AMARKETFITFORNET-ZEROPOWERSYSTEMEURELECTRIC’SFLAGSHIPSTUDYcompasslexecon.comIntroductiontoCompassLexeconOurservicesfortheenergysectorPolicyandRegulationSeniorenergyexpertsinEuropeCL’sseniorenergyexpertsaresupportedbyateamof50+experiencedconsultants.MarketdesignDesignofinfrastructureaccessregulationsLorenzoCoppiBoazPetrSpodniakDesignofeconomicinfrastructureregulationsMoselleThirdPartyAccessregulationdefinitionJasonMannGuillaumeNicholasDuquesneM&AandDueDiligenceMartinaBrooksAntonBurgerLindovskaGeraldAueTargetscreeningLjuboCommercialDueDiligenceMitrasevicRegulatoryDueDiligenceFinancialDueDiligenceBlancaPereaFabienRoquesAntonGarciaStrategyYvesLeThieisOverallstrategyDmitriRegulatorystrategyPerekhodtsevMarketingstrategyCharlesVerhaegheCompetitionEconomics&StateAidOtherFTI-CLofficesAbuseofdominantposition,AntitrustMergercontrolStateAidcomplianceofsupportschemeDisputesExpertiseinPriceReview,Hardship,ForceMajeuredisputesExpertiseinconstructiondisputesMainenergyofficescompasslexecon.comCompassLexeconispartofCLConsulting,aglobalbusinessadvisoryfirm.Confidential2ContentConfidential3StudyscopeandapproachGapanalysisandkeymarketdesignprinciplesOverviewofpolicyrecommendations–Aframeworktoidentifyandsatisfytheevolvingsystemneeds–Aninvestmentframeworkunderpinnedbyenhancedlong-termhedging/contractingopportunities–AconsumercontractingandengagementframeworkAnnex–Detailedpolicyrecommendationscompasslexecon.com1.Studyscopeandapproach4Studyoverview:a4-phaseapproachTimelineKeyphasesThestudyhasfollowedastructuredandinteractiveJune-July2022approachtoanalysethekeygapsinthecurrentmarket1design,andtoidentifypotentialsolutionsCurrentmarketdesign:DiagnosticandgapanalysistomeetpolicytargetsAspartofthestudy,we:•Conducted12steeringcommitteemeetingswithJuly-September20222EurelectricmembersPotentialmarketdesignevolutions/reformsto•Conducted12+coreteammeetings,includingaddressthegapspresentationstoEurelectric’sCustomers&RetailSept.2022–Jan.20233Services,Markets&Investments,DSOCommitteesandtoEurelectric’swiderStructureofExpertise,externalDefinitionoftheholisticmarketdesignframeworkworkshopswithindustrialconsumers,andEUandmarketarchetypesstakeholdersFebruary-March20234<EurelectricMarketdesigndays3-4Oct.<DGENERmeeting19Oct.Recommendationsonthepolicy“toolbox”,<ExpertroundtablewithDGENERChiefcommunicationandoutreach<Economist26Oct.<Externalworkshop–Brussels8MarchPublicationandcommunicationofthestudyresults–Brussels29Marchcompasslexecon.comConfidential52.Gapanalysisandkeymarketdesignprinciples6TheEUintegratedmarketensuresanefficientfunctioningofthepowersystembutneedstobecomplementedtoaddresspolicyobjectivesWholesalemarketsbasedonmarginalpricingensureanHowever,therecentenergycrisishashighlightedsomeofefficientoperationoftheenergysystemandhaveproventhegapsofthecurrentEUelectricitymarketstoaddressresilientintheenergycrisispolicyobjectives11.anefficientdispatchofgenerationandflexibilityresources;Needtodrivethescalingupofinvestmentinresourcesnecessaryfortheenergytransition(clean22.optimisedimports/exportstolimitcostsforconsumers;technologiesandflexibleresources,butalsonetworks)33.amutualisationofresourcestointegraterenewablesandNeedtobenefitconsumersandsupporttheiractivestrengthensecurityofsupply;engagement44.shorttermeconomicsignalstocoordinategenerators,prosumers,flexibilityprovidersandfosterdemandresponseAlong-termhedgingandcontractingframeworkcancomplementexistingshort-termmarketstoaddressthedouble-challengeofstimulatinginvestmentswhileprovidingbetterhedgingopportunitiesforconsumerscompasslexecon.comConfidential7Furtherdevelopmentofforwardmarketsandlong-termcontractingcanbenefitconsumersandsupportinvestmentincleantechnologyBenefitconsumersandsupporttheiractiveEnablethedeploymentoftheresourcesengagement.necessaryfortheenergytransitionAlargeshareofenergyconsumersisnotengagedinFurtherNeedforalong-termvisionwithaholisticcross-sectorthemarkete.g.duetothelackofinformationorawarenessdevelopmentofperspectiveofthesystemneedstocoordinatesubstantialofrisksandopportunities,retailpricingstructure,barrierstoinvestmentswithinashorttimeframeacrossthepowerthedevelopmentofexplicitdemand-sideresponse(DSR)orforwardsector,relatedinfrastructuresandenduseswhicharepolicyinterventionsdistortingconsumerpricesignalsmarketsandelectrifyingTheenergycrisisshowstheneedtobetterprotectlong-termEnergy-onlymarketsalonemaynotprovideadequateconsumersbypassingonthebenefitsofcleancontractinginvestmentsignalstosecureelectricitysuppliesandreachtechnologies’stablegenerationcoststoconsumerspolicyobjectivesIntheirvastmajority,residentialconsumerscurrentlydoAninvestmentframeworkcombiningenhancedprivatelongnothavecommitmentswiththeirsuppliersbeyond1-3termcontractingopportunitiesandpublicde-riskingyears.Thislimitstheabilityofsupplierstohedgeontheirschemesisnecessarytofasttrackthedeploymentofthebehalfresourcesnecessaryfortheenergytransition(cleantechnologiesandflexibleresources,butalsonetworks)compasslexecon.comConfidential8Keydesignelements–AmarketdesignfitforNet-Zeroshouldbuildontheexistinginternalenergymarket,addingthreecriticalpillarsMarketdesignfitforNet-Zero0123TheexistinginternalAconsumercontractingAninvestmentframeworkAframeworktoenergymarketandengagementframeworkunderpinnedbyenhancedcoordinatethefuturebasedonenhancedhedgingsystemneedstomeetopportunitiesandretailpricelong-termhedging/securityofsupplyandcontractingopportunitiesstructurespolicyobjectivescompasslexecon.comConfidential9Guidingprinciplesofthepolicyrecommendations1.Implementfullyexisting2.Empowerconsumersandfosterregulationsandcontinuetotransparency,liquidity,andimprovethecurrentmarketscompetitionGuidingprinciplesofthepolicyrecommendations3.Removebarriersandreinforce4.Addresslocalspecificitiesandincentivesforlong-termhedgingpolicyprioritiesthroughatoolboxthroughmarket-basedsolutionsofoptionalmeasuresforMemberStatescompasslexecon.comConfidential103.Aframeworktocoordinatethefuturesystemneedstomeetsecurityofsupplyandpolicyobjectives11AframeworktoidentifyandsatisfytheevolvingsystemneedsKeygapswiththecurrentEuropeanframeworkfortheidentificationofsystemneedstoensuresecurityofsupplySystemneedsassessmentneedstobefurtherimprovedLimitationstocurrentpowersystemplanningstudies1BroadenfocusofEU/nationalplanninginstrumentsSeasonaloutlooks–Currentinstrumentsfocussedon1)networkexpansion(TYNDP)and2)adequacy(ERAA)Adequacy(ERAA)Limitedto10years–Limitedassessmentofthedifferentsystemneeds,inparticularflexibility(long-term,short-term)andstabilityissuesNetworkexpansion(TYNDP)Timehorizonneedstobeextendedtomapchallengesonpathtowardsnet-zeroMissing:flexibility,stability–Needtoprovidevisibilityformarketparticipantsandnetworkoperatorsassessment...–AllowtimelyinvestmentsanddimensionnetworksfitforthefuturepowersystemMissing:cross-sector/end-usesplanningWholeenergysystemperspectiveneededtoassesssynergiesacrosssectors–FastrackENTSOEandENTSOGjointinitiativeforamulti-sectorialPlanningModellingscenariosSupportonlyacrossgas/electricityandaddH22022203320402050–Includedemand-sidecontribution(electrificationoftransport,industry,buildings,H2).compasslexecon.comSource:1ENTSO-E,PowerOutlooks.CompassLexeconanalysisConfidential12Notes:ACERcurrentlyconsultsontheframeworkguidelinesforscenarios.AframeworktoidentifyandsatisfytheevolvingsystemneedsKeyrecommendationstoestablishanenhancedframeworktoassesssystemneedswithacross-sectorperspectiveinthelong-termScopeofsystemneedstobeassessed:1WidenthescopeofelectricitysystemneedsassessmentLow-carbonScopeenergyandIncludeacross-sectorassessmentinsystemneedsassessmentRES2MethodologyExtendthetimehorizonofsystemneedsassessmenttomoveawayCross-sectorFlexiblefromatooincrementalapproachandallowtoanticipateinvestments/end-useenergy3innetworksandoptimisetheirdimensioningGovernancecoordinationDevelopEU-wideguidelinesforthemethodologyonEU-wide,regionalandnationalsystemneedsassessmentSystemneedsAssesssystematicallytheeconomicviabilityforallresourcesNetworksFirmenergyStresstesttheresilienceoftheenergysystemthroughanenhancedanalysisofextremeeventsinthesystemneedsassessmentDefineagovernanceframeworkwithclearresponsibilitiesonthedevelopmentofthemethodology,adequatecooperationwithdistribution,throughcooperationwiththeEUDSOentityandimprovedstakeholderengagementcompasslexecon.comConfidential134.Aninvestmentframeworkunderpinnedbyenhancedlong-termhedging/contractingopportunities14AninvestmentframeworkAninvestmentframeworkunderpinnedbyenhancedlong-termhedging/contractingopportunitiesDifferenttypesofmeasurescanbeintroducedtoenhancelong-termcontracting,reflectedbydifferenttypesoflong-termcontractsatthecoreofthenewmarketmodel•Long-termcontractsplayacriticalroletosupportlarge-scale1FacilitatingPrivate2investmentinRESandlow-carbontechnologies,aswellasinfirmandflexiblecapacitieshedgingframeworkforthroughthe•Byfacilitatingfinancingandreducingthecostofcapital,theyimprovementofRES/low-carbonreducethetotalcostofdecarbonisationandbenefitconsumersforwardmarketsinvestment:•Capacitymechanisms,privatePPAs,publicRESandlow-carbonschemes,andforwardhedging,allhavearoletoplayPPAs•Ifwelldesigned,theseinstrumentsarecomplementaryandcanAninvestmentworktogethertomeetawiderangeofneedsandpreferencesofframeworkcustomers.GuaranteePublicframeworksecurityofforRES/low-supply:Capacitycarbonmechanismsinvestment43compasslexecon.comConfidential15AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstofacilitatehedgingthroughtheimprovementofforwardmarketsKeygapsRecommendationsTherearecurrentlyrestrictionsastowhatcanbepostedascollateralonexchangesRemovebarrierstoforwardmarkethedgingVolumeofLTTRsallocatedbyTSOsforcross-borderEasecollateralregulationsinforwardmarkets,throughachangehedgingistoolowandonlylimitedtoayearintheEURegulations,bywideningthetypesofcollateralacceptedRegulatoryinterventionsincreaseuncertaintieswhichFacilitatehedgingopportunitiesacrossbordersforforwardmarketcanaffectforwardmarketliquidityandforwardcontractthroughachangeinEURegulationspricesMakeregulatoryframeworksstableForwardpowermarketslackliquidproductstohedgebeyond2-3yearsStimulatedemandandsupplyinforwardmarkets,includingatlongerhorizonsExplorevoluntarymechanismsformarketmakersinforwardmarketstostimulateliquidityupto7-10yearscompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential16AninvestmentframeworkKeygaps:Aninvestmentframeworktosupportcapital-intensivelarge-scaleinvestmentincleantechnologiesandflexibleresourcesTheEUdecarbonisationambitionrequiresastepupinpowersectorinvestmentsVolumeofRESinstalledcapacityintheEU,andprojectionofREStoreach‘Fit-for-55’and‘REPowerEU’targetsREPowerEUalonerequires€300bnofinvestmentsby2030,inadditiontotheFit-for-55investmentsTheEuropeanCommissionestimatesthatatotalof€583.8bninvestmentintheelectricitygridwillbenecessaryby2030–REPowerEUincreasedinvestmentneedsby€29.4bninpowernetworks,and€10bnforstorageoverthedecadeMarketbasedde-riskingschemeswillbeneededtoachieveEUambitionsGrowingsharesofpubliclysupportedassetswithvariablegenerationwillincreasemarketrisks(cannibalisation,lowliquidityinforwardmarkets)De-riskingschemesawardedthoughcompetitiveprocessesshouldbedesignedtohavetheleastdistortionspossibleontheshorttermmarketsAnenhancedandmoreconsistentinvestmentframeworkisneededthatwillSource:EuropeanCommission(2023)Commissionstaffworkingdocument-articulateagrowingroleforprivatelong-termcontractswithacontinuationofReformofElectricityMarketDesign.publicde-riskingarrangementswherenecessarycompasslexecon.comEuropeanCommission(2022)ImplementingtherepowerEUactionplan:investmentneeds,hydrogenacceleratorandachievingthebio-methanetargetsConfidential17AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstoestablishaprivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreementsWeputforwardarangeofmeasuresataEuropeanlevel,andsomeoptionalmeasuresatnationalleveldependingonlocalspecificitiesRemovingbarrierstoTransparencyandPublicguaranteesVoluntarypan-EUPPAStimulatingdemandandPPAsStandardisationplatformsupplyRemoveallunjustifiedConditiontheattributionofImplementinsurancePan--EUvoluntaryplatformEnvisageusingpublicbarrierspublicguaranteesforPPAsmechanismsorpublicentitiesasanexample,bytotransparencyguaranteesforEstablishapan-EuropeancontractingpartoftheirAllowallconsumerstorequirementscounterpartyrisksinPPAsvoluntaryplatformtoelectricityconsumptionthroughsignlong-termPPAsfacilitatePPAtradingwhilstPPAsEstablishstandardisedPPAstillallowingforbespokeAllowsolidarityconsortiacontractsandproductsatbilateralcontractstocontractPPAsonbehalfofEUlevelandpromoteormultiplesmallersites/buyersincentivisetheirusePPAriskmanagementSimplify/improveEncourageentitiestoaccountingobligationsandsupplyservicestocoverreportingonPPAsthebalancing/shapingriskConsiderremovingchargesandleviesrelatedtopolicycostfinancingthedevelopmentofRES/low-carbontechnologiesonPPAsvolumesofelectricitycompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential18AconsumerprotectionandengagementframeworkAninvestmentframeworkDeepdiveontherecommendationtoestablishapan-EuropeanvoluntaryplatformtofacilitatePPAtradingExistingarrangements–bilateralcontractingComplementaryPPAmarket–pan-EUvoluntaryplatformBilateralPPABalancing/shapingriskserviceprovidersBilateralPPAPan-EUvoluntarymarketRESLargeindustrialsRESResidentialconsumers,SMEs,largeindustrials,suppliers…Thevoluntaryplatformwould:1.Facilitatesupplyanddemandtomeetmoreeasily,potentiallyincludingwithbalancing/shapingriskserviceproviders2.ProvidestandardcontractualarrangementsforPPAs,tofacilitatesecondarytradingoverthelifetimeofsuchcontractsifnecessary3.AllowtheplatformoperatortoactasacentralcounterpartytoPPAcontracts,potentiallybackedbypublicguarantees.Thiswouldstillallowforbespokecontractualarrangementsoutsideoftheplatformifrequiredbysomemarketparticipantscompasslexecon.comConfidential19AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstoestablishapublicframeworkforRESandlow-carboninvestmentKeygapsLargevarietyofsupportschemesCannibalisationeffectismaintaining/Uncappedupsiderevenuesinsupportimplementedincreasingtheneedforde-riskingschemesnotresilientandcouldtriggermechanismsfuturepolicyinterventionsKeyimplementationHowtominimisedistortionsofde-HowtoavoiddampeningliquidityinHowtoredistributecostsandbenefitsquestionsriskingschemesonshort-termforwardmarkets?ofde-riskingschemestoconsumers?markets?Decisiontointroducepublicde-riskingschemeanddetaileddesignleftatMSlevelRecommendationsAllocatepublicde-riskingcontractsfornewRESandAllocatecostsandbenefitsinawaythatcontributestolow-carbonassetsthroughacompetitiveprocesshedgingforconsumerswithoutincreasingriskforretailersandharmonisetheirdesignacrossEuropewhilenotpreventingthedevelopmentofofferswithordistortingtime-differentiatedsignalssuchastime-of-use,Developguidanceonbestpracticesforthedesignofcriticalpeakpricingordynamicpricingoffersforpublicde-riskingcontracts,leavingdecisionsondetaileddesignuptoindividualcountriesAssessoptionsforcounterparty(ies)intheapplicationofthelong-termpubliccontractingschemescompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential20AconsumerprotectionandengagementframeworkAninvestmentframeworkKeydesignchoicestoestablishanefficientpublicframeworkforRESandlow-carboninvestmentwhichbenefitsconsumers(1)KeyimplementationquestionKeyimplementationoptionsThechoiceofproducttypePhysicalcontractComplexityandenergyprofileimpactPhysicalproductionIncentivesforefficientSTmarketparticipationinteractionswithshort-termFinancialcontractmarketsLessimpactsonshort-termoperationsStandardisedprofileShareofprofileIncentivesforavailabilityintimesofImprovedincentivesforefficientsupplyshortness,riskmitigationagainstdispatchaswellastobalancebetweenriskofnotbeingdispatchedpublicandprivatecontractsChoiceofreferenceindexinComplexityde-riskingcontractsimpactsLiquiditydrivetowardsforwardmarketsliquidityinforwardmarketsDayaheadmarketHybridapproachForwardmarketscompasslexecon.comMaydriveliquiditytoDACouldhelpfosterliquidityinforwardmarkets,butalsoincreasemarketriskConfidential21AconsumerprotectionandengagementframeworkAninvestmentframeworkKeydesignchoicestoestablishanefficientpublicframeworkforRESandlow-carboninvestmentwhichbenefitsconsumers(2)KeyimplementationquestionKeyimplementationoptionsABCRedistributethecosts/Levies/chargesingridtariffsThroughsupplierse.g.Resaletosuppliers/consumersbenefitsefficientlytoproportionallytotheirclients’viacentralisedauctionsofcontractslicesconsumersconsumption•Robusttoconsumerswitching•Robusttoconsumerswitching•Suppliers/consumerswouldbeabletoaccessmedium-term•Riskofuntimelyredistributionof•Efficientanddynamiccontracts(e.g.1-3years),costsandbenefits:needforredistributionofcostsandthroughvoluntary,openandsufficientlygranularintervalsbenefitstoconsumerscompetitiveauctionsorganisedbyacentralpublicorprivateentity.