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2023-09-04
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Electricity market design

FIT FOR NET ZERO

Eurelectric policy recommendations

Knowledge Partner

Subtitle

Authors

Executive Summary

The transition towards a net-zero economy by 2050 requires stepping up the volume of investment

across the energy sector and end use sectors, while ensuring better engagement and protection

opportunities for consumers. This study aims to address these challenges and contribute to the

ongoing debate about electricity market design to make it fit for the energy transition.

The energy crisis triggered by the conflict in Ukraine has demonstrated the resilience and benefits

of an integrated European market. Yet, the crisis has also highlighted some of the gaps in the current

market design and the need to pass on the benefits of renewables’ and other low-carbon

technologies’ stable generation costs more directly to consumers.

In this report, we present an analysis of the key gaps in the current market design with

recommendations to complete the set of existing markets to support an efficient transition toward

net zero over the next decades. The market design reform will need to preserve the cost-efficiency

and national and cross-border competition delivered by the internal EU energy market by building

on the current market framework.

Policy recommendations put forward in this report focus (i) on the proper implementation of

existing EU legislations and regulations, (ii) on the removal of barriers and obstacles and (iii) on

market-based solutions to reinforce incentives for stakeholders to contribute to the challenges

faced by the power system and to achieve the transition towards a net-zero economy. These

recommendations were carefully defined to foster consumer engagement, maintain the efficiency of

price signals, and improve transparency, liquidity and competition for all timeframes. On the contrary,

measures that would be detrimental to these objectives would be counterproductive and should be

avoided.

To reach these recommendations, the study started in June 2022 and has followed a structured and

interactive approach to analyse the key gaps in the current market design, and to identify potential

solutions. The study is built upon many interactions with Eurelectric’s members as well as external

stakeholders.

These policy recommendations are structured in three main pillars: (i) a consumer contracting and

engagement framework based on enhanced forward hedging opportunities and retail price

structures, (ii) an investment framework underpinned by enhanced long-term hedging/contracting

opportunities, and (iii) a framework to coordinate the future system needs to meet security of supply

and policy objectives.

An enhanced customer contracting framework – enabling sufficient possibilities for generators,

customers, and suppliers to hedge and contract, including over the long-term – would bring the

benefits of renewable energy sources (RES) and low-carbon generation more directly to consumers,

while still providing efficient short-term signals fostering active demand participation in short-term

markets. This enhanced hedging framework will be required to:

1. Guarantee adequate information for consumers and sensibilisation to risks so they may commit

for longer periods;

2. Ensure suppliers’ resilience to avoid rapid, unexpected market exits and consumers losing their

suppliers unexpectedly;

3. Enhance hedging opportunities to protect consumers against medium-/long-term price volatility

(beyond one year); and

4. Empower consumers further and facilitate demand-side response.

A market-based investment framework is necessary to step up deployment of both renewables

and low-carbon technologies, as well as firm and flexible resources (including demand-side

response and storage), and the supporting network infrastructure. The framework for RES and low-

carbon investment should allow investors to choose or combine whether to enter public de-risking

contracts, to enter private power purchase agreements (PPAs) or other forms of private contracts,

or to participate in the electricity market directly. The investment framework should provide revenue

stabilisation opportunities though long-term contracts to foster investment and reduce financing

costs while preserving effective incentives to participate in the forward, spot, and balancing markets.

Different types of measures identified to enhance long-term contracting include:

1. A role for capacity mechanisms as a core part of the market design to ensure adequacy and

security of supply, and facilitating their implementation for Member States that would opt for

such mechanism;

2. A private framework for RES and low carbon contracting, usually referred to as PPAs, which would

aim at removing barriers to PPAs and improving transparency and standardisation, and potentially

reduce counterparty risks and actively drive demand if Members States elect to provide active

support;

3. A public framework for RES and low-carbon investment with the evolution of RES support

schemes toward de-risking schemes that should be designed to bring the benefits of long-

term contracting to consumers and to minimise distortions in the market; and

4. Facilitating hedging through the improvement of forward markets by e.g., removing barriers to

hedging on forward markets.

Last, an enhanced framework to coordinate the identification of the future system needs is required

for the timely development of sources of flexible and firm power, as well as key networks and

infrastructures alongside the growth of clean technologies. New opportunities will emerge, both on

the supply side with new storage technologies, and on the demand side with new flexible loads from

the electrification of the transport, industry, and buildings sectors. An enhanced framework for

assessing, in a forward-looking and in a holistic way, the evolution of system needs is therefore

necessary to provide visibility for market participants and network operators, by:

1. Expanding the scope of system needs assessment to have a ‘whole system’ perspective, to

include wider system needs (network, firm capacity, flexibility), cross-sector assessments and for

a longer timeframe, such as 2040 and 2050;

2. Improving the current methodologies used in system needs assessment, to better adapt to a

changing energy system; and

3. Reviewing the governance arrangements to conduct the system needs assessment, accounting

for cross-sector, distribution level, stakeholder inputs.

