Time to restore stability to Europe's electricity market

It has been a tumultuous time for the European electricity market after the energy crisis sparked a flurry of market interventions. However, the time has come to coordinate and harmonise efforts to restore regulatory stability and investor confidence.

This was the sentiment shared by Maria Popova, Director for Carbon Neutrality and Renewable Electricity at the European Federation of Energy Traders (EFET), in a discussion with Enlit Content Director, Patrick Bauduin.

Popova weighed in on the European Commission's recently published proposal for electricity market design reforms and considered the possible implications for the energy system. 

Some parts of the proposal require greater ambition, said Popova. However, for the most part, she believes the proposal does a great deal to restore confidence by improving market functioning, accelerating decarbonisation efforts and protecting consumers.

"I see a clearer direction in the proposal compared to the consultation document," said Popova, adding that relief was provided around the possibility to make revenue caps a permanent feature and the possibility to extend CfDs.

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Targeted evolution of the electricity market

Popova suggested that the proposal supports a targeted evolution of the electricity market design rather than revolutionary changes, which is positive.

She emphasised several aspects of the proposal that drive these evolutionary changes, specifically in terms of boosting renewables and flexibility.

"The proposal incentivises longer-term contracting to create a buffer between short-term markets and electricity bills and also aims to improve the functioning of short-term markets to better integrate renewables, it presents an enhanced role for flexibility and also empowers and protects consumers. These are important elements."

According to Popova, the proposal addresses the key barriers to the growth of Power Purchase Agreements (PPAs), namely, the credit risk associated with smaller buyers. Member states are now required to ensure credit guarantees for offtakers that are struggling to access the PPA market, she said.

Regarding spot markets and targeted improvements, Popova suggests "this will be helpful as it tries to facilitate trading in the intraday time frame, which is critical for renewable energy producers". Related to this is the proposal's emphasis on flexibility and the growth of flexible carbon-free assets which are needed to balance the system with more intermittent renewables.

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"In this instance, I think flexibility assessments will be key, flexibility is not just about short-term intermittency, but also longer periods of low output..."

In order to drive renewables uptake regulatory stability is required, something that the market design provides, said Popova. And this, in turn, provides confidence for investors.

Room for improvement

Popova explained that one aspect requiring further attention concerns the flexibility aspects of the proposal. "It's driven from a system operator perspective, through capacity or flexibility mechanisms, but I think the important market-based mechanisms need to be explored further.

"That would include removing barriers to the participation of demand-side flexibility in different market timeframes and also exploring possibilities for longer-term PPAs".

Popova also referred to new elements introduced in the proposal, such as proposed virtual hubs for forward trading or peak shaving services. "These proposals don't seem to have a significant empirical backing and could have a negative effect on market functioning, on forward hedging or the competitive development of demand response."

"I am concerned that [virtual hubs] could make hedging on behalf of consumers less efficient and more costly."

"Thinking you could create liquidity out of thin air in virtual hubs that are not backed by economic fundamentals is quite a bet and I think we can see that it failed in the Nordic area in the past decade."

Empowering consumers

When asked if the market can empower consumers, Popova answered, "I think that it can and I think that consumers have an important role to play in the future decarbonised energy system..." Through behavioural change, consumers can help reduce demand requirements. To this end, the market does provide important demand reduction signals, she added.

Popova explained that consumers can also participate by providing flexibility and prosumers can benefit from distributed assets and selling electricity back to the grid.

And while the proposal does make important advancements in these areas, in order to maximise consumer empowerment, Popova recommended more transparency and information concerning consumption, costs, tariffs and options for more engagement.

In response to the energy crisis there have been numerous, diverse short-term market interventions over the past year across Europe, said Popova, having a significant impact on market liquidy and investor confidence.

Ultimately, the Commission's proposal offers greater harmonisation, mechanisms that improve hedging and build a more resilient energy system focusing on renewables and flexibility. According to Popova, this will safeguard Europe against future external shocks.

Listen to the Energy Transitions podcast episode for more about the electricity market reforms in Europe.