Reform of European electricity market does not change price-setting system | Energy

The European Commission’s proposal to reform the functioning of the European electricity market introduces some changes aimed at increasing consumer choice and protecting them from higher prices, but leaves the pricing model unchanged.

Brussels does not intend to tamper with the current model based on “merits”, in which the final price of electricity on the wholesale market is determined by the cost of the most expensive technology used to produce the electricity needed to satisfy demand at any given time.

“This is the basis of functioning of the raw material markets and our market economy”, explained a European source, adding that in the evaluation of other possible systems, such as through the establishment of average prices, it was concluded that “there is no produced better results”.

“Average pricing models are not transparent, lead to greater speculation in the market and do not guarantee production capacity”, justified the same source, saying that the Commission’s decision was to “build its proposal on top of the elements of the market that work, improving them”, but without changing its base. “It is still a structural change”, he defended.

“Any system change would take between five and ten years to implement and that was another consideration”, added the same source, stressing that maintaining the current short-term market operating model is the only way to ensure the production and distribution of electricity to where it is needed in the EU.

In designing its reform proposal, the Commission took into account the responses of the Member States which, “by a large majority”, expressed their support for preserving the order of merit in price setting and for the functioning of the short-term market, although complemented with new solutions that guarantee long-term stability to encourage investment.

The Commission wants to bring down production costs, namely by improving the competitiveness of European industry and promoting renewable energies (which have lower prices); and also protect consumers from market volatility and high electricity prices by offering them more choice in terms of supplier contracts.

Thus, distribution companies may be obliged to offer contracts with dynamic, variable or fixed prices, which consumers will be able to choose according to their circumstances. For example, a fixed price contract for the consumption of household appliances, and a variable price contract for powering heat pumps and/or charging car batteries, which can be done overnight, for lower prices.

Despite the recommendation of a majority of Member States for the end of exceptional measures for electricity, Brussels added a provision in the sense of facilitating state intervention for the regulation of tariffs in a crisis situation — which would be declared by Brussels in accordance with certain criteria. In that case, the Member States will be able to freeze retail market prices for a period of one year (which was, moreover, what many governments did last summer, with the setting of regulated tariffs).

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