/39

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ElectricitymarketdesignFITFORNETZEROEurelectricpolicyrecommendationsKnowledgePartner1SubtitleAuthorsExecutiveSummaryThetransitiontowardsanet-zeroeconomyby2050requiressteppingupthevolumeofinvestmentacrosstheenergysectorandendusesectors,whileensuringbetterengagementandprotectionopportunitiesforconsumers.Thisstudyaimstoaddressthesechallengesandcontributetotheongoingdebateaboutelectricitymarketdesigntomakeitfitfortheenergytransition.TheenergycrisistriggeredbytheconflictinUkrainehasdemonstratedtheresilienceandbenefitsofanintegratedEuropeanmarket.Yet,thecrisishasalsohighlightedsomeofthegapsinthecurrentmarketdesignandtheneedtopassonthebenefitsofrenewables’andotherlow-carbontechnologies’stablegenerationcostsmoredirectlytoconsumers.Inthisreport,wepresentananalysisofthekeygapsinthecurrentmarketdesignwithrecommendationstocompletethesetofexistingmarketstosupportanefficienttransitiontowardnetzerooverthenextdecades.Themarketdesignreformwillneedtopreservethecost-efficiencyandnationalandcross-bordercompetitiondeliveredbytheinternalEUenergymarketbybuildingonthecurrentmarketframework.Policyrecommendationsputforwardinthisreportfocus(i)ontheproperimplementationofexistingEUlegislationsandregulations,(ii)ontheremovalofbarriersandobstaclesand(iii)onmarket-basedsolutionstoreinforceincentivesforstakeholderstocontributetothechallengesfacedbythepowersystemandtoachievethetransitiontowardsanet-zeroeconomy.Theserecommendationswerecarefullydefinedtofosterconsumerengagement,maintaintheefficiencyofpricesignals,andimprovetransparency,liquidityandcompetitionforalltimeframes.Onthecontrary,measuresthatwouldbedetrimentaltotheseobjectiveswouldbecounterproductiveandshouldbeavoided.Toreachtheserecommendations,thestudystartedinJune2022andhasfollowedastructuredandinteractiveapproachtoanalysethekeygapsinthecurrentmarketdesign,andtoidentifypotentialsolutions.ThestudyisbuiltuponmanyinteractionswithEurelectric’smembersaswellasexternalstakeholders.Thesepolicyrecommendationsarestructuredinthreemainpillars:(i)aconsumercontractingandengagementframeworkbasedonenhancedforwardhedgingopportunitiesandretailpricestructures,(ii)aninvestmentframeworkunderpinnedbyenhancedlong-termhedging/contractingopportunities,and(iii)aframeworktocoordinatethefuturesystemneedstomeetsecurityofsupplyandpolicyobjectives.Anenhancedcustomercontractingframework–enablingsufficientpossibilitiesforgenerators,customers,andsupplierstohedgeandcontract,includingoverthelong-term–wouldbringthebenefitsofrenewableenergysources(RES)andlow-carbongenerationmoredirectlytoconsumers,whilestillprovidingefficientshort-termsignalsfosteringactivedemandparticipationinshort-termmarkets.Thisenhancedhedgingframeworkwillberequiredto:21.Guaranteeadequateinformationforconsumersandsensibilisationtoriskssotheymaycommitforlongerperiods;2.Ensuresuppliers’resiliencetoavoidrapid,unexpectedmarketexitsandconsumerslosingtheirsuppliersunexpectedly;3.Enhancehedgingopportunitiestoprotectconsumersagainstmedium-/long-termpricevolatility(beyondoneyear);and4.Empowerconsumersfurtherandfacilitatedemand-sideresponse.Amarket-basedinvestmentframeworkisnecessarytostepupdeploymentofbothrenewablesandlow-carbontechnologies,aswellasfirmandflexibleresources(includingdemand-sideresponseandstorage),andthesupportingnetworkinfrastructure.TheframeworkforRESandlow-carboninvestmentshouldallowinvestorstochooseorcombinewhethertoenterpublicde-riskingcontracts,toenterprivatepowerpurchaseagreements(PPAs)orotherformsofprivatecontracts,ortoparticipateintheelectricitymarketdirectly.Theinvestmentframeworkshouldproviderevenuestabilisationopportunitiesthoughlong-termcontractstofosterinvestmentandreducefinancingcostswhilepreservingeffectiveincentivestoparticipateintheforward,spot,andbalancingmarkets.Differenttypesofmeasuresidentifiedtoenhancelong-termcontractinginclude:1.Aroleforcapacitymechanismsasacorepartofthemarketdesigntoensureadequacyandsecurityofsupply,andfacilitatingtheirimplementationforMemberStatesthatwouldoptforsuchmechanism;2.AprivateframeworkforRESandlowcarboncontracting,usuallyreferredtoasPPAs,whichwouldaimatremovingbarrierstoPPAsandimprovingtransparencyandstandardisation,andpotentiallyreducecounterpartyrisksandactivelydrivedemandifMembersStateselecttoprovideactivesupport;3.ApublicframeworkforRESandlow-carboninvestmentwiththeevolutionofRESsupportschemestowardde-riskingschemesthatshouldbedesignedtobringthebenefitsoflong-termcontractingtoconsumersandtominimisedistortionsinthemarket;and4.Facilitatinghedgingthroughtheimprovementofforwardmarketsbye.g.,removingbarrierstohedgingonforwardmarkets.Last,anenhancedframeworktocoordinatetheidentificationofthefuturesystemneedsisrequiredforthetimelydevelopmentofsourcesofflexibleandfirmpower,aswellaskeynetworksandinfrastructuresalongsidethegrowthofcleantechnologies.Newopportunitieswillemerge,bothonthesupplysidewithnewstoragetechnologies,andonthedemandsidewithnewflexibleloadsfromtheelectrificationofthetransport,industry,andbuildingssectors.Anenhancedframeworkforassessing,inaforward-lookingandinaholisticway,theevolutionofsystemneedsisthereforenecessarytoprovidevisibilityformarketparticipantsandnetworkoperators,by:1.Expandingthescopeofsystemneedsassessmenttohavea‘wholesystem’perspective,toincludewidersystemneeds(network,firmcapacity,flexibility),cross-sectorassessmentsandforalongertimeframe,suchas2040and2050;2.Improvingthecurrentmethodologiesusedinsystemneedsassessment,tobetteradapttoachangingenergysystem;and3.Reviewingthegovernancearrangementstoconductthesystemneedsassessment,accountingforcross-sector,distributionlevel,stakeholderinputs.3IntroductionEuropeanpowermarketshavegonethroughunprecedentedchallengesinthepastfewyearsduetotothegassupplyshortageassociatedwiththeRussianaggressionagainstUkraine.WhilstthecrisisdemonstratedtheresilienceandbenefitsofanintegratedEuropeanmarket,italsohighlightedsomeareasforpotentialimprovementsofmarketdesignandhasledsomepolicymakerstocallforareformoftheEuropeanelectricitymarket.TheconsultationlaunchedbytheEuropeanCommissionhasprovidedsomeinitialguidanceontheareasoffocustoreformEuropeanelectricitymarkets.ThestudyaimstocontributetotheEUpolicydebateonthereformoftheEuropeanelectricitymarkets.ThisstudyidentifieswaysinwhichcurrentEuropeanpowermarketscouldbecompletedwitharangeofadditionalmeasurestoaddresssomeofthechallengesandgapsidentified,anddeliverthepolicyobjectivesofdecarbonisation,whilstmaintainingsafeandaffordableenergysupply.Preambleonthestudyinteractionwiththeshort-term‘energycrisis’Asastartingpoint,itisessentialtorecallafewfundamentalpointsinrelationtothecurrentenergycrisisandkeyguidingprinciples.First,thecurrentmarketdesignisnottherootcauseofthehighelectricitypriceswitnessedin2022and2023inEurope.Onthecontrary,theintegratedEuropeanmarkethasdeliveredsignificantbenefitstoconsumers.Thecurrentenergypricecrisisistheresultofagassupplycrisisthatishavingmajorcontagioneffectsonelectricityprices,whilemostoftheinterventionsandmeasuresadoptedintheEUarefocusedontheelectricitymarket.However,theenergycrisishasrevealedtheneedtoprovidemoreinstrumentstopassonthebenefitsofrenewables’andotherlow-carbontechnologies’lowergenerationcostsmoredirectlytoconsumers.Thisinturnwillrequireagreaterroleinthemarketforlong-termhedginginstrumentsandcontracts.Renewableandlow-carbonenergysourcescanofferenergyatrelativelylowandstablecosts.However,theirpotentialadvantagesforthecustomersmaynotalwaysbevisibleintheconsumers’billsduetotheinfluenceofshort-termpricesignalsonforwardprices.Asaresult,mostcustomersdonotperceivethefullbenefitofrenewableandlow-carbonenergysources,andthishasledtopolicyinterventionssuchasinframarginalpricecaps.Inparallel,thedevelopmentofvariablerenewableenergysourcesalsocreateschallengesregardingtheoperationofthepowersystemandthesecurityofsupply.Inparticular,potentialreformsofthemarketdesignshouldnothamperrecentregulatoryandmarketdevelopmentstofosterflexibilityanddemand-sideparticipation,whicharekeytocopewiththesechallenges.Second,amarketdesignreviewforthelongtermshouldnotberushedanditsimpactshouldbeadequatelyassessed.Someoftheproposalsthathavebeendiscussedinrecentmonthshavethepotentialtobeprofoundlydisruptiveforthecurrentintegratedenergymarket,suchasdecouplingshort-termwholesaleelectricitypricesfromgasprices,changesinthemarketdesignderivedfromthevariousMemberStates’crisis-relatedinterventions,ortheintroductionofdifferentiatedremunerationforeachgenerationtechnologybasedonits‘trueproductioncosts’.Suchproposalcouldleadtosignificantnegativeimpactsoncost-efficientdispatchandsecurityofsupply,withoutensuringamoreresilientmarketdesignforoperators,investors,andconsumers.4Moreover,itisparticularlyimportanttodistinguishemergencymeasuresandstructuralsolutions,andtostresstheneedforregulatorystabilityandpredictability.TemporarymeasuresandmarketinterventionsshouldnotbeextendedbeyondtheperiodforeseenbytheCouncilRegulationonanemergencyinterventiontoaddresshighenergyprices.Althoughthestructuralreformshouldnotberushed,policymakersshouldconsiderthefactthatthepolicyandregulatoryuncertaintyassociatedwiththeongoingdebatesandshort-terminterventionsareharminginvestmentandcouldundermineEurope’seffortstoattractinvestmenttodecarbonise.Onthecontrary,themarketdesignshouldprovideanadequateframeworktoguaranteeinvestors’confidencetoensurethenecessaryinvestmentsinrenewableandlow-carbontechnologies,maintainingthesystem’sbalance,fosteringsectorintegration,andcontributingtosecurityofsupply.ThestudyapproachandmethodologyThestudyhasfollowedastructuredandinteractiveapproachtoanalysethekeygapsinthecurrentmarketdesign,andtoidentifypotentialsolutions.ThestudyisbuiltuponmanyinteractionswithEurelectric’smembersaswellasexternalstakeholders:twelvesteeringcommittees,morethantwentycoreteammeetings,presentationstotheCustomersandRetailServicesandMarketsandInvestmentsCommitteesandtoEurelectric’swiderStructureofExpertise,externalworkshopswithindustrialconsumers,andEUstakeholderswereorganisedalongthecourseoftheproject.•Thefirstphasefocusedontheevaluationofthestatusquointhelightofthepolicyobjectivetodecarbonise.Asystematicmappingofthekeystrengthsofthecurrentmarketdesignandgapstobeaddressedwasconductedonsixmaintopics:(i)wholesalemarkets,(ii)balancingmarkets(iii)theinvestmentframework,(iv)retailmarkets,(v)networks,and(vi)sectorcoupling.oAspartofthisphase,thescopeofthemarketdesignreviewwasfocusedonissuesrelatingtowholesale,retail,investment,andsectorcoupling.Thisisbecausenetworkandbalancingissueswerealreadyextensivelycoveredexternally.•Thesecondphaseofthestudyintroducedthekeyprinciplesofamarketdesignthatwouldaddressthechallengesandgapsidentified,buildingonthecurrentmarketdesign;severalcasestudieswerediscussedlookingforpotentiallessonsfromothercountriesaroundtheworldthathavefacedsimilarissues.5oThisincludedpracticalcasestudiessuchasenergy-onlymarkets(Australia,Texas),capacitymechanisms(PJM),long-termcontractingmechanisms(Chile,Brazil),Europeanmarketmechanisms’overviewsaswellasnewmarketdesignapproachesdevelopedbyacademicsorpractitioners,suchastheGreekmodelproposal,theGreenPowerPool(UCL),EquivalentFirmPowerauctions(DieterHelm),decentralisedobligations(EnergySystemCatapult),etc.•Thethirdphaseofthestudyconsistedofidentifyingthekeyprinciplesofanewmarketdesignbuildingontheexistinginternalenergymarket;andondefiningalistofconcretepolicyrecommendationscorrespondingtoeachoftheseprinciples.Thestructureofthisreportmirrorsthissequence:•Thefirstsectionintroducestheevaluationofkeystrengthsofthecurrentmarketdesignandgapstobeaddressed;•Thesecondsectionintroducesthekeyprinciplesofamarketdesignthatwouldaddressthechallengesandgapsidentified,buildingonthecurrentmarketdesign;•Thethirdsectionprovides,oneachofthekeypillarsofthenewmarketdesignproposed,alistofconcretepolicyrecommendations.GapAnalysisofthecurrentmarketdesignInthissection,wereviewthecurrentmarketdesignarrangements:•Thefirstsectioncoversthekeystrengthsofthecurrentmarketdesign,focusingparticularlyonshort-termwholesalemarkets;•Thesecondsectionreviewsthekeygapsinthecurrentmarketdesign,particularlylookingat(i)consumerengagementandprotection,(ii)investmentand(iii)thecoordinationoffuturesystemneeds.KeystrengthsofthecurrentmarketdesignAswelookbackatthepast20yearsandthecurrentstatusofEUwholesalemarkets,itisimportanttoemphasisethesuccessoftheintegrationofEUwholesaleenergymarkets,whichbringsbenefitstoconsumers.Theshort-termwholesalemarketisessentialforanefficientfunctioningofthepowersystemandhasensuredefficientdispatchofgenerationandflexibilityassets,efficientcross-bordertrading,andtherefore,reducedvolatilitydespitetheexceptionalcircumstancesoftheenergycrisis.TheintegrationofEUwholesalemarketsbasedonthemeritorderandmarginalpricingprincipleshaveunlockedmajorbenefitsforconsumers.In2021alone,ACER1estimatedthebenefitsofcross-bordertradingtoamountto€34billionduetoincreaseddispatchefficiency.Itisworthnotingthatmorethanathirdofthesebenefitsweredeliveredinthelastquarterwhereenergypriceswerethehighest.1BasedonanalysisconductedbyNEMOs.Source:ACER(2022)ACER’sFinalAssessmentoftheEUWholesaleElectricityMarketDesign.6Further,thecurrentmarketdesignhasallowedforasignificantreductioninshort-termmarketvolatilityduringthecrisis,withhigherconvergenceacrossEUmarkets.ACER2estimatedthepricevolatilitywouldhavebeenaboutseventimeshigherin2021ifnationalmarketshadbeenisolated.Buildingonthesestrengths,morereformsarecurrentlyunderwaytofurtherimproveshorttermmarketssuchastheintegrationofbalancingmarketsorincreaseddemand-sideresponseparticipation.TheEUelectricitymarketintegrationhasalsoimprovedsystemresiliencethroughstrongercoordinationandsolidarity,whichhasbeendemonstratedduringtheenergycrisis,butalsoinpreviouseventswhichcouldhaveputtheEUpowersysteminjeopardy.Assuch,cross-bordertrading,integrationofbalancingmarketsandregionalcoordinationcentreshavecontributedtohigherstandardsofsecurityofsupplyacrosstheEU.However,marketintegrationisstillinprogress.Furthershort-termmarketintegration(intradayandbalancing),thefullimplementationofallservicestobeprovidedbyregionalcoordinationcentres,furtherimprovementsincross-zonalcapacitycalculationandbettercoordinationofcapacitymechanismswillalsoyieldsubstantialadditionalbenefits.Thecurrentwholesalemarketdesignisbuilttoensurethegeneratorsaredispatchedbasedonshort-runcoststominimisetotalcosts.Inshort-termmarkets,theelectricitypriceisdeterminedatthemarginalprice,i.e.,thevariablecostofthelastgeneratorbeingaskedtoproduceatagiventime.Throughthespotmarkets,generatorsarerankedaccordingtotheirshort-termcostsinthemeritorder,andonlythecheapestgeneratorsareselectedtoreachdemand.Thereisnobetteralternativetothemarginalcostdispatchmechanism.Withgrowingdecentralisationofrenewables,preservingthecurrentshort-marketfunctioningwillbekeytoensuringtheefficientreal-timedispatchofgenerationandflexibilityassetsanddemand-sideresponse,aswellasefficientcrossborderexchangesofelectricity.Asaresult,thecurrentshort-termmarketsshouldremainacentralpillarofanynewmarketdesignandinitiativesaimingatfurtherimprovingthemshouldbepursued.3KeygapsofthecurrentmarketdesignTherecentenergycrisishashighlightedsomeoftheweaknessesandgapsofthecurrentelectricitymarkets.Thestartingpointforidentifyingthekeygapsinthecurrentmarketdesigninthestudywasbasedonasetofcorefoundationalprinciples:•Themarketdesignneedstorecognisetheevolutionofpolicyobjectivessincethe1990s.Amarketdesignisneverconceivedinavacuumandisexpectedtodeliversomespecificpolicyobjective.Inthisperspective,thestudyhasmappedtheevolutioninthecontextandobjectivessincethecurrentEUelectricitymarketwasdesigned20yearsago,withagrowingfocusondecarbonisation,whilereducingtheEU’sdependenceonimportedfossilfuels.