The European Commission is finalizing a reform proposal aimed at reshaping how electricity prices are set across the European Union. The goal is to curb the excessive influence of gas on electricity prices and to adapt the market to the realities of a continent still recovering from the energy crisis triggered by the war in Ukraine, while expanding the role of renewable energy. If there are no last minute changes, the plan to be presented in the next step on March 16 seeks to ensure fixed prices protect consumers while mitigating the volatility that has magnified bills. The intention is to keep a focus on long term, stable contracts that help European industry stay competitive, without abandoning the marginal pricing model because it provides important price signals.
The reflection centers on the impact of short term price movements on consumer bills and the energy price crisis. Many households have seen energy costs triple or quadruple even as wind and solar costs decline. The proposal therefore includes measures to create a buffer between short term markets and consumer bills, according to a draft from the Commission. Brussels is pushing for long term contracts, better integration of renewables into short term markets, and stronger protections for consumers.
The proposal to improve protection around fixed prices, multiple contracts, and clearer information states that consumers should always have the option to choose an affordable fixed price contract and that providers should not unilaterally change terms before a contract expires. This would let risk averse households lock in safe prices over the long term, while still allowing those who want to benefit from price dips to engage in dynamic price contracts with providers.
Adjusted prices in crisis
Brussels also envisions protections for domestic consumers and small and medium sized enterprises through regulated retail prices during crises, and seeks to stabilize the sector by asking suppliers to do more to guard against price spikes. The plan would encourage greater use of forward contracts with generators and would consider providing a last resort framework for suppliers. It also promotes empowering consumers to share renewable energy directly, such as through self consumption, without needing to form formal energy communities. Sharing more solar energy, for instance, could improve access to low cost renewables for households that would otherwise lack such options.
Regarding measures to bolster European industry competitiveness while shielded from price volatility, Brussels aims for a stable framework and longer term contracts. Currently, long term private energy purchase contracts between a generator and a consumer are mainly available to large users in only a few member states. The Commission sees this as an obstacle and proposes using instruments such as government guarantees to cover risks. To further encourage these agreements, it also recommends allowing a reserved portion of renewable energy projects in public auctions to be allocated through purchase agreements.
The draft proposal remains to be approved by the College of Commissioners and could still change. It also examines contracts for difference, where governments guarantee a minimum and maximum fixed price to investors in low carbon energy projects, with the cap potentially adjusted. It also considers new investments in renewable energy sources such as wind, solar, geothermal, and hydro, while nuclear energy is discussed in the context of varying member state approaches.
By strengthening the long term contract markets, the Commission hopes to meet one of its reform objectives: boost renewable energy investments as a path to reducing fossil fuel use. Electricity purchase agreements and differential agreements would offer consumers price stability and provide renewable energy suppliers with predictable income, lowering financial risk and reducing capital costs. A so called virtuous cycle is envisioned to help lower costs and increase demand for renewables. The proposal also suggests creating demand management mechanisms to charge certain consumers at peak times so electricity use aligns with supply. Member states would be asked to assess energy needs, improve power system flexibility, and set targets to meet them while offering new options for flexibility support systems. (Attribution: European Commission)