Published May 3, 2023 | 4 min read
An orthodox electricity market reform
RBC Capital Markets’ Equity Research Team believes the recently published EU electricity market proposal by the European Commission reduces regulatory risk for the sector and enables the intended acceleration of renewables. Although all the various electricity subsectors are positively impacted by this reform, RBC sees networks and batteries as key enablers of the EU energy transition. RBC discussed the potential impact of the reform with NEMO's chairman Rafael Gómez-Elvira, who is quite positive about the European Commission pro-market proposal.
Focus on accelerating renewables
The European Commission’s EU electricity recently issued market reform proposal aims to enhance the stability of energy costs and support the green energy transition by increasing access to affordable renewable electricity and increasing flexibility. The proposal includes obligations to integrate renewables into the system and enhance generation predictability. It will also enable system operators to procure demand reduction at peak hours.
Supporting longer-term contracts with non-fossil power production
The proposal also includes plans to increase the number of long-term contracts such as Power Purchase Agreements (PPAs) to reduce price volatility and make electricity bills less dependent on the price of fossil fuels. Using PPAs enables companies to establish their own direct energy supplies and benefit from more stable prices of renewable production. The reform aims to address the credit risk of buyers by obliging member states to ensure the availability of market-based guarantees. All public support for new investments in infra-marginal and must-run renewable and non-fossil electricity generation will have to be in the form of two-way Contracts for Difference (CDs). The reform also aims to boost liquidity for forward contracts to allow protection against volatile prices over longer periods of time.
More choice for consumers
RBC thinks this will provide consumers with many benefits: a wider choice of contracts; clearer information before signing contracts; the possibility to lock-in long-term prices to avoid volatility and excessive risks; the option to choose dynamic pricing contracts to use price variability; use electricity when it’s cheaper, such as when using heat pumps or charging electric cars; when producing rooftop solar electricity, they will be able to sell excess electricity to neighbours, rather than just their supplier.
The NEMO’s perspective
Across Europe, 17 operational Nominated Electricity Market Operators (NEMOs) have been designated by EU member states and manage the day-ahead and intraday electricity markets. Based on a conversation with Rafael Gómez-Elvira, NEMO’s chairman and the Director of Public Affairs and Marketing at OMIE, the NEMO for the Iberian Peninsula, RBC thinks this reform looks like the right direction for all the utilities subsectors (generators and particularly renewable developers and networks) as it provides hedging and long term structured contracts which should limit exposure to price volatility, a key issue in Europe for suppliers, industries and final consumers. It also improves price information by moving to shorter interval wholesale prices. Overall, the proposal provides consumers with more flexibility, such as the possibility to have multiple suppliers for a single premise.