•Themarketdesignneedstoenablethedeploymentoftheresourcesnecessary(cleantechnologiesandflexibleresources)fortheenergytransition.Thetransitionwillcreatenewoperationalchallengesassociatedwiththerisingshareofvariablerenewablestechnologies.2Ibid.3Theimprovementoftheshort-termmarketfunctioningisbeyondthescopeofCompassLexeconstudy.However,somesuggestionscanbefoundinvariousEurelectricpublications–seeforinstanceEurelectric’sresponsetotheEuropeanCommissionconsultationonmarketdesign(p20-21),inparticularitsrequestforaclosertoreal-timeCross-BorderIntradayGateClosureTimetobetterbalancesurpluses/shortagesandontheneedtoassesscarefullyandwithtransparencytheimpactsofongoingintegrationprojectsandinfutureconsiderations.7Themarketdesignwillneedtorecogniseinadifferentiatedwaythedifferentattributesofdifferenttechnologiesandtheirrespectivecontributiontothesystem’ssafeoperation.Moreover,mostcleantechnologiesandflexibleresourcesrequirelargeCAPEXinvestment,whichsuggeststhataspecificfocusontheinvestmentframeworkforcapitalintensivetechnologiesisneeded.Thereisalsoaneedtoproperlyrecognisechallengesaheadfornetworkstoconnectmorerenewables.•Themarketdesignneedstotakeaholisticcross-sectorperspectiveandcoordinatesubstantialinvestmentswithinashorttimeframeacrossthepowersector,relatedinfrastructuresandenduses,whichareelectrifying.Theinstitutionalandgovernancearrangementsthatsupportinfrastructureplanningandendusesectorswillthereforealsoneedtoevolvetosupportanefficientmarketfunctioning.•Themarketdesignneedstobenefitconsumersandsupporttheiractiveengagement.Newtechnologiesallowactiveparticipationinthemarketofdemandaswellasdecentralisedresources.Consumersneedtoseethebenefitsoftheinvestmentsincleantechnologiesthroughelectricitypricesandhedgingapproachesthatprovidebothchoiceandadequateprotection.Thesestartingprincipleshaveformedthebasisofouranalysisofthespecificchallengesandgapsinthecurrentmarketdesign.Accordingly,thenextparagraphspresentinmoredetailthekeygapswith(i)consumerengagementandprotection,(ii)theneedforaframeworktosupportinvestmentand(iii)thecoordinationoffuturesystemneeds.ConsumerengagementandprotectionAlargeshareofenergyconsumersisnotengagedinthemarket.Thiscanbeduetoe.g.,thelackofinformationorawarenessofrisksandopportunities,retailpricingstructure,barrierstothedevelopmentofexplicitdemand-sideresponse(DSR)orpolicyinterventionsdistortingconsumerpricesignals.Forexample,whilesmartmetersareoftenaprerequisitetoconsumerengagementinoperationaltimeframe,only54%ofEuropeanhouseholdshadasmartmeterbytheendof20214,withsignificantdivergencesbetweenMemberStatesintermsofrollout.TheCleanEnergyPackagesetthefocusonconsumerengagementwithaseriesofmeasurestoempowerconsumersandfacilitatedemand-sideflexibility.5Consumerscouldthereforebemorereactivetomarketprices,whichcouldcontributetoalleviatingfuturecrises.ThesemeasuresarenotyetfullyimplementedinalltheMemberStatesorneedtobefurtherclarifiedbeforeimplementation.Forexample,theparticipationofexplicitaggregationofdemand-sideflexibilityisnotallowedinallEuropeanenergymarketsandcapacityremunerationmechanisms.Exceptionalenergypricevolatilitytriggeredbythegassupplycrisishasimpactedcustomersandhashighlightedtheneedtoassesstheresilienceofourcurrentelectricitymarketdesigntosuchexternalshocks,notablyintermsofcustomerprotectionandengagement.Inthemeantime,policymakershaveintroducedshort-termpolicyinterventions,whichaimtoaddresssuchexceptionalcircumstancesandmitigatetheimpactoncustomers.Forexample,retailpriceshaveincreasedforhouseholdconsumers.ComparedtoSeptember2021,theaverageestimatedEUretailelectricitypriceforsmallhouseholdconsumersinSeptember20224ACER-CEER(2022)AnnualReportontheResultsofMonitoringtheInternalElectricityandNaturalGasMarketsin20215EuropeanCommission(2019)CleanenergyforallEuropeanspackage.8increasedby25%to26.3c€/kWh.6ThisincreaseoccurreddespitetheretailmarketinterventionscarriedoutinallEUMemberStatestoprotectcustomers,suchaswithdirectaidforenergycosts,taxrelief,networktariffexemptions/reductions,orretailpriceregulation.Theseinterventionscomeatsignificantcosts:€600.4bnwasallocatedacrosstheEU7toprotectconsumersagainstenergycostsbetweenSeptember2021andNovember2022.8EUindustrialcompetitivenesshasbeennegativelyimpactedatatimewheretheenergytransitionrequiresmajordecarbonisationandelectrificationinvestments.ComparedtoSeptember2021,theaverageestimatedQ32022EUretailpriceforsmallindustrialconsumers9roseby40%to22.8c€/kWh,andby64%to18.6c€/kWhforlargerindustrials.10ThisincreaseishigherthaninEUtradingpartners,suchasChina(whereindustrialpricesincreasedby15%year-on-year),ortheUnited-States(dropby3%year-on-year).11Intheirvastmajority,consumerscurrentlydonothavecommitmentswiththeirsuppliersbeyondonetothreeyearsanddonotengageinlong-termcontractswithproducers.Thismaybeduetothelackofinformation,totheinabilityorthelackofinteresttocommitoverlongperiods,ortolegalorregulatoryhurdles.Thislimitstheabilityofsupplierstohedgeontheirbehalfoverthelongtermandtoprovidethemwithpricestabilityoveralongerperiodoftime.Consumerawarenessandaccesstoinformationcouldbeimprovedtoincreaseinterestinhedgingandensurethattheyunderstandtheriskstheyareexposedtointheircontractualarrangements.Last,asshownintheenergycrisis,thelackoffinancialresilienceofcertainsupplierscanleadtounfavourablecircumstancesforconsumers.CoordinationoffuturesystemneedsThecurrentEUframeworkforlong-termstudies12isinsufficienttoeffectivelyinformpolicymakers,investors,andotherstakeholdersandcoordinatethelarge-scaleinvestmentsrequiredtoreachEuropeanGreenDealobjectives,thetransitiontoaclimate-neutraleconomyby2050andincreaseEurope'senergyindependencefromunreliablesuppliersandvolatilefossilfuels.Whilethecurrentframeworkhasstartedtoevolvetocatertothesenewchallenges,gapsremaininthesystemneedsframework.Currently,thekeyEUlong-termstudiesfocusprimarilyonelectricityandgasnetworkexpansion(TYNDP)andpoweradequacy(ERAA).TheTYNDPhasstartedtodevelopa‘systemneed’perspective,withflexibilityassets(storageandCO2-freepeakingunits)asanadditionalinvestmentoptionforthe2040horizontoaddressnetwork-relatedissues.13Thefocusremainsnarrow,coveringonlypartiallythedifferentsystemneeds,suchasflexibility(long-term,short-term),orstability.TheERAAwouldbenefitfrom(i)moredetailedgranularityofgridconstraintstoimproveconsistencybetweenEUandnationalanalysesand(ii)methodologicalenhancementstoensuretheeconomicviabilityofresources.Further,thetimehorizonof10yearsistooshortforthepathtonet-zero.6EuropeanCommission(2022)QuarterlyreportonEuropeanelectricitymarkets.7Thisamountsto€705.5bnforEurope,with€264bnearmarkedbyGermany.8Bruegel(2022),Nationalfiscalpolicyresponsestotheenergycrisis.Consultedon27January2023.9BandIB-Theannualconsumptionofsmallindustrialconsumersfallsintherangeof20MWhto500MWh.ThisconsumptionbandisdefinedbyEurostatasIB.10EuropeanCommission(2022)QuarterlyreportonEuropeanelectricitymarkets.11Ibid.12SuchastheTen-YearNetworkDevelopmentPlan(TYNDP)ofENTSO-EandENTSOGandtheEuropeanResourceAdequacyAssessment(ERAA)ofENTSO-E.13ENTSO-E(2023)TYNDP2022-OpportunitiesforamoreefficientEuropeanpowersystemin2030and2040.9Further,thestudiesoftenlackacomprehensivevisionfromafullenergysystemperspective,especiallytheenduses.Giventhecross-sectorinterdependencies,withelectrificationandgasnetworktransformation,coordinationiskeybeyondelectricityandgastransmissionsystemoperators(TSOs)–toincludehydrogen,end-uses,anddistributionsystemoperators(DSOs).Thisdimensionhasalreadybeenidentifiedtosomeextent,withENTSO-EandENTSOGrecentlylaunchingajointinitiativeforamulti-sectorialPlanningSupport,butthisislimitedtothegasandelectricitysectors,andwithaplannedimplementationonlyin2028.14Thisframeworkneedstodevelopearlier,giventheurgencyofeffortsrequiredtomeetpolicytargets,andbeaccompaniedbyarobustgovernanceframework.InvestmentframeworkAninvestmentframeworkislackinginthecurrentmarketdesigntosupportcapital-intensivelarge-scaleinvestmentincleantechnologies.ToreachREPowerEUtargets,substantialinvestmentisnecessaryinrenewables.TheECanalysisindicatesthatREPowerEUaloneneeds€300bnofinvestmentby2030,inadditiontotheFit-for-55investmentsneeded.ThelatestCommissionStaffWorkingDocumentshowsthat510GWofwindand592GWofsolarphotovoltaic(PV)willbeneededtoreachREPowerEUtargetsby2030.15Bycomparison,in2020,installedwindcapacityamountedto175GW,and100GWforsolarPV.16Moreover,investmentsofabout€350-450bnwillbeneededinthecomingdecadestomaintainthesamenuclearcapacityintheEU.17Giventhesignificantinvestmentsneededinrenewablesandnuclear,itisnecessarytobuildanenhancedandmoreconsistentinvestmentframeworkwhichwillarticulateagrowingroleforprivatelong-termcontractswithacontinuationofpublicde-riskingarrangementswherenecessary.Long-termcontractsaretheanchorofaninvestmentframework,astheysupportefficientriskallocation.Thisde-riskingactstoreducethecostoffinancing,andultimatelythecostsforconsumers.Thefurtherdevelopmentofprivatecontractingwillbekeytofacethisinvestmentchallenge,suchaswithPowerPurchaseAgreements(PPAs).Inaddition,supportschemesforcleantechnologieswillcontinuetoplayaroleinde-riskinginvestmentinsometechnologiesandneedtoevolvetolimitpotentialdistortionsinpowermarketsandtomakethemresilienttopotentialpolicyinterventions.Privateandpubliclong-termcontractsalsoallowconsumerstohedgepricesdirectlyorindirectlythroughtheirsuppliers.However,thereareseveralshortcomingsinthecurrentpublicandprivatelong-termcontractingarrangementsthatneedtobeaddressed.PPAsfacelegal,regulatory,informational,andeconomicissues.Inthepastdecade,26.2GWofPPAshavebeensignedacrossEurope.18However,thisuptakehasbeenconcentratedinafewcountries,asmorethan50%ofthesePPAshavebeensignedeitherinSpainortheNordics.19Thisuptakehasbeenfacilitatedbyspecificpoliciesinthesecountries,likepublicguarantees,20orPPAsourcing14ENTSO-E(2020)ENTSO-ERoadmapforamulti-sectorialPlanningSupport.15EuropeanCommission(2022),ImplementingtherepowerEUactionplan:investmentneeds,hydrogenacceleratorandachievingthebio-methanetargets.16Eurostat,EU27.17EuropeanCommission(2022)OpeningspeechbyCommissionerSimsonatthe15thEuropeanNuclearEnergyForuminNovember2022.18RE-Source(2023)RE-SourceRenewableEnergyBuyersToolkitdata(asof26/01/2023).19Norway,Sweden,Finland.SeeCRE’s2022commissionedconsultantstudyonpublicsupportforPPAsinEuropeformoredetail.(InFrench)andTheCorporatePPAtoolbyWindEurope.20Spain,Norway.10obligationsonlargeelectro-intensiveusers.21Morethan60%oftheseEuropeanPPAshavebeensignedineitherheavyindustryortheinformationandcommunicationstechnology(ICT)sectorbylargecompanies,22showingthatthesecontractsarenotattainablebyorsuitedtoalloff-takers.Theenergycrisishasalsoheightenedtheregulatoryandpoliticalrisksofsupportschemes.Asshownbytherecentcrisis,mechanismsdesignedwithuncappedupsiderevenuesincaseofhighpricesmaynotberesilientandcouldtriggerfuturepolicyinterventions.Indeed,ex-postchangestosupportschemes,includingrevenueclawbackintimesofupsides,leadtogreaterrisksforinvestors.Conversely,thedesignofsupportschemescanalsomitigaterisksofalleged‘windfallprofits’,aswellasbetterprotectconsumersagainstshort-termpricevariations.23Further,thegrowingshareofrenewablesstressestheimportanceoftheinteractionbetweensupportschemesandmarketmechanisms.Dependingontheirdesign,theseschemescancreatemarketdistortionsaffectingshort-termdispatchandlong-terminvestmentlevels,aswellascreateanunevenplayingfieldacrossEUgeneratorsinthesinglemarket.Thecostslinkedwiththesedistortionsincreasewiththepenetrationofrenewables.Moreover,althoughnewassetscouldintheorysecurethesaleoftheiroutputinforwardmarkets,andthereforeatleastpartoftheirinvestment,theparticipationinforwardmarketisnotrelevantinpracticetosecureinvestmentnorsupportcapital-intensivelarge-scaleinvestmentincleantechnologies.Indeed,hedgingonforwardmarketsisoftenhinderedbylowdemandforlong-termhedging,liquidityissues,anddifficultiestohedgeacrossborders.Asaresult,thereareonlyrareoptionsinEuropetotradeovermorethanthreeyearsinforwardmarkets–andnooptionsbeyondtenyears–andtheliquidityoftheseproductsislow.ThelackofforwardmarketsliquidityinsmallbiddingzoneswasidentifiedbyACERas‘themostimportantproblem’.24Liquidityisunevenacrossbiddingzones,limitingtheabilitytoadjusthedgesacrosstimeinlessliquidmarkets.Forexample,maturemarketslikeGermanyhaveachurn25factorof7.5,comparedtoSlovakia,Greece,Belgium,orHungarywithchurnbelow0.5in2021.26Thisleadstohigherbid-askspreadsforsmallerbiddingzoneswhichincreasesthecostofhedging.Thereislowdemandforlong-termforwardhedgingfromsuppliers,duetouncertaintiesontheirlong-termconsumerportfolio.Asaresult,forwardpowermarketslackliquidproductstohedgebeyond2-3years,eveninbiddingzoneswithmatureforwardmarkets.ThisistrueeveninGermany,themostliquidforwardbiddingzoneintheEU,whichhasverylowvolumesofforwardproductsbeyondthreeyears,withallliquidityconcentratedonthe1–3-yeartimeframe.Theenergycrisishasshowntheimportanceofsecurityofsupplyandtheneedforaclosely-knitEUcoordination.Today,thereisapatchworkofcapacityremunerationmechanismsacrossEurope,showingthelackofharmonisationprinciplesleadingtotheirconvergence.CapacityremunerationmechanismshavebeenintroducedacrossEuropewithmarkeddifferences:capacitypaymentsintroducedinsomecountriesfollowingtheliberalisationofthemarket,decentralisedcapacity21Spain.22Forexample,Google,AmazonandFacebookholdmorethan27%ofallEuropeanPPAcontractedcapacity.Source:RE-SourceRenewableEnergyBuyersToolkitdata(asof26/01/2023)23Forinstancewithtotwo-sidedcontractsfordifference,consumersgetcompensatedwhenpricesexceedthecontractstrikeprice.24ACER-CEER(2022)ACER-CEERDraftPolicyPaperontheFurtherdevelopmentoftheEUforwardmarket.25Churnfactorsareacommonmeasureofliquidityinpowermarkets,definedasthetotaltradedvolumedividedbythedemandofthemarketzone.26ACER-CEER(2022)ACERCEERWholesaleElectricityMarketMonitoring2021,ProgressofEuropeanelectricitymarketintegration.11market(France),regionalisedcapacitymarkets(Italy),strategicreserves(Germany),capacitymarketaccountingforlocalcongestions(Ireland),etc.Withtheexpectedfurthergrowthofvariablerenewablegeneration,thereisaneedforcapacitytocovertheresidualload,potentiallywithalessfrequentutilisationthaninthepast.However,despitetherolloutofthesemechanismsacrossEurope,theyaretemporary,theirimplementationiscomplex,areonlyallowedasalastresortmeasure,andaresubjecttostateaidclearance.Thiscreatesuncertaintyontheirstability.ThecurrentmarketdesignlacksaclearEU-levelframeworkoncapacitymechanisms,whichgrantsvisibilityandstabilitytoinvestors.12KeymarketdesignprinciplesAmarketdesignthatwillsupportanefficienttransitiontowardnet-zerooverthenextdecadeneedstopreservethecost-efficiencyandnationalandcross-bordercompetitiondeliveredbytheinternalEUenergymarketbybuildingonthecurrentmarketframework,throughthefollowingkeyprinciples:1.Providinganenhancedcustomercontractingframeworkenablingsufficientpossibilitiesforgenerators,customers,andsupplierstohedgeandcontract,includingoverthelong-term.Thiscouldbringthebenefitsofrenewableenergysources(RES)andlow-carbongenerationmoredirectlytoconsumers,whilefosteringtheirengagement.