•Riskofdampeningpricesignals•Createadditionalrisksandandtheincentivestoconsumeinuncertaintyforsuppliersonthe•Lowersupplierriskexposureoff-peakperiodswhenthereiscostsandbenefitstorecoverandbutashareoftheriskoncostabundantRESandlow-carbononthebalancingoftheirportfolio.recoveryandbalancinggenerationtransferredtothecentralentity•Costsmaybeallocatedtoconsumerswithlessprice-•Riskofinterferencewithelasticdemandandraiseforwardmarketsconcernsregardingthefairnessofallocation.compasslexecon.comConfidential22AninvestmentframeworkKeygaps:Capacitymechanismsarenotafullpartofthecurrentmarketdesignframework,leadingtouncertaintyforinvestorsandheterogeneityCapacitymechanismsinEuropeCapacityCapacityNocommonvisionatEUlevelonmarketdesignandhowtoensuresecurityofmarketpaymentsupplyStrategicNocapacityEUpowermarketshavebeenhistoricallybasedontheenergy-onlymarketdesignreservemechanismmodelbut……manycountrieshavedeemednecessarytointroducecapacitymechanismstosupportinvestment,andtoprovidethepoliticallydesiredlevelofsecurity……leadingtoapatchworkofapproaches,withlimitedharmonisationandcreatinghurdlestoefficientcross-borderparticipationStateaidclearanceisrequiredthroughacomplexanduncertainprocess……whichhasnotyetfosteredstrongharmonisationandcoordination……onlyallowingcapacitymechanismsaslast-resortandtemporarymeasurescreatinguncertaintiesforthebusinesscaseofnewinvestmentdecisionsThestateaidclearanceprocesscreatesregulatoryuncertaintyandcapacitymechanismsareperceivedastemporaryratherthanastructuralpartofthemarketdesigncompasslexecon.comConfidential23AninvestmentframeworkKeyrecommendationstoguaranteesecurityofsupply:CapacityMechanismsThepowermarketdesignshouldevolvetoincludemarket-widecapacitymechanismsasacorepartofthemarketdesigntoensuresecurityofsupply,andtheprocessofapprovalshouldbestreamlined•Developguidelinestofoster•Considertheintroductionofaharmonisationofcapacityprocurementmechanismallowingmechanismsandsimplifythelong-termcontractingforflexibleapprovalprocess,whilekeepingresourcestoensureallsystemneedssufficientflexibilitytoaddressnational(esp.linkedtoflexibility)aremet-e.g.adequacyneedsandspecificities.withstorage/DSR.•StructurallyembedCapacityTheguidelineswouldallowforamoreMechanismsinthemarketdesignsystematicex-anteapprovalofCMsthroughEURegulationtostreamlineandautomatetheapprovalOptionalfurtherMSmeasureprocess…NationaldecisiontoimplementornotCMs•…andthroughthemodificationofEURegulationswhichsetstheirlast-resortandtemporarycharacter.compasslexecon.comEU-widemeasureConfidential245.Aconsumercontractingandengagementframework25AconsumerprotectionandengagementframeworkAllowconsumerstohedgeefficientlythroughaenhancedcontractingandengagementframeworkcombinedwithefficientpricesignalsAnenhancedconsumercontractingframeworkcouldbringthebenefitsofEmpowerAdequateSuppliers’renewableenergysources(RES)andlow-carbongenerationmoreconsumersinformationresiliencedirectlytoconsumers…andfacilitate…whilestillprovidingefficientshort-termsignalsfosteringactivedemandandDSRsensibilisationparticipationinshort-termmarkets.Theoverarchingobjectiveistoofferconsumersamorebalancedchoiceoftorisksshort-andlong-termpricesignalsinretailpricesAenhancedconsumerThispillarisstronglylinkedtotheinvestmentframeworkpillarthroughthecontractinghedgingpropertiesoflong-termcontractingandtheimportanceofforwardmarkets,publicschemesandPPAsandengagementcompasslexecon.comframeworkEnhancehedgingopportunitiesConfidential26AconsumerprotectionandengagementframeworkKeygaps:AneedtobringbenefitsofRES/low-carbongenerationmoredirectlytoend-consumerswhilefosteringconsumerengagementRetailmarketad-hocinterventionacrossEuropetoprotectconsumersagainstrisingpricesThehighpricesseenduringtheenergyDirectaidcrisishaveledtowidespreadforenergyinterventionsacrossMemberStatestocostsprotectconsumersTaxRelief-ThisshowstheneedtobetterpassonthebenefitsofrenewablesandotherRetailcleantechnologies’stablegenerationcoststoconsumersNetworkHowever,thelackoflong-termconsumertariffcommitmenttosuppliersconditionstheirwillingnesstoengageinlong-termreductions/contractswithgenerators–limitinghedgingopportunitiesexemptionsAtthesametime,alargeshareofenergyRetailPriceconsumersisnotengagedinthemarketRegulationcompasslexecon.comSource:CompassLexeconanalysis,BruegelasofOctober2022Confidential27AconsumerprotectionandengagementframeworkKeyrecommendationstoestablishanenhancedlong-termcontractingframeworkAdequateinformationtoconsumersandsensibilisationtorisksAdequateinformationtoconsumersthroughastrictimplementationofArt.10ofElectricityDirectiverequiringsuppliersHelpsdriveengagementintoprovidefairandtransparentgeneraltermsandconditionsinplaintheshorttermandhedgingandunambiguouslanguagetoconsumersonproposedoffers,includingrisksundertakenwhensigninganewcontract.EnhancelongtermhedgingopportunitiesEmpowerconsumerandfacilitatedemand-Ensuresuppliers’resilience(beyondoneyear)sideresponseConsideraflexibleresilienceframeworkonRelievenationallegal/regulatoryImplementexistingprovisionsoftheCleansupplierstoguaranteetheirsolidityandconstraintstolong-termconsumerEnergyPackagetoliftbarrierstodemand-ensurecustomers’protection,including(i)commitmentwiththeirsuppliers.sideresponse.regularstresstestsand(ii)reportingrequirementstowardsregulators.LiftbarriersforsupplierstohedgelongerEnsurethatconsumerscanhaveaccesstotermandofferlong-termhedgingpossibilitiesanadequaterangeofretailoffersforconsumersbyfacilitatingtheresaleofencompassingshort-termincentives.long-termhedgedvolumesandallowingcost-reflectiveterminationfeescompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential28ThankyouforyourattentionConfidential29FurtherdetailsofpolicyrecommendationscanbefoundinthestudyreportAccessibleherecompasslexecon.comCONTACTDETAILSFabienRoquesBerlinHelsinkiParisExecutiveVicePresident&HeadofKurfürstendamm217Unioninkatu3022PlacedelaMadeleineEnergyPracticeBerlin,10719Helsinki,00100Paris,75008froques@compasslexecon.comDirect:+33153053629BrusselsLondonSingaporeMobile:+3378837150123SquaredeMeeûs5AldermanburySquare8MarinaViewBrussels,1000London,EC2V7HRAsiaSquareTower1CharlesVerhaegheSingapore,018960VicePresident-EnergyPracticeCopenhagenMadridcverhaeghe@compasslexecon.comBredgade6PaseodelaCastellana7TelAvivMobile:+33610887384Copenhagen,1260Madrid,28046YigalAlonStreet114TohaBuildingDüsseldorfMilanTelAviv,6744320Kö-BogenViaSanRaffaele1Königsallee2BMilan,20121Düsseldorf,40212ThisreporthasbeenpreparedbyCompassLexeconprofessionals.TheviewsexpressedinthisreportaretheauthorsonlyanddonotnecessarilyrepresenttheviewsofCompassLexecon,itsmanagement,itssubsidiaries,itsaffiliates,itsemployeesorclients.compasslexecon.com6.Annex-Detailedrecommendations6.1-Aframeworktoidentifyandsatisfytheevolvingsystemneeds6.2-Aninvestmentframework6.3-Aconsumerprotectionandengagementframework316.1.Annex-AframeworktoidentifyandsatisfytheevolvingsystemneedsDetailedrecommendations32AframeworktoidentifyandsatisfytheevolvingsystemneedsKeygapswiththecurrentEuropeanframeworkfortheidentificationofsystemneedstoensuresecurityofsupplyScope•BasedontheNECPs,differentforwardlookingEUpowersystemstudies(TYNDP,ERAA)arecarriedout.ThesestudieshaveaMethodologynarrowfocuscoveringonlypartiallythedifferentsystemneeds,suchasflexibility(long-orshort-term)orsystemstability.TheymayGovernancelackmoredetailedinformationonnetworkconstraintstoproviderobustadequacyassessment•Thesestudiesoftenlackacomprehensiveassessmentfromawholeenergysystemperspective.Forexample,powerandgassystemsynergiesarenotfullyassessedinnetworkexpansionstudies.Inaddition,demand-sidecontributionstotheenergysystem,likethoseassociatedwiththeelectrificationoftransport,industryandbuildings,orelectrolysers,arenotfullycapturedincurrentstudies.•Moreover,thesestudieshaveadifferenttimehorizon,andoftendonotprovidealong-termperspectiveontheevolutionofsystemneeds.Whilenetworkexpansionstudieshaveatimeframeof20years,adequacystudiesarelimitedto10years.Thescenariosunderpinningcurrentstudiesextendto2050,buttheyarelimitedtohighlevelnarrativestocoordinateactionsatpan-Europeanlevel,andtoprovideinformationtopolicymakersandstakeholderstosupportdecision-making.•Thecurrentmethodologiesneedtobeenhancedtoreflecttheevolutionofthepowersystemoperationalchallenges.TheseimprovementstothemethodologyforthesystemneedsassessmentrequireanEUharmonisedapproachatprinciple-level,underpinnedbyEUguidelines•Currently,systemneedsassessmentsareconductedrelativelyin-siloacrossgasandelectricity•Coordinationacrossdistributionandtransmissionisstilllimitedforsystemplanning,includingatEUlevel.•Moregenerally,stakeholderinvolvementcouldimproveinthegovernanceofsystemneedsassessmentacrossEurope.Currentprocessesalreadyincludestakeholderconsultationsandaccountforviewsacrosstheindustry.Yet,greatertransparencyaroundsystemneedsassessmentmethodologies,resultsanddatausedwouldhelpindustrypeer-reviewandcontinuousimprovementofsuchstudies.compasslexecon.comConfidential33ScopeMethodologyGovernanceAframeworktoidentifyandsatisfytheevolvingsystemneedsKeyrecommendationstoenhancethesystemplanningframework–Scopeofthesystemneedsassessment(1)OverviewofrecommendationsKeyconsiderationsforimplementationWidenthescopeofAsafirststep,developamoregranulardefinitionofthesystemattributesthatwillbevaluableinthefuturepowerelectricitysystemneedssystem.Theseattributesinclude:assessmentinEUlegislationto:1.Firmcapacity:orthedispatchablegeneration,demand-sideflexibilityorstoragetoensureadequacybetweenavailablegenerationandresidualloadatpeak(aftersubtractionofvariablegeneration).•gobeyondthenetworkexpansionandcapacity2.Flexiblecapacity:ortheextenttowhichcapacitiesinapowersystemcanmodifytheirelectricityproductionoradequacycoveredinconsumptioninresponsetovariabilityofthesystemstate,expectedorotherwise.ERAA/TYNDP,ToperformthissystemneedsassessmentatregionalandEuropeanlevels,inputsfromnationallevelsshould•bringmoreconsistency,beprovidedonthebasisofadequatecooperationbetweenTSOsandDSOstoencourageconsistencyandandproperlytakeintoaccountdistributedresourcesaswellassystem-relevantdistributionnetworks’constraints(ifany).•encompassthedifferentMoreover,thisassessmentshouldbesufficientlydetailed,forinstanceconsideringpossiblerestrictionsorsystemneeds,includingoutagesoncross-zonalinterconnections,congestions,etc.networkneeds,adequacyandflexibility.–Otherwise,nationalassessmentswillneedtoprovideahigherlevelofdetails,riskinginconsistenciesandinefficientcoordinationatEUlevelLastly,thesystemneedsassessmentshouldnotbetoomuchbottom-updrivenortooincrementalandshouldconsiderthepossibilityandtherelevancetodevelopanEUoverlaygrid(orasupergrid)andtoanticipateinvestmentsinnetworksandoptimisetheirdimensioningtakingintoaccountthelong-termneeds.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential34ScopeMethodologyGovernanceAframeworktoidentifyandsatisfytheevolvingsystemneedsKeyrecommendationstoenhancethesystemplanningframework–Scopeofthesystemneedsassessment(2)OverviewofrecommendationsKeyconsiderationsforimplementationIncludeacross-sectorTheassessmentshouldincludethepotentialconsumptionandflexibilitycontributionsoftheindustrial,assessmentinlong-termbuildingsandtransportsectorsthatelectrifyaswellasthedevelopmentofhydrogenandmorebroadlyofsystemneedsassessmentrenewableandlow-carbongases.ExtendthetimehorizonofExtendthetimehorizonofsystemneedsassessmenttoatimeframealignedwithdecarbonisationobjectives,systemneedsassessmentreflectingthekeypolicytargetsandmilestonessuchas2040and2050.