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Electricity Market Design Reform
After Russia’s invasion of Ukraine caused severe volatility and spikes in the EU’s energy prices in 2022, it became clear that the European electricity market, as has been drawn up in the previous decades, has to be redesigned. In March 2023, the Commission presented its proposal on the redesign, which was adopted by the co-legislators in December 2023. As part of the package, the revision of the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) was also adopted in March 2024.
The updated EMD concerned a large scope of regulatory elements, aiming to decouple the electricity market from volatile fossil fuel prices in order to make electricity more affordable to consumers, increase security of supply and enhance the roll-out of Renewable Energy Sources.
Under the premises of ensuring an enhanced security of supply, the reform not only includes Indicative National Flexibility targets across different timeframes, but also introduces non-fossil Flexibility Support Schemes to ensure the financial stability and adequate investment signals to flexibility services.
The new EMD gives the possibility to Member States to exclusively support renewable power purchase agreements (PPAs) insofar as they are compliant with the Member States decarbonisation plans and conditions allow it. On this, the ACER is tasked to give an assessment on the PPA market and the creation of standardised PPAs contracts to streamline PPAs creation, as well as a demand aggregation for PPAs in order to make them more accessible to energy demand and SMEs. The new EMD also gives a more structural position to capacity mechanisms and introduces them as no longer an “emergency measure” but as an optional and reliable way to increase Security of Supply. The reform lays out the conditions under which an energy crisis can be declared by the Council. This would allow Member States to reduce electricity prices for vulnerable and disadvantaged customers and introduce measures to avoid undue distortion and fragmentation. Additionally, it includes mandatory regulated last-resort tariffs to tackle energy poverty in Europe that expands also to SMEs.
One of the more prominent aspects of the EMD redesign is the introduction of two-way contract of difference or equivalent schemes, which will apply to new power-generating facilities based on wind/PV/geothermal, hydropower without reservoir and nuclear energy. These schemes can come into force after three years, while the revenues generated will be redistributed towards final consumers.
What’s in it for hydrogen?
The reformed EMD lays the groundwork for the decarbonisation, financial stability, and support of the massive roll-out of RES which consequently enables the availability of abundant clean energy sources to produce clean hydrogen. This is further accelerated by the new EMD’s flexibility measures that establish national objectives for flexibility based on the needs across different timeframes (short term, monthly and seasonal). Here, dispatchable clean hydrogen presents itself as the predominant solution for seasonal flexibility - and with locational criteria – enabling better congestion management, for instance done by electrolysis, as well as an assessment of the overall flexibility needs at EU’s level. Potentially this will be followed by a strategy on flexibility carried out by the Commission. The new EMD also includes new non-fossil flexibility schemes to support energy storage technologies and demand response tools which will provide investment signals and financial support to Hydrogen to power facilities. Further, the new EMD also aims to transform capacity mechanisms into a more structural element of the Electricity Market and eliminate their last-resort nature, allowing hydrogen to participate in these markets. These mechanisms could play an essential role in supporting hydrogen use in power plants likely to provide capacity services when the variable renewables are scarce, unable to satisfy demand (in Dunkelflaute events for instance).
The new EMD sets the EU on a path to a more integrated energy system, where the interplay between renewable sources and hydrogen will be key to ensure sustainable, reliant, and affordable energy for European industry and its citizens. The inclusion of flexibility targets and the promotion of non-fossil flexibility support schemes in the new market design can help the decarbonisation and security of supply of the energy system. Indeed, hydrogen’s ability to provide essential flexibility, long-duration storage at scale and security of supply services in the power sector are pivotal in the transition to a system dominated by renewable energy.
Links to legislation and further reading
Proposal for Regulation to improve the Union’s electricity market design
Text of provisional agreement, Regulation to improve the Union’s electricity market design
Proposal for Regulation on Wholesale energy Market Integrity and Transparency (REMIT)