•Inallcountries,customersshouldhavethepossibilitytoaccessavarietyofpricingandsupplyoffers,includingnotonlydynamicpricingbutalsolong-termcontracts.Suppliersandenergyserviceprovidersarebestplacedtodefinetheseofferstoreflectcustomers'needs,anditisuptotheregulationtoremoveexistingbarrierssosuppliersmaydesignandprovidethoseoffers.•Ratherthan“decoupling”short-termwholesaleelectricityandgasprices,theproposedmarketdesignaimstoofferamorebalancedchoiceofshort-andlong-termpricesignalsinretailprices,ultimatelysupportingelectrification.•Hedgingandlong-termcontractscanbeimplementedwithoutremovingshort-termsignalstoendconsumers,whicharekeytostimulatethedevelopmentofdemand-sideflexibility.2.Providingamarket-compatibleinvestmentframeworkforbothrenewablesandlow-carbontechnologies,aswellasfirmandflexibleresources(includingdemand-sideresponseandstorage),whicharecapital-intensivetechnologies.Thisframeworkshouldstrikeabalancebetweenrobustrevenuestabilisationandeffectiveincentivestoparticipateintheforward,spot,andbalancingmarkets.3.Maintainingadequacyandsecurityofsupplyandmeetingevolvingpowersystemrequirements,inparticularbecauseofdecentralisationandincreasingflexibilityandfirmnessneeds.13PillarI:ConsumercontractingandengagementframeworkIntroductionThereistypicallyamismatchbetweenthetimeframeforhedgingbetweenconsumers/suppliersandproducers.Whereasgeneratorsneedtosecurepartoftheirrevenuesover10-15yearsorlongertomakenecessaryinvestmentsbankable,consumerstendnottohedgeorenterintolong-termcontracts–exceptsomespecific,largerconsumers–andsuppliersusuallydonothedgebeyond1-3yearsintheabsenceoflong-termcommitmentoftheircustomers.Theremovalofregulatorybarrierstolong-termcontractingforconsumersandtheintroductionofanenhancedandliquidlong-termcontractingframeworkservesasonewayforconsumerstodirectlyreceivethebenefitsfromlessvolatileenergycosts.Thisispossiblewhilestillprovidingefficientshort-termsignalsfosteringactivedemandparticipationinshort-termmarkets.Differentconsumershavedifferentcharacteristics,differentcapabilities,differentriskprofiles,etc.Thereisno‘one-size-fits-all’solution,andseveraloptionsshouldbemadeavailable,fromwhichinformedconsumerscanchosefreely,toensurearesilientandefficientmarketdesign.Largeconsumersmaygenerallyhaveaninterestinlong-termhedgingandcontractingbutfinditdifficulttodosobecauseofcreditriskrequirementsorlackofavailableproductsmatchingtheirneeds.Forsuchconsumers,thebasicno-regretproposalistofocusontheremovalofexistingbarrierstolong-termcontracts–whileinparallelfacilitatingPPAsasdetailedinthenextsection.Thisincludesremovinganylegalobstacles,promotingstandardisationandtransparency,and,whereappropriate,reducingcreditriskthroughtoolslikeaggregationandpoolingmechanismsorguaranteesunderwrittenorprovidedbypublicbodies.Smallconsumersmaynothaveaninterestinlong-termhedgingandcontracting,butforthosewhoare,theymayalsobelegallypreventedfromdoingso,aswellastheretailerswhoservethem.Forsuchconsumers,thekeyquestiontobeaddressedishowtoenableaccesstolong-termhedgingandcontracting,andtothebenefitsofRESandlow-carbontechnologies,shouldtheybeinterestedorshoulditbeadaptedtotheirriskprofile.Thepotentialimpactofhedgingincentivesontheresilienceofsuppliersandretailcompetitionshouldbethoroughlyassessed,asitcanposerelevantproblemsabouttheriskexposureofretailersandcostrecoveryincaseofearlycontracttermination.Finally,thisenhancedlong-termcontractingframeworkdoesnotsubstitutetheneedtofosteractiveengagementofconsumersinshort-termmarketsandsupportdemand-sideflexibility(eitherimplicitlyorexplicitly).Retailpricestructureswillneedtoprovidestronger,butdifferentiatedincentivestoreflectconsumerexpectationsandcharacteristics.Forexample,dynamicpricing–whichisalreadywidelyappliedinsomeMemberStatesandanimportanttoolforflexibility–mightnotbesuitableforallconsumercategories.Criticalpeakpricing,aswellasothertime-of-usetariffsprovidesimpleryetefficientincentives.Inallcases,itisimportantthatsmartmeterrolloutandaccesstothecorrespondingdataisacceleratedtoallowcustomerstograspthebenefitofflexibility.Generalprovisions1.1Recommendation:Introduceaconsumercontractingandengagementframeworkadaptedtodifferentconsumersegments.Thisframeworkshouldincludeprovisionsto:14i.Guaranteeadequateinformationtoconsumersandsensibilisationtoriskssotheymaycommitforlongerperiods;ii.Ensuresuppliers’resiliencetoavoidrapid,unexpectedmarketexitsandconsumerslosingtheirsuppliers;iii.Enhancehedgingopportunitiestoprotectconsumersagainstmedium-/long-termpricevolatility(beyondoneyear);iv.Furtherempowerconsumersandfacilitatedemand-sideresponse.Theneedtointervenetofosterhedgingandthetypesofmeasuresdiffersdependingonconsumers.i.Largerconsumers:largeconsumersmayhaveaninterestinlong-termhedgingandcontracting,throughtheirsupplierornot,butsometimesfinditdifficulttodoso,dependingontheirnationalcircumstances.Fortheseusers,interventionsshouldfocusontheremovalofexistingbarrierstolong-termcontractsaccordingtoRecommendations1.14to1.25onPPAsandtheimprovementofforwardmarketstofacilitatetheirself-protection.ii.Smallerconsumers:thereareavarietyofsmallconsumerprofiles,andtheconsumerprotectionframeworkshouldrecognisethesedifferences.Whilesomemaybebetterinformedandmaychooseknowinglytobeexposedtomarketrisks,seekingtousetheirflexibilitytorespondtopricesignalsandoptimisetheirbills,somemaylackinformation,interest,ormeans(time,financially,technically)torespondtopricesignalsorhedge.AdequateinformationtoconsumersandsensibilisationtorisksImprovingconsumers’awarenessandaccesstoinformationcoulddriveengagementintheshortterm,aswellashedging.Didacticinformationandincreasing‘energyliteracy’coulddriveaggregatedPPAsacrosssmallusersforinstance.Inaddition,thereisapotentialtobetterinformconsumersonlong-terminvestmentintotheenergytransition.Forexample,rooftopsolarpanelshedgeagainstshorttermpricesthroughdirectelectricityproduction.Finally,consumersmaytakesubstantialrisksembeddedinthecontractualarrangements.Theyshouldthereforebeadequatelyinformed(Recommendation1.2).1.2Recommendation:EnsureadequateinformationforconsumersthroughastrictimplementationofArt.10ofElectricityDirectiverequiringsupplierstoprovidefairandtransparentgeneraltermsandconditionsinplainandunambiguouslanguagetoconsumersonproposedoffers,includingrisksundertakenwhensigninganewcontract.Suppliers’resilienceAsshownintheenergycrisis,supplierfailuresoftenleadtounfavourableconditionsforconsumers.Thereisapotentialtobetterinformconsumeronriskexposurethroughtheirsuppliersorpubliccommunications,whichcanincreasehedging.AllowingNationalRegulatoryAuthorities(NRAs)toperformregularstressteststoverifysuppliers’financialresilienceortheirabilitytofacemajorchangesinmarketdynamicswouldbetterprotectconsumersagainstthoserisks(Recommendation1.3).Ashedgingmitigatestheimpactsofpriceshocks,bettersupplierresiliencewouldalsodrivedemandforhedging.Themeasuresshouldadequatelyreflecttherisksactuallytakenthroughtheirofferstructures.151.3Recommendation:Consideraflexibleresilienceframeworkonsupplierstoguaranteetheirsolidityandensurecustomers’protection.Thisframeworkcouldinclude(i)regularstressteststoverifytheabilityofsupplierstofacemajorchangesinthemarketdynamics;and(ii)reportingrequirementstowardsregulatorsonhowsuppliersensuretheirresilience.NRAswouldthusbeabletochecksuppliers’resilienceagainstmarketshockseitherthroughfinancialrobustness,throughriskhedginginconsistencywiththeriskstakendependingonthestructureoftheirportfoliosandcustomers’retailpriceorothermeans.Forinstance,consumersoptingfordynamicpricingmaynotrequirehedging,whileconsumerswithfixedpriceswould.Aprerequisiteofthisresilienceframeworkistoensurethatbarrierstolong-termhedgingandsupplyinforwardmarketsareaddressed.Todoso,MemberStatescouldenvisagetodefinesuchaframeworkinsuppliers’licenseconditionsorintheregulation.DevelopingguidanceatEUlevelwouldbeusefultofacilitateharmonisationofprocessesandmethodologiesacrossMemberStatesandaccountforthefactthatsuppliersmaybepresentinvariousjurisdictions.Long-termhedging(beyondoneyear)Intheirvastmajority,consumerscurrentlydonothavecommitmentswiththeirsuppliersbeyond1-3yearsanddonotengageinlong-termcontractswithproducersorsuppliers.Thismaybeduetothelackofinformation,totheinabilityorthelackofinteresttocommitoverlongperiods(e.g.duetotheriskofmovingout,etc.,)ortolegalconstraintsorregulatoryhurdles.Unnecessaryregulatoryhurdlesshouldberemoved(Recommendation1.4).Theabsenceoflong-termconsumer’scommitmenttosuppliersimpactstheirwillingnesstoengageinlong-termcontractswithgenerators.Generally,retailmarketcontractsusuallylastafewyearsmaximum,aspolicieshavebeenattemptingtoincreaseswitchingrateforconsumerstofindthebestdealsandstimulatecompetitionintheretailmarket.However,ifasupplierengagesinalong-termcontract(e.g.,10years),itcontractsasetvolumeandpriceforthecontractperiod.Asaresult,thisimpliesavolumeandapriceriskforthesupplier.Tobuyelectricityovermultipleyears,thesuppliershouldhaveareasonableexpectationthatitsportfoliodemandwillcovertheamountscontracted.Incaseoftoohighofhedging,electricitywouldneedtoberesold,potentiallyatlowerprice.Withoutguaranteesfromconsumers,buyingelectricitymanyyearsinadvanceisriskyforthesupplier,sincethecustomercouldleaveforanothersupplier.Tofacilitatelong-termhedgingforendconsumers,barriersforsuppliersshouldbeliftedand,inparticular,therightofsupplierstochargecost-reflectiveterminationfeesshouldbeexplicitlyprovidedforinlegislation(Recommendation1.5).1.4Recommendation:Relievenationallegal/regulatoryconstraintstolong-termconsumercommitmentwiththeirsuppliers(mostlyforsmallerconsumers).Thisincludesconstraintstothesigningoflong-termretailcontracts(whichwouldalsoincludePPAs),innationallegislation(e.g.,CzechRepublicorSpain27),orinsomecasesatoostrictapplicationofthecompetitionlaw,aswellasprovisionsthatimpedeadequatemodalitiestoprotectbothconsumersandsuppliers,forinstanceincaseofearlyterminationonbothsidesofthecontract.1.5Recommendation:Liftbarriersforsupplierstohedgelongertermandofferlong-termhedgingpossibilitiesforconsumers(mostlyforsmallerconsumers).Tohedgeoverthelongrun,suppliersneedsomeassurancethattheydonotover-procureelectricityiftheirportfolio’sconsumption27SmallconsumersinSpainarenotabletosigncontractswiththeirsuppliersoverperiodsofmorethanayear.16decreases.Long-termassuranceofconsumercommitmentwouldunlockretailoffersbasedonconsumerloyalty.•Facilitatetheresaleoflong-termhedgedvolumesbymakingforwardmarketsmoreliquidandimprovingLong-TermTransmissionRight(LTTRs)allocation(NB:whilecoveringthevolumeriskofconsumerswitching,supplierswouldstillbearasubstantialpricerisk).•Allowcost-reflectiveterminationfees/othermechanismsforconsumerstocompensatetheirprevioussupplierforhedgingcosts.Thisfeecouldbedeterminedaccordingtoaregulatedmethodologyordeterminedfreelybythesupplierbeforesigningitsinitialcontractwiththecustomer.Anotherapproachthatcouldbeinvestigatedwouldbetoallowforthenewsuppliertopaytheterminationfeesonbehalfoftheconsumertotheformeroneincaseofearlyterminationoftheinitialcontractbytheconsumers.Inbothcases,regulatorymonitoringcouldbeimplementedtofosterconsumertrust.Suchterminationfeesmustbeinplaceincasesupplierswouldhavetheobligationtoofferfixedpricecontracts.Togofurther,someMemberStatescoulddecidetoprotectparticularconsumersegmentsagainstmarketpricevolatility.Todoso,theycouldimplementde-riskingcontracts,forinstancethroughspecificcontractingschemes.Eurelectricconsidersthattheseadditionalinterventionsarenotnecessarybut,shouldMemberStatesdecidetointroducethem,Eurelectricconsidersthatthisshouldbedelegatedtosuppliersthroughcompetitiveauctionsandshouldnotleadtoasinglebuyermodel.Asanexample,theso-called‘affordabilityoptions’28couldprotectconsumersagainstsustainedpricespikesandremovetheneedforinterventionseenduringthecurrentcrisis.However,theyraiseanumberofimplementationquestions,especiallytosettheadequateleveloftheoptionactivation,todefinecounterpartiesandtorecovercosts.Shouldtheybeconsidered,theyshouldbecontractedinamarket-basedwayandpreventinganydistortionsincompetition.Empowerconsumersandfacilitatedemand-sideresponseTheCleanEnergyPackagealreadyincludedaseriesofmeasurestoempowerconsumersandfacilitatedemand-sideflexibility.ThesemeasuresarenotyetfullyimplementedeverywhereinEuropeorneedtobefurtherclarifiedbeforeimplementation,buttheirimplementationshouldbethepriority(Recommendation1.6).Moreover,tofosterdemand-sideparticipation,consumersshouldhaveaccesstoanadequaterangeofoffersencompassingshort-termincentives(Recommendation1.7).1.6Recommendation:ImplementexistingprovisionsaspartoftheCleanEnergyPackagetoliftbarrierstodemand-sideresponse(DSR),inadditiontocompletingthesmartmeterrollout,toallowconsumersandaggregatorstoparticipateinallmarketsegments.Thekeyenablersforgreaterconsumerengagementshouldbeputinplacetoallowconsumerswhowishtoandcanactivelyparticipateintheenergysystemtodoso.Thisincludes:•ThefullimplementationofrelatedmeasuresforeseenintheCleanEnergyPackage:Articles13,15,17and32oftheElectricityDirectivealreadyaddresstherightsofaggregationanddemandresponseparticipationinthemarket.Beforeconsideringadditionallegislation,wefeeltheCommissionshouldfocusonensuringthepropertransposition,implementation,andenforcementoftheexistingArticles.28Anaffordabilityoptionisafinancialproducthedgingconsumersagainsttoohighpricespikes,aimingtoguaranteethatthepricepaidbyconsumersremainsunderacertainthreshold,toavoidaffordabilityissues.17•ThesharingofgoodpracticebetweenMemberStatestofacilitateanefficientimplementationandfosterharmonisationacrosstheEU.