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential35ScopeMethodologyGovernanceAframeworktoidentifyandsatisfytheevolvingsystemneedsKeyrecommendationstoenhancethesystemplanningframework–MethodologyforthesystemneedsassessmentOverviewofrecommendationsKeyconsiderationsforimplementationDevelopEU-wideguidelinesTheEUguidelineswouldbeinlinewiththesystemneedsassessmentrecommendations.TheseharmonisedforthemethodologyonEU-principleswoulddifferentiatethetypesofsystemneedsbutshouldleaveroomtoensurethatasystemneedswide,regionalandnationalassessmentatnationallevelcanbespecificenoughtocoverallpotentialissuesandneedsatthatlevelandtosystemneedsassessmentassessspecificlocalneedsthroughTSO/DSOcooperation.AssesssystematicallytheThiscouldbebasedonanenhancedERAAEconomicViabilityAssessment(EVA)methodology.Thisincludes:economicviabilityforthedifferenttypesofresources–Theenhancementtothecurrentmethodology:inclusionoftheeffectsofclimatechangeintheclimateyearsinthesystemneedsusedintheERAA,expansiontoincludekeytechnologiesoftheenergytransitions,suchasbatteries,hydroplants,assessmentelectrolysers,anddemandresponse,andestimationandintegrationofpotentialrevenuesacrossthe(economic)lifetimeoftherelevantassets.–TheapplicationoftheEVAmethodologytocoverothersystemneeds,whileensuringtherobustness,quality,andrelevanceoftheEVAanalysis(cf.computationtimeconstraints):ideally,theEVAshallalsoneedtoensuretheviabilityofresourcestomeetwidersystemneedsbeyondadequacy.Theeconomicviabilityshouldalsobeassessedtakingintoaccountallsourcesofrevenues,asprovidingsystemservicesalsoprovidesothersourcesofincometoenergyresources.Thisalignswiththewiderdefinitionofsystemneeds.StresstesttheresilienceofTheresilienceoftheenergysystemshouldbestresstestedthroughanenhancedanalysisofextremeeventsintheenergysystemthesystemneedsassessment.Forinstance,testingtheimpactsofspecificextremeclimateeventsorofstructuralassumptions(e.g.expectedavailabilityoffirmcapacities)onthesystemwouldhelpcomplementmethodologiesmeasuringthelikelihoodofextremeeventsoccurring.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential36ScopeMethodologyGovernanceAframeworktoidentifyandsatisfytheevolvingsystemneedsKeyrecommendationstoenhancethesystemplanningframework–GovernanceOverviewofrecommendationsKeyconsiderationsforimplementationReviewthegovernanceInparticular:arrangementstoconductthesystemneedsAssigntheresponsibilityofthedevelopmentofthesystemneedsassessmentmethodologyandcoordinationoftheassessmentassessmenttoENTSOE/ENTSOGuponvalidationofACERandoversightoftheEuropeanCommission.Defineagovernanceframeworkforcross-sectorsystemneeds’assessment,underpinnedbyacoordinatingentityoverseeingtheprocess.Asafirststep,coordinationcanbuilduponthecurrentENTSOE-ENTSOGcross-sectorcoordination.–CooperationwiththeentityinchargeofH2systemplanning,e.g.theENNOH,shouldbeimplementedtoensureconsistencyofplanningexercisesacrosselectricity,gasandH2.Ensureadequatecooperationwithdistribution,throughcooperationwiththeEUDSOentity,asDSOsshouldstartcarryingouttheirownprospectiveassessments,toensureconsistencyofplanningexercisesandadequateassessmentofdecentralisedresources.Improvestakeholderengagement,includingDSOs,aswellasintheindustrial,buildingsandtransportsectorswhichelectrify,throughextendedstakeholderconsultationsandstakeholdergroupmeetings.–Improvetransparencyonmethodologies,assumptions,andjustifications,forabetterinclusionofstakeholdersinthesystemneedsassessmentprocess.Forexample,acommonintegrateddatabaseandmodellingplatformcouldbeimplementedtoenhancetransparencyofeconomicviabilityassessments.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential376.2Annex-AninvestmentframeworkDetailedrecommendations38AconsumerprotectionandengagementframeworkAninvestmentframeworkKeygaps:BetterliquidityisneededforthemarkettofunctionefficientlyandtoimproveriskhedgingintheforwardmarketTherearecurrentlybarriersforparticipantstohedgeonforwardmarkets.Thetimehorizonofforwardmarketsisinsufficienttosupportinvestment.–Thereislowdemandforlong-termforwardhedgingfromsuppliers,duetouncertaintiesontheirlong-termconsumerportfolio.–Asaresult,forwardpowermarketslackliquidproductstohedgebeyond2-3years–eveninbiddingzoneswithmatureforwardmarkets.–Moreover,thevolumeoflong-termtransmissionrights(LTTRs)allocatedbyTSOsforcross-borderhedgingistoolowandtheirdurationislimitedtoayear,limitinglong-termhedgingpossibilities.Renewablesundersupportschemesusuallyhavenoincentivetohedgeintheforwardmarket,especiallywhenthesupporttheyreceiveislinkedtoday-aheadprices.–Thedesignoftheseschemescouldbeadaptedtoprovidesomeincentivesforproducerstohedgeinforwardmarkets.Collateralrequirementsareabarriertohedginginforwardmarketsforproducers,consumers,andsuppliers.–Collateralrequirementsactasabarriertoentryformarketplayersandreducetheoverallshareofhedgedvolumesonforwardmarkets.Therearecurrentlyrestrictionsastowhatcanbepostedascollateralonexchanges.Regulatoryinterventionsincreaseuncertaintieswhichcanaffectforwardmarketliquidity.–Theycanpotentiallyaffectthespotmarketpriceand,hence,thevalueoftheforwardcontracts(i.e.,theIberianMechanism,thecaponinframarginalrents).Wefirstrecommendremovingbarrierstohedginginforwardmarkets.–Measuresthroughtheconsumerengagementandprotectionframeworkcouldalsostimulatedemandforlong-termhedging.Marketmakerscouldalsobeconsideredtoactivelydriveliquidityonthesemarkets.compasslexecon.comConfidential39AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstofacilitatehedgingthroughtheimprovementofforwardmarkets(1)OverviewofrecommendationsKeyconsiderationsforimplementationEasecollateralregulationsWideningthetypesofcollateralacceptedisneededtoeasecollateralrequirements,suchasnon-collateralizedinforwardmarkets,throughbankguarantees,oracceptingunderlyingelectricityproduction,customercontractsoremissionstradingscheme’sachangeintheEUpermitsascollateral.RegulationsTheCommissionDelegatedRegulation(EU)2022/2311introducingtemporaryemergencymeasuresonMakeregulatorycollateralrequirementsisnotsufficientasithelpstoonlyalleviatetheliquiditypressureofaround15%oftheframeworksstableenergymarketparticipants.AstructuralandwidersolutionshouldbeaddressedthroughtheongoingEuropeanMarketInfrastructureRegulation(EMIR)reviewprocess:thecollateralacceptedbycentralclearingcounterparties(CCPs)foreitherbankguarantees,orpublicentityguaranteesshouldbeaccessibleforthewiderenergyclearingindustryratherthanjustfornon-financialenergycounterpartiesthatareclearingmembers.Regulatoryuncertaintyunderminesinvestors’confidenceinmarkets,hedgingopportunitiesandendsinlackofinvestments.Inthisregard,revenuecapsonexistinginframarginalproductionmustbeended.