its delivery to consumers in another, enhancing overall efficiency.
- Boosting Competition: Increased competition in the market helps keep prices affordable.
- Consumer Choice: Allowing consumers to choose their energy suppliers further ensures competitive pricing and better service.
Electricity market design rules
The EU expects the share of electricity from renewable sources, mainly solar and wind, to grow from 37% in 2020 to over 60% by 2030. However, electricity must still be reliably produced and delivered during periods without wind or sun.
To achieve this, markets need to adapt by integrating renewable energies and attracting investment in flexible, fossil-free technologies like demand side response and energy storage, which can complement variable energy production. Additionally, markets should provide incentives for consumers to play a more active role in maintaining electricity system stability.
The EU electricity market must be transparent and efficiently monitored to ensure fair competition and prevent market abuse and manipulation. In response to high and volatile energy prices and security of supply concerns in 2022, EU leaders urged the Commission to swiftly reform the electricity market to secure energy sovereignty and achieve climate neutrality.
The EU expects the share of electricity from renewable sources, mainly solar and wind, to grow from 37% in 2020 to over 60% by 2030. However, electricity must still be reliably produced and delivered during periods without wind or sun.
To achieve this, markets need to adapt by integrating renewable energies and attracting investment in flexible, fossil-free technologies like demand side response and energy storage, which can complement variable energy production. Additionally, markets should provide incentives for consumers to play a more active role in maintaining electricity system stability.
The EU electricity market must be transparent and efficiently monitored to ensure fair competition and prevent market abuse and manipulation. In response to high and volatile energy prices and security of supply concerns in 2022, EU leaders urged the Commission to swiftly reform the electricity market to secure energy sovereignty and achieve climate neutrality.
Reform of the energy market design and REMIT
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On 14 March 2023, the European Commission presented a Proposal for a Relulation COM(2023) 148 final to Improve the Union’s electricity market design, by revising:
The European Parliament and Council reached an agreement and confirmed by a vote in April/May 2024. Hungary voted against on the Directive. |
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Key Aspects of the Reforms
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Clean energy for all Europeans package
In 2019, as part of the 'Clean Energy for All Europeans' package, the EU adopted four pieces of legislation to adapt its market rules to new realities:
- Directive on Electricity:
- Directive EU/2019/944 establishes common rules for the internal market for electricity, placing consumers at the center of the clean energy transition. It enables active participation and provides a robust framework for consumer protection.
- Regulation on Electricity:
- Regulation EU/2019/943 governs the internal market for electricity, ensuring electricity can move freely to where it is most needed. This facilitates cross-border trade and competition, benefiting society.
- Regulation on Risk Preparedness:
- This regulation focuses on preparing for and managing risks in the electricity sector to ensure a stable and secure energy supply.
- Regulation on the Agency for the Cooperation of Energy Regulators (ACER):
- This regulation strengthens the role of ACER, enhancing cooperation among national energy regulators and ensuring the smooth functioning of the internal energy market.
Key Benefits
- Consumer Empowerment: The legislation prioritizes consumer involvement and protection, enabling them to actively participate in the energy market.
- Flexibility and Renewable Integration: The rules support the European Green Deal by providing the necessary flexibility to integrate a higher share of renewable energy into the grid.
- Economic Growth: By fostering cross-border trade and competition, these rules contribute to the creation of green jobs and economic growth.
Regulation on risk preparedness in the electricity sector
The Regulation EU/2019/941 on Risk Preparedness in the Electricity Sector mandates EU countries to develop plans to address potential future electricity crises. These plans must include tools for prevention, preparation, and management of such situations.
Background and Necessity
- Independent Report (May 2015): Highlighted that EU countries often focused on national contexts during crises, neglecting cross-border impacts, which sometimes worsened the crisis, undermined the market, and increased energy costs.
Key Requirements
- Crisis Scenario Identification: EU countries must use common methods to identify all potential electricity crisis scenarios at both national and regional levels.
- Risk Preparedness Plans: Plans must be based on identified scenarios and emphasize cooperation and coordination among EU countries, fostering a spirit of solidarity.
- Cross-Border Considerations: The regulation ensures that countries consider cross-border impacts in their planning to avoid exacerbating crises.
- Monitoring Framework: Establishes a systematic approach for monitoring security of supply issues through the Electricity Coordination Group.
The Agency for the Cooperation of Energy Regulators (ACER)
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First established in 2009 under Regulation 713/2009 and further strengthened by Regulation (EU) 2019/942, the Agency for the Cooperation of Energy Regulators (ACER) is an independent body that promotes the integration and completion of the European internal energy market for electricity and natural gas.
Key Responsibilities of ACER
- Coordination of National Regulators: Facilitates the coordination of actions among national energy regulators at the European level, including making binding decisions when national regulators cannot agree.
- Development of Common Rules: Works on creating common network and market rules.
- Participation in Initiatives: Engages in regional and cross-regional initiatives to enhance energy market integration.
- Market Monitoring: Supervises market activities to combat market manipulation and protect market participants and consumers.
- Advisory Role: Provides advice to EU Institutions on matters such as trans-European energy infrastructure development and security of supply.
Decision-Making Process
- ACER’s Director: Adopts decisions, recommendations, and opinions.
- National Regulators’ Involvement: National regulators are involved through ACER’s working groups, and significant decisions require the approval of two-thirds of national regulators in ACER’s Board of Regulators.
REMIT Regulation
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The Wholesale Energy Market Integrity and Transparency (REMIT) Regulation EU/1227/2011 ensures the integrity of electricity and natural gas markets, promoting fair and competitive prices based on supply and demand, and preventing profits from market abuse. Key Aspects of REMIT
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Reporting and Monitoring
Enforcement and Coordination
- Transaction Reporting: Market participants must report all wholesale energy market transactions to ACER.
- Data Collection and Monitoring: ACER is responsible for collecting and monitoring all relevant trading data in the European wholesale energy markets (electricity and natural gas).
Enforcement and Coordination
- Enforcement Decisions: The relevant regulatory authority is responsible for making the final enforcement decision when a REMIT breach is identified.
- ACER’s Role: ACER coordinates the follow-up of potential REMIT breaches to ensure consistent decisions across Europe.
- Collaboration: ACER works closely with the European Securities and Market Authority (ESMA) and other financial, competition, and relevant authorities.
Energy pricing models
The EU electricity market consists of various players in the supply chain, including producers, suppliers, and end-consumers. The market operates on a system of marginal pricing, also known as a pay-as-clear market.
How Marginal Pricing Works
- Uniform Pricing: All electricity generators receive the same price for the power they sell at any given moment.
- Bidding Process: Electricity producers bid into the market based on their production costs. Renewable energy, having zero production cost, is always the cheapest and is bid first.
- Demand Fulfillment: The market buys electricity from the cheapest sources first, continuing until demand is met. The price is set by the last producer whose electricity was needed to meet total demand.
Advantages of Marginal Pricing
- Efficiency: Ensures that the cheapest electricity is used first.
- Transparency: Provides clear insights into the true costs of energy.
- Cost Incentives: Encourages producers to keep their costs low.
- Consumer Benefits: Offers a transparent model that can incentivize individuals to generate their own electricity.
Comparison with Pay-As-Bid Model
- In a pay-as-bid system, producers would bid at the price they expect the market to clear, which wouldn't necessarily result in cheaper prices.
Consensus
- The marginal pricing model is widely considered the most efficient for liberalized electricity markets and was already in use in most EU countries before being formalized in EU legislation.