•TheremovalofbarrierstoDSR,whererelevant,byenablingDSRparticipationinallelectricitymarketsegmentsandcapacitymechanisms.Thisincludestheremovalofeitherexplicit(notconsideredineligibletechnologies)orimplicitbarrierstotheirparticipation(e.g.,prequalificationrequirements,productdesign).ItisworthnotingthatreformsarealreadyunderwaywithrespecttoremovingbarrierstoDSR.InDecember2022,ACERsubmittedadraftframeworkguidelineonanewnetworkcodeondemandresponsetotheEuropeanCommission29asanadditionalsteptowardstheimplementationofbindingEUrules,besidesthealreadyexistingprovisionsinboththeDirectiveandRegulationfortheInternalElectricityMarket.Beyondthesemeasures,providingadequateshort-termsignalstoconsumerswouldbekeytoimprovetheefficiencyofthesystem.Thespectrumofoffersshouldgowellbeyonddynamicpricingtoadapttodifferentconsumers’needsandsituations.1.7Recommendation:Ensurethatconsumerscanhaveaccesstoanadequaterangeofretailoffersencompassingshort-termincentives.Thankstotheroll-outofsmartmeters(andrespectivedataaccess),theseincentivescouldbeintroducedinvariousways,suchastime-of-usetariffs,criticalpeakpricing,dynamicpricing,anddynamicrebates.NRAscouldmonitorthemarketforavailablechoicesregardingthetypesofretailoffersandwhetherthereareanyregulatorybarriersthathinderretailerstooffernewproducts.PillarII:InvestmentframeworkforgenerationIntroductionMassiveinvestmentsareneededtomeetdecarbonisationobjectiveswhilemaintaininghighstandardsofsecurityofsupply,ensureaffordability,reducedependenceonimportedfossilfuels,andaddressidentifiedsystemneeds.Theinvestmentchallengerequiresbuildingastrongerframeworktosupporttheseinvestments,fostertheirtimelydelivery,andfacilitatefinancing.Theseinvestmentsincludelarge-scaleinvestmentinRES(includingwindandPV,butalsohydroandotherRES)andlow-carbontechnologies(suchasnuclear),aswellasinfirmandflexiblecapacities(suchaspump-storageandbatteries).Thesealsoincludeinvestmentneedsatconsumerleveltoelectrifyendusesanddevelopdecentralisedresources.Long-termcontractsplayacriticalroletosupporttheseinvestmentsincapital-intensivecapacitiesandtechnologies.Long-termcontractsfacilitatefinancingandreducethecostofcapital,therebyreducingthetotalcostofinvestmentsandbenefittingconsumers.Inaddition,aninvestmentframeworkenablinglong-termcontractsmustaddressthequestionoftheadequatecounterpartiesforthesecontracts.Severaloptionsarepossible,suchassuppliers,consumers,orotherentitiesontheirbehalf.Thesearrangementswillplayanimportantroleindefiningtheallocationofrisks,costs,andbenefitsacrossparticipants.29SeeACER(2022)ACERsubmittedtheframeworkguidelineondemandresponsetotheEuropeanCommission–firststeptowardsbindingEUrules.18Differenttypesofmeasurescanbeintroducedtoenhancelong-termcontracting,reflectedthroughdifferenttypesoflong-termcontractsatthecoreofthenewmarketmodelandpotentiallycumulated.Wehavegroupedrecommendationsfortheinvestmentframeworkaroundthefollowingthemes,whichshouldbeconsideredascomplementary:1.Frameworktoguaranteesecurityofsupply:Capacitymechanisms2.PrivateframeworkforRESandlow-carboninvestmentusuallycalledPowerPurchaseAgreements(PPAs)3.PublicframeworkforRESandlow-carboninvestment4.FacilitatinghedgingthroughtheimprovementofforwardmarketsForwardhedging,PPAs,publicRESandlow-carbonschemes,andcapacitymechanisms,allhavearoletoplayinde-riskinginvestments,mitigatingexposuretoshort-termvolatilityforconsumersandensuringthesecurityofsupply.Ifwelldesigned,theseinstrumentspresentdifferentbutcomplementarypurposesthatcouldbeadaptedtoawiderangeofneedsandpreferencesofcustomers.Thosetoolsshouldbevoluntaryandwell-designed,andacoherent/holisticapproachshouldbeensuredaspartofthereformtomaintaincompetition,encouragemarketliquidity,anddelivertherightlong-terminvestmentsignals.Frameworktoguaranteesecurityofsupply:CapacitymechanismsToday,powermarketsintheEUarebasedontheEnergy-Onlymarketdesignmodelwheredayaheadmarginalpricingensuresefficientdispatchandcontributes(tosomeextent)toprovidinginvestmentsignals.Inthefuture,duetosignificantincreasesofnon-dispatchablegenerationwithlowvariablecosts,firmandflexiblecapacitieswillbecomeincreasinglyvaluable,especiallyduringstressevents.Manycountriesalreadyhavedeemeditnecessarytointroducecapacitymechanismstoprovidethedesiredlevelofsecurityofsupplyandtosupportinvestmenttodoso.Targetedsupportschemesarealsoconsideredorimplementedonstorageanddemand-sideresponse.ThesemechanismsareheterogeneousacrossEurope,butmostinvolvesomeformoflong-termcontracts.Stateaidapprovalisrequiredfortheintroductionofcapacitymechanisms:itaimstoensurethesemechanismsareproportionatetotheirgoalintermsofsecurityofsupply,butthecurrentstateaidframeworkcanalsocreateuncertaintyoncapacitymechanismsstability.Moreover,currentlegislationdefinesthemastemporaryadditionstotheenergy-onlymarketmodelandasalast-resortmeasuretoaddresssecurityofsupplyconcerns.Toensureadequacyandsecurityofsupply,capacitymechanismscouldbeacorepartofthemarketdesign.MemberStatesshouldbeabletofreelychoosewhethertoimplementcapacitymechanisms,andtheprocessofapprovalshouldbesmootherthantoday(Recommendations1.8and1.9).Generalprovisions1.8Recommendation:StructurallyembedCapacityMechanismsinthemarketdesignthroughachangeinEUlegislationandregulationstostreamlineandautomatetheapprovalprocessifdesignrequirementsaremet.EUmemberstatescoulddecidewhethertoimplementcapacitymechanisms.1.9Recommendation:StructurallyembedCapacityMechanisms(CMs)inthemarketdesignthroughthemodificationofEUlegislationandregulationswhichsettheirlast-resortandtemporarycharacter.AsCMswouldbeanintegratedpartofthemarketdesign,theyshouldnolongerbeseen19asalastresortandtemporarysolution,whichmaydeterinvestmentstoensureadequacyandsecurityofsupply.CapacityMechanismdesignSimplifyingproceduresforamoresystematicex-anteapprovalofCMswouldincorporatethesemechanismsdirectlyintothemarketdesign.Todoso,theapprovalprocessshouldbebasedonpre-definedguidelines(Recommendation1.10).BuildingoncurrentprinciplesdefinedinEUregulations,theseguidelineswouldfurtherharmonisethekeyaspectsofCMstofosteralevel-playingfieldintheinternalelectricitymarket,aswellasfacilitatecross-borderparticipation.1.10Recommendation:Developguidelinestofosterharmonisationofcapacitymechanismsandsimplifytheapprovalprocess,whilekeepingsufficientflexibilitytoaddressnationaladequacyneedsandspecificities.Inparticular:•Specifymeasurestoensurethatthesemechanismsarecompetitive,market-wide,andtechnologicallyopen,remuneratingall–existingandnew–capacities(includingDSRandstorage)basedontheirrespectivecontributiontosystemneeds.30•Provideforlong-termcontractstobeawardedastheoutcomeofthecapacitymechanisms,tonew-builtplants,DSRorstorage,orformajorrefurbishmentworksofexistingplants.Differentstandarddurationofthelong-termcontractscouldbeaccessiblebasedonobjectiveandtechnology-neutralcriteriasuchasthelevelofinvestmentsandotherrelevantcosts.•Specifymeasurestoensurethatthesemechanismsshouldhaveanefficientinterfacewithenergymarkets.Theirrulesshouldavoiddistortingenergymarkets,suchaswitheligibilitycriteriaoractivationrules.Forinstance,remunerationbasedonavailabilityratherthanactualgenerationwouldavoiddistortions.Inaddition,thedesigncouldintegratefeaturestohedgeconsumersagainstpricespikes,e.g.,throughreliabilityoptions.However,modalitiesofimplementationshouldbecarefullyanalysedastheymaynotbeadaptedtoalltechnologies,particularlystorage.MechanismstoensureadequatesystemneedsAsthesecurityofsupplyissuebecomesmorecomplexwithgrowingsharesofvariablegeneration,thesystemneedswillnolongerbeonedimensionandfocussedoncapacityadequacy.Ensuringadequateinvestmentinfirmandflexibletechnologieswillbenecessarytomaintainsecurityofsupply.Ifthesystemneedsassessmentidentifiesadditionalneedsforflexiblecapacities,suchasrampingconstraintsorinertia,whichwouldunlikelybecovered,adequateprocurementproceduresmayneedtobeestablished(Recommendation1.11).Todoso,nextgenerationcapacitymechanismscouldevolvetoensureavailabilityofsufficientfirmandflexibleresourcesbeyondshort-termbalancingreserves’procurement.1.11Recommendation:Considertheintroductionofaprocurementmechanismallowinglong-termcontractingforflexibleresourcestoensureadequatesupplyofthedifferentsystemneeds(linkedtoflexibility)iftherewouldbeariskthatsuchneedswouldnotbemet.Thiswouldnotreplacetheprocurementofshort-termoperationalreservesthatcurrentlyvaluestheflexibilityofresourcesfor30Inspecificsituationswherenonewinvestmentsareneededbutexistingresourcesabouttoclosecouldsolveveryrareoccurrencesofadequacyissue,strategicreservesmechanismsmaybeanoptiontoconsider.20quickadjustmentsofgeneration/consumptionlevels,butwouldaimtoguaranteethatavailableresourcesaretechnicallyabletoprovideallsystemneeds.Suchmechanismscouldbefurtheranalysedtocomplementthetraditionalcapacitymechanismsandcouldeitherbeseparateorcombinedintoamulti-product‘capabilitymechanism’.Insuchacase,theyshouldbetechnologicallyopen.PrivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreements(PPAs)Overthepasttwodecades,thegrowthinrenewableshasbeendrivenbysupportpolicies,largely‘out-of-market’contractswithapubliccounterparty.Asthecostsofthesetechnologiesreduced,theyhavebecomemorecostcompetitive.Publicsupportforthesetechnologiescangraduallybephaseddownasmarket-driveninvestments,oftenunderpinnedbyprivatecontracts,developandcontributetomeetingpolicyobjectives.TheframeworkforRESandlow-carboninvestmentshouldallowinvestorstochooseorcombinewhethertoenterpublicde-riskingcontracts-iftheyexist-toenterprivatepowerpurchaseagreementsorotherformsofprivatecontracts,ortoparticipateintheelectricitymarketdirectly.Asmentionedbefore,allthesecontractingapproachesmaycontributetoinvestmentsandcanbecomplementaryifwelldesigned.However,thereiscurrentlyarangeoflegal/regulatory,informational,andeconomicbarriersforthebroaderuptakeofcorporatePPAs.AsnotedbytheCommission,the2019ElectricityMarketDirective,theElectricityMarketRegulationandtheRenewableEnergyDirectivealreadyaddressanumberofregulatoryandpolicybarrierspreviouslyidentified.However,thesemeasuresarenotalwaysimplementedinallmemberstatesandlegalbarriersmayremain.Creditworthinessisamajorbarrieracrossmostsectors,particularlyinheavyindustryandmanufacturing,aswellasinlessdevelopedEuropeaneconomies,wheremanyorganisationshaveappropriateenergyfootprintforPPAsbutarenotratedbyanymajorcreditratingagency.ThecomplexityofnegotiatingPPAsactsasabarrierwhichslowsentryintothemarketbylesssophisticatedoff-takers.Thereisalackoflong-termhedgingproductstoaddressimbalancecosts,orcounterpartydefaultswithPPAs.Thereisthereforeariskwhichcoulddeterenteringintosuchagreements.Tomitigaterisks,thereisalackofpossibilitiestotradePPAcontractsonasecondarymarket.Further,inits2019survey,theCommissionnotedlimitedawarenessandinteresttosignPPAs,especiallyforSMEs.Furthermore,characteristicssuchaslongtenuresandfixedpricingmayhavereducedattractivenessforpotentialoff-takersastheycanimpacttheirratingsnegatively.Asafirststep,werecommendremovingbarrierstoPPAs,mitigatingtherisksassociatedwiththesecontracts,andimprovingtransparencyandstandardisationacrossEurope.FurthermeasurescouldalsobeconsideredtoactivelydrivedemandinthePPAmarket.RemovingbarrierstoPPAsLiftinganyremainingbarrierstoPPAsisa‘no-regret’actiontostrengthenlong-termcontractinginthecurrentmarketdesign.Thesebarriersoftenstemfromnationallegislations(Recommendation1.12).211.12Recommendation:MandateMemberStatesthroughEUlegislationtoremoveallunjustifiedbarrierstoPPAs.CounterpartyriskisabarriertoPPAs,astheriskthatoneofthepartiesdefaultscoulddeterenteringintosuchagreementsinthefirstplace.ThisisparticularlytruegiventhelongdurationofPPAcontracts.TostimulatePPAs,MemberStatescoulddecidetotakeon(someof)thisriskformarketparticipantsthroughinsurancemechanismsorpublicguarantees(Recommendation1.13).ThiscouldbedonetodrivePPAsforcertaincategoriesofusers,suchaslargeelectro-intensiveindustrialcustomers,butcouldgofurtherandextendtosmallerplayersandsuppliers.1.13Recommendation:IntroduceaframeworkforMemberStatestoimplementinsurancemechanismsorpublicguaranteesforcounterpartyrisksinPPAs.ShouldMemberStatesdecidetointroducesuchmeasures,differentoptionscouldbeenvisaged,potentiallysubjecttoStateaidapproval.AsisalreadyinplaceinSpainandNorway,MemberStatescouldestablishinsurancemechanismsorprovidepublicguaranteesthatconsumerscouldrequestwhensigningPPAsacrossEurope.•Insurancemechanismsorpublicguaranteescouldbeprovidedtosmallerparties,retailersorconsortiaofsmallerbuyers,tobroadentheoff-takerbaseofPPAs,and/ortolargeconsumers.•Aninsurancemechanismcouldbeintroduced,forinstancethroughthevoluntaryplatformenvisagedinRecommendation1.19.Alternatively,Publicfundscouldofferguaranteesto(i)generators,protectingthemagainstanoff-takerdefault,and(ii)thebanksorotherlenderssecuringrepaymentofloanstakenouttoprepaypartofthePPA.•,Theseguaranteeshaveacost,however,asthepublicentityisundertakingariskonbehalfofgeneratorsand/orlenders.