Finalising the EU’s electricity market redesign for the benefit of small consumers

A reform of the European electricity market is needed to give small consumers access to continuous, more affordable energy that is as carbon-free as possible. The introduction, for example, of a mechanism that removes from the mix carbon-free power plants that are too costly, will help reduce prices for customers, writes Thierry Bros.

Thierry Bros is an energy and climate expert. He is Professor at Sciences Po university in Paris and a regular contributor to Natural Gas World.

After the 17 October Council agreement and before final details are ironed out, it is worth thinking on how to implement the reform for the benefit of small consumers. As electricity market design partly failed due to too little innovation in the last 20 years, the mechanism needs also to be “innovation-fostering”.

Small consumers are not interested in spending time and effort in understanding the electricity system and their bills; they want a continuous secured supply of electricity as decarbonised as possible and as affordable as possible. Decarbonised electricity should therefore continue to have priority access to the grid but the rules should evolve to benefit customers and avoid rent-seeking situations.

Each intermittent renewable (wind, solar) and baseload decarbonised (run-of-river hydro, nuclear) plants could either decide to provide electricity on demand at market price or, more likely, apply to priority access to the grid with long-term contracts (Power Purchase Agreements, concluded between a large industrial consumer and a producer of decarbonised electricity, and fixed price) as agreed by the Council.

Once all fixed prices long-term contracts are disclosed, the grid operator will set priority access ranking with the lowest cost first (also called the concept of a merit order curve in competitive markets). To balance the market, each transmission system operator will call on-demand other national plants available (decarbonised plants with no PPA or fixed contracts, dam, gas, coal and battery) or call on imports at market price (including CO2 prices if non-green).

If a decarbonised plant with a fixed price contract can produce and the grid is, for technical reasons, unable to transport it will continue to get paid, as it is the case today. But if overall demand is too low and less costly fixed price decarbonised electrons can fully meet demand, the too-expensive decarbonised producer will not be able to inject on the grid and will not be paid.

For example, when in summer, market prices are negative because of too much renewable electricity it is unfair to charge small customers not only for the agreed fixed price electricity produced and needed but also for the fixed price electricity not needed. This mechanism will allow too expensive decarbonised plants to be removed from the mix, reducing prices for customer.

To kick start fierce competition, all producers with long-term fixed price contracts will have the ability to reduce their proposed fixed price each year to improve their priority ranking access to the grid for the benefit of consumers. This will always guarantee competition on the decarbonised part of the supply.

This mechanism puts in competition all decarbonised production as consumers’ interest is limited to paying as little as possible and to avoid continuing to pay for decarbonised electricity not injected on the grid, that should otherwise balloon in years to come with more and more projects coming on-line.

No technology/company should extract an undue long-term revenue from the state. If a cheaper decarbonised producer can materialise, it will change the overall merit order curve for its benefit.

The too expensive decarbonised producer will face the risk of being unable to monetise its unneeded electricity; to avoid its plant becoming stranded it could either offer a lower fixed price contract or decide to sell its production via PPAs to large industrials or on demand at market price at his own risks.

This mechanism is not only technologically neutral as it puts all decarbonised production on the same level playing field but also, more importantly, “innovation-fostering” as it will push all decarbonised suppliers to implement low-cost solutions.

This article draws from a non-paper published on 28 March by the Jacques Delors Institute – Notre Europe think-tank and authored by Thierry Bros and Jean-Arnold Vinois.