The European Commission has moved forward with a September reform plan for the electricity market, following a year and a half of insistence from Spain. The aim is to reduce reliance on gas prices and steer the system toward electricity-driven resilience to prevent a replay of the current crisis. The proposal, unveiled last week, introduces regulatory changes rather than merely offering ideas or broad recommendations for member states to implement on their own.
The core strategy pushes for more bilateral deals between producers and consumers—the so-called PPAs (power purchase agreements). It addresses several hurdles. Spain, a European leader in this area, finds that although these long-term contracts can help stabilize energy costs, they currently cover only a small share of total production. A key concern is the risk placed on buyers to secure energy for many years, such as a 20-year horizon. The plan envisions the state stepping in to shoulder this risk through public guarantees.
Spain has already created the FERGEI fund, set up in 2020 within the framework of its regulation of energy-intensive industries. The program envisions annual support of 200 million euros, potentially rising to 600 million euros to assist large energy users. Yet, according to the Ministry of Industry, Trade and Tourism, no formal guarantee has been issued yet. Officials note that volatility in energy prices since Russia’s invasion of Ukraine has hindered long-term price fixing for PPA agreements. Negotiations around leveraging the fund continue, with major players such as the Large Energy Consumption Companies Association (AEGE) pursuing large renewable tenders under these guarantees.
Another focal point is promotion of auctions for difference—a mechanism that sets a regulated price for a defined energy quantity and settles the difference with the state if market prices rise, or compensates the promoter if prices fall. Spain participates in this system, which spans nine European countries and includes a calendar of auctions through 2025. The effect on the market is a tension: companies with high daily market prices may delay investments, hoping for more favorable terms in the future.
without touching the market
In his Spain-Portugal summit remarks, the Portuguese prime minister urged ending the rule that fixes electricity prices based on the most expensive generation source and averages across the portfolio. He also suggested reducing daily market volume while promoting renewable tenders and prioritizing nuclear and hydro sources. The European Commission, however, rejected this approach, arguing it could scare off new investments.
Economics experts point out that a factory earning around 50 euros per megawatt-hour in recent years might see 100 euros now, a shift that reflects structural changes in energy pricing. Yet some see positive elements in resilience, responsiveness, and storage as crucial for reducing dependence on gas as large renewable energy inputs grow.
As observed by AFRY’s senior advisor, capacity payments—used to ensure energy can be supplied when needed—illustrate the need for tools that address market failures. The new EU stance opens room for government-designed mechanisms to incentivize storage and better integrate renewables in line with Spain’s objectives, while simplifying procedures to reduce reliance on government aid.
Details
The editor of Fenie Energía notes that the European Commission has focused on the marginal futures market rather than daily prices, arguing that the proposed framework could create new tensions by forcing marketers serving large customer bases to hedge themselves and bid fixed prices for a minimum 12 months. The idea of government guarantees remains broad, and industry participants emphasize the need to see concrete risk-sharing terms before proceeding.
Representatives from AEGE stress that one of the most beneficial measures would be the ability to choose among multiple energy suppliers. They recall past experiences and stress the importance of long-term PPAs and preferential grid access for renewables tied to consumer contracts. Consulting insights from Mazars highlight that regulation remains uncertain pending state-level decisions, making the outcome dependent on political will and the final shape of national implementations.
discussion
Spain’s response to Brussels’ proposal has been cautious, with officials signaling months of negotiations ahead. At a recent industry forum, regulators urged stakeholders to submit input ahead of the next high-stakes Energy Council meeting. The two sides have signaled a shared objective to reform the market in the second half of 2023, aiming for reforms that could be ready before the European elections in mid-2024, though observers acknowledge that major changes are unlikely in the near term. The discussion continues to revolve around how to balance price stability with investment incentives while ensuring a robust transition to renewable energy sources. (Attribution: European Commission policy brief and industry analyses, 2024)