•Ifsuchinsurancemechanismsorpublicguaranteeswereoffered,thiswouldneedtobedoneinawaythatminimisescompetitivedistortions.Asthemarketmaturesfurther,theneedofapublicguaranteemaybereconsidered.AnotherbarrieristhereportingaccountingobligationforfinancialPPAsintheEU(Recommendation1.14).UnderEUstandards,financialPPAsarerequiredtobereportedasderivativesthatarerevaluedaccordingtothemarket.Suchrevaluationcanleadtomovementsinprofitandlossstatementforenergyintensivecompanies.IntheUS,GenerallyAcceptedAccountingPrinciples(GAAP)reportingrulesaresimplerandfinancialPPAsaremorepopular.1.14Recommendation:AnalyseaccountingobligationsonPPAstomakesurethesearenotabarrierforcompaniestoenterPPAs,simplifyreportingforfinancialPPAsandprovideguidancetocompaniesontheirreporting.ThiscouldreducebarrierstofinancialPPAs,whichhavetheadvantageofnottakingoutoforganisedpowermarkets(e.g.,theday-aheadmarket).SmallerplayersstillfacebarrierstosignPPAsand,insomecountries,publicpurchaserulesmaypreventpublicentitiesfromengaginginlong-termPPAsfortheirownelectricityconsumption(Recommendation1.15).Moreover,thesepartiesmaynotbeallowedormayfacedifficultiestopooltogetherandsignjointPPAsthroughaconsortium–suchastransactioncostsandhighercounterpartyrisksduetothehighernumberofcounterparties(Recommendation1.16).1.15Recommendation:Allowallconsumerstosignlong-termPPAs,includingsmallerconsumersorpublicconsumers,andremovelegalconstraintspreventingthemtoentersuchcontracts.221.16Recommendation:EnsuresolidarityconsortiatocontractPPAsonbehalfofmultiplesmallersites/buyersandthemutualisationofPPArisksareallowed.Withamulti-buyerPPAsthroughcorporateconsortia,theconsortiumcouldsignPPAsonbehalfofnumeroussites/consumers(thatwouldnotbeableindividuallytonegotiatePPAs)andwouldbejointlyresponsibleforthecontract.Asaresult,itcouldincludeasolidaritymechanismincaseoneofthebuyersdefaults.Inaddition,thesearrangementsreducethecounterpartyriskfordevelopersthroughthediversificationofbuyers.Todoso,standardPPAcontractsadaptedtoconsortiacouldbeelaborated.Thiscouldevenbeconsideredforthepurposeofcollectiveself-generationmodels.WhenconsumersorsupplierscontractPPAs,theycontributetofinancingthedevelopmentofRESandlow-carbontechnologies.However,intheirelectricitybill,theymayalsopaychargesandleviesaimedatfinancingthedevelopmentofRESandlow-carbontechnologiesonthesamevolumes.ThismayactasaneconomicbarriertothedevelopmentofPPAs(Recommendation1.17).1.17Recommendation:ConsiderremovingchargesandleviesrelatedtopolicycoststofinancethedevelopmentofRESandlow-carbontechnologiesonthevolumesofelectricityacquiredbyconsumersthroughPPAs(physicalorfinancial)withRESandlow-carbongenerators.ThiswouldleveltheplayingfieldbetweenPPAsandpublicde-riskingschemes.TherightpreconditionsneedtobedefinedtoensurethattheconcernedPPAsarenotonlycomplementarytopublicde-riskingschemesforagivenasset,butfullycontributetoitsfinancing.ImprovingtransparencyBeyondremovingbarrierstoPPAs,increasingthetransparencyofPPAinformationwouldhelpmarketparticipantswhensigningnewcontracts.TransparencyrequirementscouldbesetonPPAsignatoriesbenefitingfromsupportforPPAs,suchaspublicguarantees,astonotdiscouragetheiruptake(Recommendation1.18).1.18Recommendation:ConditiontheattributionofpublicguaranteesforPPAstotransparencyrequirementsonprice,volumetypes,andkeycharacteristicsinvolved.IncreasinginformationtransparencyofPPAswouldhelpmarketparticipantsdevelopnewPPAsbyactingasareferencemodel.Thisinformationcouldbeprovidedtotheregulatorsandpublishedinanaggregatedformonthepan-EuropeanvoluntaryplatformdevelopedaspartofRecommendation1.19.SupportingstandardisationThestandardisationofPPAcontractsandproductprofileswouldhaveadualeffect,bothloweringthetransactioncostsacrosscontractingpartiesandenablingsecondarytradingofcontractsduringtheirlifetime.Thelatterwouldreducetherisksofsigningsuchlong-termcontracts,astheycouldberesoldmoreeasilyshouldthesituationofoneofthepartieschange.CreatingstandardcontractsandanexchangeplatformforPPAswouldbethefirststepsinloweringtransactioncostswithready-madecontractualagreementsandliquiditypooling(Recommendations1.19and1.20).Yet,thecreationofstandardcontractsorvoluntaryplatformswithstandardcontractsdonotguaranteetheiruse.Tocreatethenecessaryconditionsforsecondarytradingopportunitieslimitingtherisksfaced,standardisationofcontractscouldbedirectlyincentivised(Recommendation1.20).1.19Recommendation:Establishapan-EuropeanvoluntaryplatformtofacilitatePPAtrading.Theinterestofsuchaplatformcouldbeconfirmedthroughamoredetailedassessmentandtheconsultationofthemarket.Theplatformwouldfirstfacilitatesupplyanddemandtomeetmoreeasily.23ThisplatformwouldprovidestandardcontractualarrangementsforPPAs,tofacilitatesecondarytradingoverthelifetimeofsuchcontractsifnecessary.ThisarrangementwouldalsoallowtheplatformoperatortoactasacentralcounterpartytoPPAcontracts,potentiallybackedbypublicguarantees(seeRecommendation1.18).Thevoluntarynatureofthisplatformwouldstillallowforbespokecontractualarrangementsoutsideoftheplatformifrequiredbysomemarketparticipants.1.20Recommendation:EstablishstandardisedPPAcontractsandproductsattheEUlevelandpromoteorincentivisetheiruse(e.g.,conditiontheattributionofpublicguarantees,streamlinedapprovalprocesstoparticipateinPPAtradingplatform).ThiscouldbebuiltonexistingworktodevelopstandardisedPPAcontracts,likethestandardEFETCorporatePPAcontract.31EUGuidelinescouldsetoutsomeoftheprinciplesguidingthedraftingofthesecontractsandthedesignoftheproducts.Standardisationcouldalsoapplytotheproductdesignandprofile.ThiswouldfacilitatenegotiationofPPAs,includingforsmallerorlessinformedconsumers,aswellastheirsecondarytrading.Thesestandardcontractsmustnotbeimposed,astheymaybeadaptedtoanysituationsorspecificneeds,buttheiruseshouldbepromotedandincentivised.Asanexampleofanincentive,followingRecommendation1.18,theattributionofpublicguaranteescouldbesubjecttostandardcontractualclauses.OneofthebarrierstostandardisationandstrongerdevelopmentofPPAsislinkedtothebalancing/shapingrisk,i.e.,theriskthattheactualoutputoftheassetdifferseitherfromthestandardproductprofileorfromtheconsumerloadprofile.Giventhespecificshapeoftheoutputoftheseassets–inparticular,variableRESplants–andtherelativelylowdevelopmentofPPAs,thereisnoadequateproductorservicesofar.EncouragingmarketparticipantstodevelopthesenewproductsorservicescouldliftbarriersforsomepartiestoenterintosuchcontractsastheywouldfacilitateofferingstandardshapedproductsorbalancingsupplyanddemandwithsuchPPAs,potentiallybothforgeneratorsandoff-takers/suppliers(Recommendation1.21).1.21Recommendation:Encourageentities(e.g.suppliers,generators,flexibilityprovidesorPPAaggregators)tosupplyservicestocoverthebalancing/shapingriskagainstremunerationunderthelongterm.Theseentitiescouldsellasetofstandardisedfinancialderivativeswithdifferenttimehorizonsdesignedtohedgetheshapingandbalancingrisksfortypicalwindorsolarprofilesinagivenzone.Tofacilitatethis,marketoperators,suchasthePPAplatformoperator,couldofferatradingplaceforsuchproductsanddefinetheirstandardfeaturesinconsultationwithmarketparticipants.Theseentitiescouldalsoofferbalancing/shapingservicestothePPApartiestocomplementoutputstomeetPPAprofiles,whichcouldbebackedupbyflexibleresourcessuchasstorageordemand-sideresponse.AsmarketparticipantssigningaPPAarestillexposedtobalancing/shapingrisks,thisrecommendationaimstoencouragemarketpartiestoofferandpotentiallytostandardisehedginginstrumentsandbalancing/shapingservices,andreducetransactioncosts.StimulatingdemandandsupplyinthePPAmarketInaddition,moredirectmeasurescouldbeimplementedtodrivedemandandsupplyforPPAs.Todoso,thereisarangeofpotentialmeasuresthatshouldbelefttothediscretionofMemberStates.Forinstance,tostimulateliquidityonthedemandside,publicentitiescouldcontractpartoftheirelectricityconsumptionthroughPPAs(Recommendation1.22).31EFET(2019)CPPAStandard.241.22Recommendation:Envisageusingpublicentitiesasanexample,bycontractingpartoftheirelectricityconsumptionthroughPPAs.MemberStatescoulddecidetoimposeaminimumlevelofPPAsupplyforthepublicsector’sconsumption.Asalargeconsumer,procuringelectricityforpublicsectorusethroughPPAswouldstimulatedemandforsuchcontractswithrenewables.DevelopinggovernmentcontractscanalsoimprovethestandardisationofPPAsbysettingreferencecontractsforpublicsectordemandandbeyond.PublicframeworkforRESandlow-carboninvestmentThereiscurrentlyawidevarietyofsupportschemesimplementedinMemberStates.Tomeettheincreasedrenewableenergytargetsatthelowestcostsforsociety,andconsideringthecostreductionofthesetechnologies,RESsupportschemesareevolvingintocontractingschemestode-riskinvestmentinRESandlow-carbontechnologies.Asexplainedintheprevioussubsection,contractingschemesmaydevelopbetweenprivatepartieswithoutpublicsupportthroughPPAs,providedbarriersarelifted.However,inmanycountries,thesewouldcoexistwithpublicschemes.ThelargeshareofRESdevelopmentismostlybasedontechnologieswithlowvariablecosts,aswellasvariableandcorrelatedgeneration.Thiscouldleadtoa‘cannibalisation’effect,meaningthatthedevelopmentofthesetechnologieswoulddampenpricesatwhichtheywouldbeabletoselltheirelectricity,thereforemaintainingorevenincreasingtheneedforde-riskingmechanisms.Insuchasituation,thecostsofpublicde-riskingschemes,togetherwithgridcosts,couldrepresentalargeshareoftheconsumers’bills.Theallocationofthesecostsandbenefitsshouldthereforebetreatedadequatelytoensureitsefficiency.Thesepublicde-riskingschemesfornewassetscouldalsobringthebenefitsoflong-termcontractingtoconsumers.However,thesecancreatemarketdistortionsforwhichthecostsincreasewiththepenetrationofrenewables.Further,theenergycrisishasshownthatrenewablesupportschemeswithuncappedupsiderevenuesinthecaseofhighpricesmaynotberesilientandcouldtriggerfuturepolicyinterventions.Thisisbecausetheperceptionof‘windfallprofits’andneedtoraisemoneytofinanceconsumerprotectionmayleadMemberStatestointerveneandcreatepolicyorregulatoryuncertainty.Therefore,theoptimaldesignsofcontractingschemesfornewassets,adaptedtothedifferentconsideredRESandlow-carbontechnologies,shouldbeidentifiedtoreducecurrentmarketdistortions,andcontributetoprotectingconsumers.Thecontractingframeworkcouldbebasedonacontractfordifferencedesign.Forinstance,two-sidedcontractsfordifference32(CfDs)designhelpprotectconsumersandhavebeenincreasinglyusedacrossEurope.Theuseofthesetwo-sidedCfDscouldavoidex-postinterventionsofgovernments,especiallyincountrieswheretheneedtofurtherprotectconsumersislikelytoappear.However,thesearenottheonlyschemesthatcouldbeenvisagedandcouldbeadequate.Forinstance,forcapital-intensivetechnologieswithlongconstructiontimes,schemesbasedonthedefinitionoftheremunerationofanassetbasecouldalsobeconsidered.32Contractwherethebuyerpaysthecontractual‘strike’pricetothesellerforthecontractedvolume,andthesellerpaysthereferenceindextothebuyer.Thereferencepriceistypicallythepriceontheday-aheadmarketandcanbeweightedaveragedacrossagivenperiod(e.g.amonth)usingastandardprofile.Asaresult,intimeswherethestrikepriceexceedsthemarketprice,thegeneratorreceivesapremiumandintimeswherethestrikepriceisbelowmarketprice,ashareofthemark-upisretrocededtothebuyertoreachthestrikeprice.25Publicde-riskingschemesfornewassetsshouldtypicallybeallocatedthroughacompetitivetenderingprocess(Recommendation1.23).Furthermore,theirdesignprinciplesmustbeadjustedtothemarketenvironment,toreducenegativeimpactsonshort-termmarketsandtoavoiddrainingliquidityfromtheforwardmarkets.Contractingapproachforpublicde-riskingschemes1.23Recommendation:Allocatepublicde-riskingcontractsfornewRESandlow-carbonassetsthroughacompetitiveprocessandharmonisetheirdesignacrossEurope,usingmarket-basedtenders.TheEUlegislationshouldalsospecifythattheparticipationinthesetendersshouldnotbemandatorytoallowformarket-driveninvestments.Exemptionsfromthecompetitiveallocationprocesscouldbeallowedforspecificcapacitiesforinstance,suchassmall-scaledistributedresourcesorintheabsenceofpotentialcompetition.Guidanceonbestpracticesforthedesignofpublicde-riskingcontractsAtoolboxapproachcanbetakenonthedesignofsupportschemesacrossMemberStates,toincreaseharmonisationofde-riskingschemesacrossEuropewhileleavingfreedomtoMemberStatesontheirimplementation(Recommendation1.24).ThiswouldhelpminimisemarketdistortionswherepossibleandalignEUcountriesonbestpractices.1.24Recommendation:Developguidanceonbestpracticesforthedesignofpublicde-riskingcontracts,leavingdecisionsondetaileddesignuptoindividualcountries.Forinstance,theseschemescouldbebasedon(two-sided)contractsfordifference,butdifferentoptionsarepossiblefortheimplementationofschemestode-riskRESandlow-carboninvestments.ForCfDs,thedesignshouldconsiderthefollowingpoints:•Producttype:Publiclong-termcontractscaneitherbebasedonpurelyfinancialinstrumentsorbeattachedtophysicaldeliveryofelectricity.Financialproductshavetheadvantageofde-riskingRESandlow-carbongeneratorswithlessimpactsonshort-termoperationsbutwouldrequireadequateclausestoensuretraceabilityandobjectivemeeting.•Timehorizon:Contractlengthcandiffer,particularlybasedon(i)thetechnologycharacteristics(largerinvestmentstobefinancedoverlongerperiodsmayneedlongercontracts)and(ii)thetrade-offbetweenthemarketrisktobesupportedbyconsumersandinvestorsinRESandlow-carbongeneration.Longercontractlengthswouldgrantmorerevenuecertaintytoinvestors,butthisriskistakenonbyconsumersforlongerperiodsoftime.•Counterparty:Suchschemeshavetypicallybeencontractedbypublicentities,butalternativesarepossibleinthespecificdesign(publiccompany,etc.).Thecostandbenefitallocationwouldalsobeakeycomponentoftheconsumerframework,asitcouldplayaroleinprotectingconsumersbybringingbenefitsofstablecostsofRESandlow-carbonassetsmoredirectlytothem.•Referencemarket(s):Whererelevant,definereferencemarketsinordernottodistortthehedgingstrategyorimpedeliquidityincertainmarketsegments.Forinstance,publiclong-termcontractsbasedonCfDsaretypicallyreferencedonday-aheadmarketprices33,butthismayaffecttheliquidityinforwardmarkets,especiallyasRESshareincreases,becauseit33Seefootnote32.26maydriveliquiditypredominantlytotheday-aheadmarket.Otherreferencepricesarepossible,includingbutnotlimitedtoforwardmarkets,intraday,orevenacombinationofreferenceprices.Includingreferencetoforwardmarketsinthecalculationofthereferenceprice34couldfosterliquidityinforwardmarketsandlonger-termhedgingfortheseenergysources.However,itwouldincreasemarketrisksforinvestors,becauseofthedifferencebetweentheexpectedproductionprofilesandtheproductstradedinforwardmarkets.