The electric market reform agreed upon by the European Parliament and the Council of the European Union late last year has just received the Parliament’s final backing, even as wholesale power prices in Spain sag. It marks a paradox: a change urged by Spain itself after electricity costs surged dramatically from mid-2021, designed to shield consumers from price volatility while accelerating the deployment of renewable energy sources.
The rule, built as a regulation and a directive, won broad approval in the chamber (433 in favor, 140 against, 15 abstentions and 473 in favor, 80 against, 27 abstentions, respectively), yet still requires formal backing from the Council to become law.
The text does not alter the marginal pricing model, where the most expensive technology (gas, as it stands) remains the reference, though it opens the door to revisiting the framework within three years. The marginal system was designed to spur renewable growth at a time when energy systems were dominated by fossil fuels, ensuring every technology received payment at the price of the most expensive one, lest renewables be left unfunded because they are cheap.
In a system where renewables dominate (Spain produced more than half of its output last year from this source), the marginal logic loses relevance. It is possible that a new reform will be needed as renewables spread across Europe or if price scenarios similar to recent weeks in Spain recur, with many hours priced at zero or even negative values.
The main shift aims to boost the use of forward markets to increase liquidity. This is the approach chosen to curb price volatility and it relies on two instruments: power purchase agreements (PPAs), signed between generators and consumers, and the so‑called contracts for differences (CFDs). CFDs are contracts between energy producers and a government to support investments in power generation: when market prices fall below the contract price, the government supplements the shortfall so the producer does not lose; if market prices rise above the contract, the producer repays part of the gain to the government to prevent excessive profits. In this way, higher prices can generate government revenue that can be redistributed later.
The reform will allow CFDs for all new electricity production projects, whether based on renewables or nuclear. This was a major sticking point during negotiations that stretched from March to December of the previous year, marked by disagreements between France, favoring its nuclear plants, and Germany, aiming to shield its industry from penalties. Ultimately, Spain’s stance prevailed in pushing CFDs for existing technologies such as nuclear and hydro, though opponents within companies and the European Commission resisted.
The future electricity market law includes stronger protections for consumers, guaranteeing access to fixed-price contracts or dynamic-price contracts, and providing essential information about available options. It will prevent suppliers from unilaterally altering contract terms and supports EU-wide measures to prohibit disconnections to vulnerable customers even during supplier-customer disputes. It also sets up a mechanism to declare an electricity price crisis under specific conditions, so if prices spike again in a way similar to two years ago, authorities know where to start. Still, the reform does not promise that such a scenario will never happen again.
“The document includes measures to protect citizens, especially the most vulnerable, and to accelerate the deployment of renewable energy sources. The Parliament has taken a step toward energy democratization, shaping a market design that addresses the failures exposed by the energy crisis. All consumers, including micro, small, and medium-sized enterprises, will have access to stable, affordable, long-term prices,” argued the Spanish MEP, who was the primary advocate for the reform in the European Parliament. The European Commission’s third vice-president and minister for the Ecological Transition and the Demographic Challenge affirmed that the agreement signals a real commitment from European institutions to consumers during potential emergencies, according to sources reporting on the matter.