•Energyprofile:Thesecontractsmayremuneratephysicalelectricitygeneration,productioncapability,and/orbebasedonstandardproductionprofiles.ForCfDs,usingstandardproductionprofilessetsincentivesforproducerstobeavailableintimesofphysicalshortness/highprices,butcouldalsoshieldtheproduceragainstthevolumerisklinkedtothepossibilityofnotbeingdispatched(e.g.,duetocongestion).Thecontractcouldalsocoveronlyasetpercentageoftheproductionofanasset,allowingassetownerstochooseashareuptoasetlimit,andhavesuspensionclausesfortemporaryperiods,suchasintimesofnegativeprices.Thiscouldprovidebetterimprovedincentivesforefficientdispatchaswellastobalancebetweenpublicandprivatecontracts.•Technologicalspecificity:Beyondcontractlength,differentcontracttypescouldbedefinedtomatchthecontractfeaturesmorecloselytoeachtechnology’scharacteristics.Two-wayCfDsaremostrelevantforvariableRESandlow-carbontechnologies,whiledispatchableRESandlow-carbontechnologies(e.g.,basedongreen/syntheticgasesorstorage)mayrequireadaptedschemestoensureadequateshort-termincentives.•Efficientsystemincentives:Thesecontractsshouldincludeprovisionstoensureefficientdispatchincentivesinthecontractdesign–forinstancebyavoidingincentivestoproduceattimesofnegativeprices.•Contractualconditions,includingterminationconditions:Theimplementationofsuchschemesshouldgothroughapropercontractingframeworktosecureitsapplicationforparties.TherulesregardingtheterminationconditionsofpartiestothecontractsshouldbedefinedinadvanceandcouldbebasedonCommissionrecommendations,inordertoavoidex-postmodificationsbyMemberStatesasthiswouldincreaseregulatoryrisksforinvestors.Optionsfortheallocationofthecostsandbenefitsofthelong-termpubliccontractingschemesIncaseofpublicde-riskingschemeswithRESandlow-carbonproducers,differentsolutionsarepossibletoredistributethecosts(andbenefitsincaseofe.g.,two-sidedCfDs)toconsumers.Todoso,therearekeydimensionstoconsider:i.Theimpactonconsumerpricesignals:theallocationofcostsandbenefitsofpublicde-riskingschemescouldhaveanimpactoncompetitiveness,electrification,andenergyefficiencydecisionsorpurchasingpower.Itshouldcomplementtheenergypricecomponentofconsumers’bills,andassuch,itmayaffectpricesignals.Moreover,incaseofcostsandbenefits,theirallocationcouldact,toacertainextent,asapricestabiliserandcontributetoprotectingconsumersfromperiodsofhighprices,iftheallocationiswell-designed.However,ifappliedtoflexibleloadsuchasstorageassetsorsomeflexibleloads34Thereferencepricecouldbe,forinstance,setattheweightedaveragepriceofforwardmarketindicesandday-aheadmarketprice.27indemand,itmayreduceincentivesforthemtooptimisetheirconsumption/flexibilityaspricespreadsbetweenpeakandoff-peakmaybereduced.ii.Theriskallocationandtheimpactonsuppliers:thedefinitionofthecounterparty(ies)andtheallocationofcostsandbenefitsofpublicde-riskingschemesmaycreateadditionaluncertaintiesandrisksforsuppliers,whichwouldinturnnegativelyimpactconsumers.Itisthereforeimportanttoensurepublicde-riskingschemesdonotcreateunnecessaryburdensorrisksforsuppliers.iii.Theinterplaywiththeretailmarketandthedynamicsofretailcompetition:moregenerally,theseschemesshouldbedesignedtoavoidnegativeinterferenceswiththeretailmarketandcreatingdistortionsbetweencompetitors.Toaddressthesekeydimensions,theframeworkforpublicde-riskingschemesshouldconsiderhowtoorganisetransfersbetweenpartiesand,morespecifically,thecounterparty(ies)tolong-termcontracts(Recommendation1.25).Then,thedesignofthemechanismwillbekeytoprovidetherightincentivesandallocaterisksefficiently(Recommendation1.26).1.25Recommendation:Assesswhichoptionsforcounterparty(ies)intheapplicationofthelong-termpubliccontractingschemeswouldbethemostsuitable,consideringinparticulartheirimpactsonpricesignalsandincentivesforconsumers,thefairallocationofrisksandtheimpactsonsuppliersandtheinterplaywiththeretailmarket.Severaloptionsarepossibletodesigntheimplementationoftheseschemes,whichallpresentadvantagesanddisadvantages.ThelistbelowisnotexhaustiveanddoesnotincludethemanydifferentsolutionsMemberStateshaveinadditiontoelectricitymarketregulationwhenitcomestofinancingpublicmeasuresanddecisions.Someexamplesare,however,listedtoillustratesomeofthepossibleoptions:1.Long-termcontractcarriedoutonbehalfofconsumers,withcostsandbenefitsallocatedeitheracrossallconsumersortoasubsetthroughleviesorchargesembeddedingridtariffs.Thissolutionwouldalleviatesomeoftheriskslinkedtotheswitchingofconsumersacrosssuppliers,sincecostsandbenefitscanbeattributedtoconsumersbasedontheiractualload–independentoftheirsuppliers.However,thecostsandbenefitsshouldbeallocatedatsufficientlygranularintervals,toavoidfiscalissuesandinefficiencieswithlaggedpayments.Moreover,ifnotdoneproperly,thisallocationcoulddampenpricesignals.Thedesignofthelevystructurecanbeacomplextask.Itshouldnotdistorttheratiobetweenpeakandoff-peakpricesortheincentivestoconsumeinoff-peakperiodswhenthereisabundantRESandlow-carbongeneration.2.Long-termde-riskingschemescarriedoutonbehalfofconsumers,withcostsandbenefitsallocatedthroughsuppliers.Thecostsorbenefitsgeneratedbythecontractinagivenperiod35couldbedistributedacrosssuppliers,forinstanceproportionallytotheircustomers’loadduringthatperiod.Thesupplierswouldthenpassonthecostsorbenefitstotheirconsumers.Likethepreviousoption,thissolutionwouldalleviatesomeoftheriskslinkedtotheswitchingofconsumersacrosssuppliers.Moreover,supplierswouldbeabletocombinethesecostsandbenefitswiththerestoftheirsourcingcostsinadynamicwaytoprovidemoreefficientpricesignalsthroughtheirpriceofferstoconsumers.However,itmaycreateuncertaintyonthecosts35Ashorterperiod,e.g.hourlyanddaily,wouldimprovecost-reflectivity.28andbenefitstorecoverandonthebalancingofthesuppliers’portfolio.Further,costsmaybeallocatedtoconsumerswithlessprice-elasticdemandandraiseconcernsregardingthefairnessofallocation.3.Resaletosuppliers/consumersviacentralisedauctionsoflong-termcontractslices.Suppliers/consumerswouldbeabletoaccessmedium-termcontracts(1-3yearsforexample),throughvoluntary,open,andcompetitiveauctionsorganisedbyacentralpublicorprivateentity.Thiscentralentitywouldsourcethiselectricitybyactingascounterpartytolong-termcontractswithRESandlow-carbonsourcesthroughtenders.Theselong-termcontractswouldthenbebrokendownintoshortercontractsandauctionedtothesuppliersorconsumers.Comparedtothepreviousmodel,thisoptionreducesthesupplierriskexposurewithlong-termcontractsandwouldleveltheplayingfield.Theshortercontracttermsareindeedmorecloselyalignedwiththecontractualtermsontheretailmarket,andsosupplierscanbetteraligntheirelectricitysourcing.Consequently,ashareoftheriskistransferredtothecentralentityhavingenteredthelong-termcontracts,astherevenuesfromtheseauctionsmaynotcorrespondtothepaymentstowardstheRESandlow-carbongeneratorsunderthesecontracts.Voluntaryparticipationinthecompetitiveauctionscouldalsocreateanadditionalriskthatthevolumescontractedonthelong-termarenotboughtbysuppliers/consumers–forexampleattimeswhereexpectedshort-termmarketpricesarelowerthanexpectedauctionprices.Thereisarangeofoptionsdependingontheriskslefttothecentralentity.Thecentralentitycouldbearsomerisksandbeincentivisedtoorganisetheresaletosuppliers/consumersinthemostefficientway.Ortheallocationprocesscouldbestronglyregulated,andthecentralentitywouldbearno/verylimitedrisks.Atleasttoacertainextentdependingonthemandateandriskslefttothecentralentity,someoftheseriskswouldeventuallybefallconsumersandtheresidualcostsorbenefitswouldneedtobeallocatede.g.,toconsumersthroughalevyorcharge(cf.option1).Moreover,thecentralentitycouldinterferewithforwardmarket,soitsinteractionwiththemarketshouldbecloselylookedattoavoiddistortionsorrisksregardingcompetitionandefficiencyoftheforwardmarket.Inthefirstoption,i.e.,iftheallocationofthecostsandbenefitsisthroughalevyorcharge,akeyissuewouldthenbewhetherandhowthesecostsandbenefitsmayberedistributedtoconsumers,particularlyinpresenceofconsumerswitching.Ifsuchcostsandbenefitsareallocatedinlongintervals,thensuppliersandtheirconsumerscouldfacerisksduetotheasynchronousnatureofmarketcostsandpublicde-riskingschemes.Moreover,ifnotproperlydesigned,de-riskingschemescoulddampenshort-termpricesignalstoconsumers,havinganegativeimpactontheoverallefficiencyofthemarket.Ifconsumers’pricesaremostlydefinedbasedonlong-termarrangementsandnolongerreflecttheshort-termvariationsinprices,consumerswouldhavenoorlimitedincentivestomanagetheirloadefficiently,e.g.,bychargingtheirelectricvehiclesatnightratherthanduringpeakhours.However,short-termpricesignalscanstillbesenttoconsumersunderlong-termde-riskingschemes.Hedgingpricesdonotnecessarilyremovetheincentivesforconsumerstoreducetheirconsumptionintimesofhighpricesiftheyareproperlyreflectedinretailoffers.Itisthereforeimportanttoallocatecostsandbenefitsinanefficientway(Recommendation1.26).291.26Recommendation:Morespecificallyinthecaseofoption1(allocationthroughalevyorcharge),allocatethecostsandbenefitsofpublicde-riskingschemesfornewinvestments(forexampleincaseoftwo-waycontractsfordifferencesandsimilarStatearrangements)inawaythatcontributestohedgingforconsumerswithoutincreasingtheriskforretailerswhilenotpreventingthedevelopmentofofferswithordistortingtime-differentiatedsignalssuchastime-of-use,criticalpeakpricingordynamicpricingoffers.Thecostsandbenefitsofsuchschemesshouldbepassedthroughtoretailersandconsumersinaproportionateandnon-discriminatoryway,and,asaccordingtoRecommendation1.17,mayexclude,undercertainconditions,volumessourcedthroughPPAs.Theallocationcouldbeproportionaltotheoverallconsumption,theconsumptionduringtighterperiods,thesubscribedcapacity,throughafixedcomponent,orthroughacombinationofthesepossibilities;however,alltheseapproacheshaveprosandcons.Forinstance,anallocationproportionaltotheconsumptioncouldbedeemedequitablebutdampenpricesignals(reducingtheratiobetweenpeakandoff-peakprices)andincentivestoelectrification.Conversely,apurelyfixedcomponentwouldlimitnegativeimpactonincentivesbutcouldraiseacceptabilityissues,especiallyforsmallerconsumers.Eveniftheallocationofthecostsandbenefitsarebasedonconsumption,thereareavarietyofavailableapproachestopreservetheabilityforsupplierstoprovidepricesignalstoconsumers.Forexample,theallocationofcostsandbenefitsofde-riskingschemescouldcoverabaseloadconsumptionathedgedprices,leavingshort-termsignalsforanydeviationsfromthesepre-agreedvolumes.Alternatively,costsandbenefitscouldalsobeallocatedtoconsumersthroughfixedrebatesorfixedfees(overagivenperiod,e.g.,amonthorayear)sothatactualconsumptioncanstillexposedtoshort-termsignals.Theallocationtoconsumersshouldbedynamic,i.e.,updatedonaregularbasis,sothatthebenefits–usuallylinkedtohighpricesinthemarket–maybedistributedtoconsumerstobalanceanincreaseinpricesduetothesehighprices,andviceversa.Thisway,consumersmaybenefitfromstablecostsofRESandlow-carbontechnologies.Facilitatinglong-termhedgingthroughalongertimehorizonofforwardmarketsandimprovedliquidityBetterliquidityisneededforthemarkettofunctionefficientlyandtoimproveriskhedgingforallmarketparticipants(producers,suppliers,aggregators)intheforwardmarket.Therearecurrentlybarriersforparticipantstohedgeonforwardmarkets.First,thetimehorizonofforwardmarketsisinsufficienttosupportinvestment.Thereislowdemandforlong-termforwardhedgingfromsuppliers,duetouncertaintiesontheirlong-termconsumerportfolio.Asaresult,forwardpowermarketslackliquidproductstohedgebeyond2-3years–eveninbiddingzoneswithmatureforwardmarkets.Moreover,thevolumeoflong-termtransmissionrights(LTTRs)allocatedbyTSOsforcross-borderhedgingistoolowandtheirdurationislimitedtoayear,limitinglong-termhedgingpossibilities(Recommendation1.28).Also,asmentionedpreviously,renewablesundersupportschemesusuallyhavenoincentivetohedgeintheforwardmarket,especiallywhenthesupporttheyreceiveislinkedtoday-aheadprices.Thedesignoftheseschemescouldbeadaptedtoprovidesomeincentivesforproducerstohedgeinforwardmarkets.30Furthermore,collateralrequirementsareabarriertohedginginforwardmarketsforproducers,consumers,andsuppliers.Collateralrequirementsactasabarriertoentryformarketplayersandreducetheoverallshareofhedgedvolumesonforwardmarkets.Therearecurrentlyrestrictionsastowhatcanbepostedascollateralonexchanges(Recommendation1.27).Finally,regulatoryinterventionsincreaseuncertaintieswhichcanaffectforwardmarketliquidity(Recommendation1.29).Theycanpotentiallyaffectthespotmarketpriceand,hence,thevalueoftheforwardcontracts(i.e.,theIberianMechanism,thecaponinframarginalrents).Wefirstrecommendremovingbarrierstohedginginforwardmarkets.Measuresthroughtheconsumerengagementandprotectionframeworkcouldalsostimulatedemandforlong-termhedging.Marketmakerscouldalsobeconsideredtoactivelydriveliquidityonthesemarkets.Removingbarrierstoforwardmarkethedging1.27Recommendation:Easecollateralregulationsinforwardmarkets,throughachangeintheEURegulations,bywideningthetypesofcollateralaccepted,suchasnon-collateralisedbankguarantees,oracceptingunderlyingelectricityproduction,customercontracts,oremissionstradingscheme’spermitsascollateral.TheCommissionDelegatedRegulation(EU)2022/2311introducingtemporaryemergencymeasuresoncollateralrequirementsisnotsufficientasithelpstoonlyalleviatetheliquiditypressureofaround15%oftheenergymarketparticipants.AstructuralandwidersolutionshouldbeaddressedthroughtheongoingEuropeanMarketInfrastructureRegulation(EMIR)reviewprocess:thecollateralacceptedbycentralclearingcounterparties(CCPs)foreitherbankguarantees,orpublicentityguaranteesshouldbeaccessibleforthewiderenergyclearingindustry,ratherthanjustfornon-financialenergycounterpartiesthatareclearingmembers.1.28Recommendation:Facilitatehedgingopportunitiesacrossbordersforforwardmarkets,whereLTTRsarealreadyused,throughachangeinEURegulations,by:•Increasinglong-termcross-bordercapacityvolumesofferedbyTSOsthroughmoreefficientcapacitycalculation36andadequateinvestmentwhereneeded.•KeepingtheoptionalityofLTTRsasitisusedbymarketparticipantstoproperlyhedgetheirunderlyingrisksandexposuresandhencecontributetohigherliquidity.Obligationswillnotinterestmarketparticipantsandwillbedetrimentaltoforwardmarketliquidity.•AllocatingLTTRproductswithmaturitiestomatchatleastforwardmarketproductmaturities,aminimaintroducing3-yeartenorLTTR.Longertenorscouldbeenvisagedtoenablecross-borderPPAs.•InvestigatingthepossibilitytoincreasethefrequencyofauctionsforLTTRproducts.Detailsonthegranularityofproductsandfrequencyofauctionsshouldbecarefullyassessedandconsultedwithmarketparticipants.Anychangeofallocationdesignmustbecarefullyassessedthroughcost-benefitanalysisandaddedvalueproven.36NotethatEurelectricconsidersthattheaddedvalueofflow-basedcapacitycalculationandallocationhasnotbeensufficientlydemonstratedandishencenotcomplianttoforwardcapacityallocationguideline.Theimplementationofflow-basedcapacitycalculationandallocationwouldbevaluableandcontributingtobetterhedgingpossibilitiesonlytotheextentthatmorecross-zonalcapacitiesbeingallocated,whichshouldbetheultimategoalgiventheneedforlong-termhedgingundercurrentcircumstances.31•Facilitatingsecondarytrading,e.g.,havingpowerexchangeseasingtheexchangeofLTTRsbetweenmarketparticipantsatapriceagreedbetweenthem(commercialtransaction).1.29Recommendation:Makeregulatoryframeworksstable.Regulatoryuncertaintyunderminesinvestors’confidenceinmarkets,hedgingopportunitiesandendsinlackofinvestments.Inthisregard,revenuecapsonexistinginframarginalproductionmustbeended.Stimulatingdemandandsupplyinforwardmarkets,includingatlongerhorizons,Goingfurther,iftheeffortstoremovebarrierstoforwardmarkethedgingandfacilitatecross-borderhedgingarenotsufficientandtherearestillhurdlestohedginginthelong-term(upto7-10years),moredirectactionsmayneedtobeundertakentoimprovetheliquidityonforwardmarketsonanadhocbasis(Recommendation1.30).1.30Recommendation:Explorevoluntarymechanismsformarketmakersinforwardmarketstostimulateliquidityupto7-10years.Thesemarketmakingservicesshouldbecontractedthroughamarket-basedprocesswithvoluntaryparticipation.Theselectedentityperformingthemarketmakingfunctionwouldhavetheobligationtopostaminimumvolumeofbuyandsellordersforselectedstandardproducts,withamaximumbid-askspreadtoincreaseliquidity.Inexchangeforthisservice,themarketmakerwouldberemuneratedwithacompetitivelysetfeethroughthetenderfortheattributionofitsfunction,forinstancechargedthroughnetworktariffs.Theimplementationpracticalitiesshouldhoweverbecarefullyanalysed.PillarIII:AframeworktocoordinatethefuturesystemneedsIntroductionThefastdecarbonisationofthepowersystemraisesnewchallengesforitscontinuedsafeoperation.Timelydevelopmentofsourcesofflexibleandfirmpowerwillbeneededalongsidethegrowthofrenewables.Atthesametime,newopportunitieswillemergebothonthesupplysidewithnewstoragetechnologiesandonthedemandsidewithnewflexibleloadsfromtheelectrificationofthetransport,industry,andbuildingssectors.Anenhancedframeworkforassessing,inaforwardlookingway,theevolutionofsystemneedsintermsoffirmandflexibleresourcesisnecessarytoprovidevisibilityformarketparticipantsandnetworkoperators.Inparticular,itmightbeusefultoimprovetheplanningapproachfornetworkinvestment,movingawayfromanincrementalreinforcementofthegridtoallownetworkoperatorstoanticipateinvestmentsandtodimensionthenetworktobefitforthefuturepowersystem,whileincorporatingtheuseofflexibility.Weproposetoenhancetheexistingsystemplanningframeworkalongthreemainaspects:•Expandingthescopeofsystemneedsassessmenttohavea‘wholesystem’perspective•Improvingthecurrentmethodologiesusedinsystemneedsassessment•ReviewingthegovernancearrangementstoconductthesystemneedsassessmentWedetailourrecommendationsbelow.32ScopeofthesystemneedsassessmentCurrently,MemberStatesdevelophigh-levelnationalenergyandclimateplans(NECPs)toaddressenergyefficiency,renewabledevelopment,greenhousegasemissionsreductions,interconnections,andresearchandinnovation.37Theseplansshouldcoverboththemedium-(10years)andthelong-term(30years).TheyareassessedatEUlevelbytheEuropeanCommissiontoestablishwhethertheyaresufficientforthecollectiveachievementoftheEnergyUnionobjectives.BasedontheNECPs,differentforwardlookingEUpowersystemstudies(TYNDP,ERAA)arecarriedout.Theyfocusprimarilyon(i)electricitynetworkexpansionor(ii)capacityadequacy.Thesestudiesthereforehaveanarrowfocuscoveringonlypartiallythedifferentsystemneeds,suchasflexibility(long-orshort-term)orsystemstability.Theymaylackmoredetailedinformationonnetworkconstraintstoproviderobustadequacyassessment.Further,thesestudiesoftenlackacomprehensiveassessmentfromawholeenergysystemperspective(Recommendation1.31).Forexample,powerandgassystemsynergiesarenotfullyassessedinnetworkexpansionstudies.Inaddition,demand-sidecontributionstotheenergysystem,likethoseassociatedwiththeelectrificationoftransport,industryandbuildings,orelectrolysers,arenotfullycapturedincurrentstudies(Recommendation1.32).Moreover,thesestudieshaveadifferenttimehorizon,andoftendonotprovidealong-termperspectiveontheevolutionofsystemneeds.Whilenetworkexpansionstudieshaveatimeframeof20years,adequacystudiesarelimitedto10years(Recommendation1.33).Thescenariosunderpinningcurrentstudiesextendto2050,buttheyarelimitedtohighlevelnarrativestocoordinateactionsatpan-Europeanlevel,andtoprovideinformationtopolicymakersandstakeholderstosupportdecision-making.1.31Recommendation:WidenthescopeofelectricitysystemneedsassessmentinEUlegislationtogobeyondthenetworkexpansionandcapacityadequacycoveredinERAA/TYNDP,bringmoreconsistency,andencompassthedifferentsystemneeds,includingnetworkneeds,adequacyandflexibility.Asafirststep,developamoregranulardefinitionofthesystemattributesthatwillbevaluableinthefuturepowersystem.Theseattributesinclude:1.Firmcapacity:orthedispatchablegeneration,demand-sideflexibility38,orstoragetoensureadequacybetweenavailablegenerationandresidualloadatpeak(aftersubtractionofvariablegeneration).2.Flexiblecapacity:ortheextenttowhichcapacitiesinapowersystemcanmodifytheirelectricityproductionorconsumptioninresponsetovariabilityofthesystemstate,expectedorotherwise.39ToperformthissystemneedsassessmentatregionalandEuropeanlevels,inputsfromnationallevelsshouldbeprovidedonthebasisofadequatecooperationbetweenTSOsandDSOstoencourageconsistencyandproperlytakeintoaccountdistributedresourcesaswellassystem-relevantdistributionnetworks’constraints(ifany).37InapplicationoftheRegulation(EU)2018/1999ontheGovernanceoftheEnergyUnionandClimateAction.38Demand-sideflexibilitycanbeexplicit(i.e.respondingtospecificactivations)orimplicit(i.e.respondingtopricesignals)andcanprovidebothcapacityatpeak(firm)andflexibility.39Toillustrate,thisincludesforinstancetheabilitytorampupordowntofollowtheevolutionoftheresidualload,especiallyinsystemswithhighphotovoltaiccapacities.33Moreover,thisassessmentshouldbesufficientlydetailed,forinstance,consideringpossiblerestrictionsoroutagesoncross-zonalinterconnections,congestions,etc.Otherwise,nationalassessmentswillneedtoprovideahigherlevelofdetail,riskinginconsistenciesandinefficientcoordinationatEUlevel.Lastly,thesystemneedsassessmentshouldnotbetoobottom-updrivenortooincrementalandshouldconsiderthepossibilityandtherelevancetodevelopanEUoverlaygrid(ora‘supergrid’)andtoanticipateinvestmentsinnetworksandoptimisetheirdimensioningtakingintoaccountthelong-termneeds.1.32Recommendation:Includeacross-sectorassessmentinlong-termsystemneedsassessment,includingthepotentialconsumptionandflexibilitycontributionsoftheindustrial,buildingsandtransportsectorsthatelectrify,aswellasthedevelopmentofhydrogen,andmorebroadly,ofrenewableandlow-carbongases.1.33Recommendation:Extendthetimehorizonofsystemneedsassessmenttoatimeframealignedwithdecarbonisationobjectives,reflectingthekeypolicytargetsandmilestonessuchas2040and2050.MethodologyforthesystemneedsassessmentInadditiontowideningthescopeofsystemneedsassessments,thecurrentmethodologiesneedtobeenhancedtoreflecttheevolutionofthepowersystemoperationalchallenges.TheseimprovementstothemethodologyforthesystemneedsassessmentrequireanEUharmonisedapproachatprinciple-level,underpinnedbyEUguidelines(Recommendations1.34,1.35and1.36).1.34Recommendation:DevelopEU-wideguidelinesforthemethodologyonEU-wide,regional,andnationalsystemneedsassessment,inlinewiththesystemneedsassessmentrecommendationsinthissection(Recommendations1.1-1.3and1.5-1.6).TheseharmonisedprincipleswoulddifferentiatethetypesofsystemneedsbutshouldleaveroomtoensurethatasystemneedsassessmentatnationallevelcanbespecificenoughtocoverallpotentialissuesandneedsatthatlevelandtoassessspecificlocalneedsthroughTSO/DSOcooperation.1.35Recommendation:Assesssystematicallytheeconomicviabilityforthedifferenttypesofresourcesinthesystemneedsassessment.ThiscouldbebasedonanenhancedERAAEconomicViabilityAssessment(EVA)methodology.Thisincludes:•Theenhancementofthecurrentmethodology:inclusionoftheeffectsofclimatechangeintheclimateyearsusedintheERAA40,expansiontoincludekeytechnologiesoftheenergytransitions,suchasbatteries,hydroplants,electrolysers,anddemandresponse,aswellastheestimationandintegrationofpotentialrevenuesacrossthe(economic)lifetimeoftherelevantassets.•TheapplicationoftheEVAmethodologytocoverothersystemneeds,whileensuringtherobustness,quality,andrelevanceoftheEVAanalysis(cf.computationtimeconstraints):ideally,theEVAshallalsoneedtoensuretheviabilityofresourcestomeetwidersystemneedsbeyondadequacy.Theeconomicviabilityshouldalsobeassessedtakingintoaccountallsourcesofrevenues,asprovidingsystemservicesalsoprovidesothersources40Climatechangeisexpectedtohaveanimpactonpowersystems,onboththesupplyanddemandofelectricity,aswellasonadequacy(e.g.,ondemand,wind/solargeneration,hydrostocks…).Currently,onlyhistoricalclimatedataareconsideredforERAAsimulations.SeeENTSO-E(2022)EuropeanResourceAdequacyAssessment,Annex2–Methodology.34ofincometoenergyresources.ThisalignswiththewiderdefinitionofsystemneedsinRecommendation1.31.1.36Recommendation:Stresstesttheresilienceoftheenergysystemthroughanenhancedanalysisofextremeeventsinthesystemneedsassessment.Forinstance,testingtheimpactsofspecificextremeclimateeventsorofstructuralassumptions(e.g.,expectedavailabilityoffirmcapacities)onthesystemwouldhelpcomplementmethodologiesmeasuringthelikelihoodofextremeeventsoccurring.GovernanceCurrently,systemneedsassessmentsareconductedrelativelyin-siloacrossgasandelectricity.In2020,ENTSO-Edevelopedanew,multi-sectoralplanningsupport(MSPS)conceptandaroadmapfortheevolutionoftheTYNDPasatooltoprogressivelydeliverinfrastructureplanningusingaholisticapproachandmulti-sectorialframework.AccordingtoENTSO-E’simplementationroadmap,themethodologywouldbestructuredbyalegalframeworkandwouldbeimplementedby2028,whichcouldbetoolategiventheinvestmentneedstodeliverbythatpoint.RegardingtheERAA,nospecificcoordinationacrosssectorsisimplementedbeyondstakeholders’consultation.TSO-DSOcoordinationiskeyforanintegratedassessmentofsystemneedsatthelocalandnationallevel.Indeed,thegrowthofdistributedRESgenerationanddevelopmentoflocalenergyinitiativeshaveamajorimpactatasystem-scalelevelandraisenewopportunitiesandnewsystemneeds.Yet,coordinationacrossdistributionandtransmissionisstilllimitedforsystemplanning,includingatEUlevel.GovernanceschemesshouldbedevelopedtoensureconsistencyinTSOandDSOplanningexerciseanddevelopamutualunderstandingofthedevelopmentoflocalresources,includingflexibility,toensureefficientgridandotherresourcesplanningatbothdistributionandtransmissionlevelsandinacoordinatedway.GiventhevarietyofsituationsacrossEuropeintermsofdistributionstructures,theframeworkshouldbeadaptabletothesediversesituations.TofacilitateplanningexercisesatDSOlevel,exchangesofinformationanddatashouldbeimplementedinbothdirectionsbetweenTSOsandDSOs.Moregenerally,stakeholderinvolvementcouldimproveinthegovernanceofsystemneedsassessmentacrossEurope.Currentprocessesalreadyincludestakeholderconsultationsandaccountforviewsacrosstheindustry.Yet,greatertransparencyaroundsystemneedsassessmentmethodologies,resultsanddatausedwouldhelpindustrypeer-reviewandcontinuousimprovementofsuchstudies.Toaddressthesepoints,currentgovernancearrangementscanbeimproved(Recommendation1.37).1.37Recommendation:Reviewthegovernancearrangementstoconductthesystemneedsassessment.Inparticular:•AssigntheresponsibilityofthedevelopmentofthesystemneedsassessmentmethodologyandcoordinationoftheassessmenttoENTSO-E/ENTSOGuponvalidationofACERandoversightoftheEuropeanCommission.•Defineagovernanceframeworkforcross-sectorsystemneeds’assessment,underpinnedbyacoordinatingentityoverseeingtheprocess.Asafirststep,coordinationcanbuilduponthecurrentENTSO-E/ENTSOGcross-sectorcoordination.Cooperationwiththeentityin35chargeofH2systemplanning,e.g.,theENNOH41,shouldbeimplementedtoensureconsistencyofplanningexercisesacrosselectricity,gasandH2.•Ensureadequatecooperationwithdistribution,throughcooperationwiththeEUDSOentity,asDSOsshouldstartcarryingouttheirownprospectiveassessments,toensureconsistencyofplanningexercisesandadequateassessmentofdecentralisedresources.•Improvestakeholderengagement,includingDSOs,aswellasintheindustrial,buildingsandtransportsectorswhichelectrify,throughextendedstakeholderconsultationsandstakeholdergroupmeetings.Improvetransparencyonmethodologies,assumptions,andjustifications,forabetterinclusionofstakeholdersinthesystemneedsassessmentprocess.Forexample,acommonintegrateddatabaseandmodellingplatformcouldbeimplementedtoenhancetransparencyofeconomicviabilityassessments.41EuropeanNetworkofNetworkOperatorsforHydrogen.36ContactdetailsCharlotteRENAUD-HeadofMarkets&CustomersEmail:crenaud@eurelectric.orgChristianGRUBER-Advisor–WholesaleMarketsEmail:cgruber@eurelectric.orgFabienRoques-ExecutiveVicePresident&HeadofEnergyPractice22,placedelaMadeleine,75008Paris,FranceDirect:+33153053629Mobile:+33788371501Email:froques@compasslexecon.comCharlesVerhaeghe–VicePresident22,placedelaMadeleine,75008Paris,FranceMobile:+33610887384Email:cverhaeghe@compasslexecon.comDisclaimer:ThisEurelectricreporthasbeenpreparedwiththesupportofCompassLexeconprofessionals.TheviewsexpressedinthisreportdonotnecessarilyrepresenttheviewsofCompassLexecon,itsmanagement,itssubsidiaries,itsaffiliates,itsemployeesorclients.Eurelectricpursuesinallitsactivitiestheapplicationofthefollowingsustainabledevelopmentvalues:EconomicDevelopmentGrowth,added-value,efficiencyEnvironmentalLeadership•Commitment,innovation,pro-activenessSocialResponsibility•Transparency,ethics,accountabilityUnionoftheElectricityIndustry-EurelectricaisblBoulevarddel’Impératrice,66–bte2-1000Brussels,BelgiumTel:+3225151000-VAT:BE0462679112•www.eurelectric.orgEUTransparencyRegisternumber:4271427696-87

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