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential40AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstofacilitatehedgingthroughtheimprovementofforwardmarkets(2)OverviewofrecommendationsKeyconsiderationsforimplementationFacilitatehedgingRecommendedchangesinEUregulationinclude:opportunitiesacrossbordersforforward•Increasinglong-termcross-bordercapacityvolumesofferedbyTSOsthroughmoreefficientcapacitycalculationmarkets,whereLTTRsareandadequateinvestmentwhereneeded.alreadyused,throughachangeinEURegulations•KeepingtheoptionalityofLTTRsasitisusedbymarketparticipantstoproperlyhedgetheirunderlyingrisksandexposuresandhencecontributetohigherliquidity.Obligationswillnotinterestmarketparticipantsandwillbedetrimentaltoforwardmarketliquidity.•AllocatingLTTRproductswithmaturitiestomatchatleastforwardmarketproductmaturities,aminimaintroducing3-yeartenorLTTR.Longertenorscouldbeenvisagedtoenablecross-borderPPAs.•InvestigatingthepossibilitytoincreasethefrequencyofauctionsforLTTRproducts.Detailsonthegranularityofproductsandfrequencyofauctionsshouldbecarefullyassessedandconsultedwithmarketparticipants.Anychangeofallocationdesignmustbecarefullyassessedthroughcost-benefitanalysisandaddedvalueproven.•Facilitatingsecondarytrading,e.g.havingpowerexchangeseasingtheexchangeofLTTRsbetweenmarketparticipantsatapriceagreedbetweenthem(commercialtransaction).compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential41AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstofacilitatehedgingthroughtheimprovementofforwardmarkets(3)OverviewofrecommendationsKeyconsiderationsforimplementationExplorevoluntaryThesemarketmakingservicesshouldbecontractedthroughamarket-basedprocess,withvoluntaryparticipation.mechanismsformarketmakersinforwardmarketsTheselectedentityperformingthemarketmakingfunctionwouldhavetheobligationtopostaminimumvolumeoftostimulateliquidityuptobuyandsellordersforselectedstandardproducts,withamaximumbid-askspreadtoincreaseliquidity.7-10yearsInexchangeforthisservice,themarketmakerwouldberemuneratedwithacompetitively-setfeethroughthetenderfortheattributionofitsfunction,forinstancechargedthroughnetworktariffs.Theimplementationpracticalitiesshouldhoweverbecarefullyanalysed.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential42AconsumerprotectionandengagementframeworkAninvestmentframeworkKeygapstoestablishaprivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreementsThereiscurrentlyaTheElectricityMarketRegulationandtheRenewableEnergyDirectivealreadyaddressanumberofregulatoryandpolicybarrierspreviouslyidentified.However,thesemeasuresarenotalwaysimplementedinallmemberstatesandlegalrangeoflegal/barriersmayremainregulatory,informational,andCreditworthinessisamajorbarrieracrossmostsectorswheremanyorganisationshaveappropriateenergyfootprintforeconomicbarriersforPPAsbutarenotratedbyanymajorcreditratingagency.thebroaderuptakeofThecomplexityofnegotiatingPPAsactsasabarrierwhichslowsentryintothemarketbylesssophisticatedoff-takers.corporatePPAs.Thereisalackoflong-termhedgingproductstoaddressimbalancecosts,orcounterpartydefaultswithPPAs.Thereisthereforeariskwhichcoulddeterenteringintosuchagreements.Tomitigaterisks,thereisalackofpossibilitiestotradePPAcontractsonasecondarymarket.StandardisationofPPAItwouldhaveadualeffect,bothloweringthetransactioncostsacrosscontractingpartiesandenablingsecondarycontractsandproducttradingofcontractsduringtheirlifetime.Thelatterwouldreducetherisksofsigningsuchlong-termcontracts,astheyprofilescouldberesoldmoreeasilyshouldthesituationofoneofthepartieschange.CreatingstandardcontractsandanexchangeplatformforPPAswouldbethefirststepsinloweringtransactioncostswithready-madecontractualagreementsandliquiditypoolingYet,thecreationofstandardcontractsorvoluntaryplatformswithstandardcontractsdonotguaranteetheiruse.Tocreatethenecessaryconditionsforsecondarytradingopportunitieslimitingtherisksfaced,standardisationofcontractscouldbedirectlyincentivisedMoredirectmeasurescouldbeimplementedtodrivedemandandsupplyforPPAs.Todoso,thereisarangeofpotentialmeasuresthatshouldbelefttothediscretionofMemberStates.Confidential43compasslexecon.comRemovingbarrierstoTransparencyandPublicguaranteesVoluntarypan-EUPPAStimulatingdemandAconsumerprotectionandengagementframeworkPPAsStandardisationplatformandsupplyAninvestmentframeworkKeyrecommendationstoestablishaprivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreements(1)OverviewofrecommendationsKeyconsiderationsforimplementationMandateMemberStatesLiftinganyremainingbarrierstoPPAsisa‘no-regret’actiontostrengthenlong-termcontractinginthecurrentthroughEUlegislationtomarketdesign.Thesebarriersoftenstemfromnationallegislations.removeallunjustifiedbarrierstoPPAsThisrecommendationaimstomakesureaccountingobligationsarenotabarrierforcompaniestoenterintoPPAs.AnalyseaccountingobligationsonPPAs,Indeed,underEUstandards,financialPPAsarerequiredtobereportedasderivativesthatarerevaluedaccordingtosimplifyreportingforthemarket.Suchrevaluationcanleadtomovementsinprofitandlossstatementforenergyintensivecompanies.financialPPAsandprovide–IntheUS,GenerallyAcceptedAccountingPrinciples(GAAP)reportingrulesaresimplerandfinancialPPAsareguidancetocompaniesonmorepopular.theirreportingAllowallconsumerstosignThisincludessmallerconsumersorpublicconsumers:smallerplayersstillfacebarrierstosignPPAsand,insomelong-termPPAsandremovecountries,publicpurchaserulesmaypreventpublicentitiesfromengaginginlong-termPPAsfortheirownelectricitylegalconstraintspreventingconsumption.themtoentersuchcontractsMoreover,thesepartiesmaynotbeallowedormayfacedifficultiestopooltogetherandsignjointPPAsthroughaconsortium–suchastransactioncostsandhighercounterpartyrisksduetothehighernumberofcounterpartiescompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential44RemovingbarrierstoTransparencyandPublicguaranteesVoluntarypan-EUPPAStimulatingdemandAconsumerprotectionandengagementframeworkPPAsStandardisationplatformandsupplyAninvestmentframeworkKeyrecommendationstoestablishaprivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreements(2)OverviewofrecommendationsKeyconsiderationsforimplementationEnsuresolidarityconsortiaWithamulti-buyerPPAsthroughcorporateconsortia,theconsortiumcouldsignPPAsonbehalfofnumeroustocontractPPAsonbehalfsites/consumers(thatwouldnotbeableindividuallytonegotiatePPAs)andwouldbejointlyresponsiblefortheofmultiplesmallercontract.sites/buyersandthemutualisationofPPArisksAsaresult,itcouldincludeasolidaritymechanismincaseoneofthebuyers’defaults.Inaddition,theseareallowedarrangementsreducethecounterpartyriskfordevelopersthroughthediversificationofbuyers.ConsiderremovingchargesTodoso,standardPPAcontractsadaptedtoconsortiacouldbeelaborated.Thiscouldevenbeconsideredfortheandleviesrelatedtopolicypurposeofcollectiveself-generationmodels.costRemovingchargesandleviesrelatedtopolicycoststofinancethedevelopmentofRESandlow-carbontechnologiesonthevolumesofelectricityacquiredbyconsumersthroughPPAs(physicalorfinancial)withRESandlow-carbongeneratorswouldlevelthefieldbetweenPPAsandpublicde-riskingschemes.TherightpreconditionsneedtobedefinedtoensurethattheconcernedPPAsarenotonlycomplementarytopublicde-riskingschemesforagivenassetbutfullycontributetoitsfinancing.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential45RemovingbarrierstoTransparencyandPublicguaranteesVoluntarypan-EUPPAStimulatingdemandAconsumerprotectionandengagementframeworkPPAsStandardisationplatformandsupplyAninvestmentframeworkKeyrecommendationstoestablishaprivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreements(3)OverviewofrecommendationsKeyconsiderationsforimplementationIntroducepublicguaranteesShouldMemberStatesdecidetointroducesuchmeasures,differentoptionscouldbeenvisaged,potentiallyorinsurancemechanismssubjecttoStateaidapproval.AsisalreadyinplaceinSpainandNorway,MemberStatescouldestablishinsuranceforcounterpartyrisksinmechanismsorprovidepublicguaranteesthatconsumerscouldrequestwhensigningPPAsacrossEurope:PPAsInsurancemechanismsorpublicguaranteescouldbeprovidedtosmallerparties,retailersorconsortiaofsmallerbuyers,tobroadentheoff-takerbaseofPPAs,and/ortolargeconsumers.Aninsurancemechanismcouldbeintroduced,forinstancethroughthepan-EUvoluntaryplatform,alsopartofrecommendationsonPPAs.Alternatively,publicfundscouldofferguaranteesto(i)generators,protectingthemagainstanoff-takerdefault,and(ii)thebanksorotherlenderssecuringrepaymentofloanstakenouttoprepaypartofthePPA.–Theseguaranteeshaveacost,however,asthepublicentityisundertakingariskonbehalfofgeneratorsand/orlenders.Ifsuchinsurancemechanismsorpublicguaranteeswereoffered,thiswouldneedtobedoneinawaythatminimisescompetitivedistortions.Asthemarketmaturesfurther,theneedofapublicguaranteemaybereconsidered.ConditiontheattributionofIncreasinginformationtransparencyofPPAsonprice,volumetypes,andkeycharacteristicsinvolvedwouldhelppublicguaranteesforPPAsmarketparticipantsdevelopnewPPAsbyactingasareferencemodel.totransparencyrequirementsThisinformationcouldbeprovidedtotheregulatorsandpublishedinanaggregatedformonthepan-EuropeanvoluntaryplatformdevelopedaspartofRecommendationcompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential46RemovingbarrierstoTransparencyandPublicguaranteesVoluntarypan-EUPPAStimulatingdemandAconsumerprotectionandengagementframeworkPPAsStandardisationplatformandsupplyAninvestmentframeworkKeyrecommendationstoestablishaprivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreements(4)OverviewofrecommendationsKeyconsiderationsforimplementationEstablishstandardisedPPAThiscouldbebuiltonexistingworktodevelopstandardisedPPAcontracts,likethestandardEFETCorporatecontractsandproductsatPPAcontract.EUlevelandpromoteorincentivisetheiruseEUGuidelinescouldsetoutsomeoftheprinciplesguidingthedraftingofthesecontractsandthedesignoftheproducts.Standardisationcouldalsoapplytotheproductdesignandprofile.ThiswouldfacilitatenegotiationofPPAs,includingforsmallerorlessinformedconsumers,aswellastheirsecondarytrading.Thesestandardcontractsmustnotbeimposed,astheymaybeadaptedtoanysituationsorspecificneeds,buttheiruseshouldbepromotedorincentivised.Asanexampleofanincentive,theattributionofpublicguaranteescouldbesubjecttostandardcontractualclauses.Establishapan-EuropeanTheinterestofsuchaplatformcouldbeconfirmedthroughamoredetailedassessmentandtheconsultationofvoluntaryplatformtothemarket.Theplatformwouldfirstfacilitatesupplyanddemandtomeetmoreeasily.facilitatePPAtradingThisplatformwouldprovidestandardcontractualarrangementsforPPAs,tofacilitatesecondarytradingoverthelifetimeofsuchcontractsifnecessary.ThisarrangementwouldalsoallowtheplatformoperatortoactasacentralcounterpartytoPPAcontracts,potentiallybackedbypublicguarantees.Thevoluntarynatureofthisplatformwouldstillallowforbespokecontractualarrangementsoutsideoftheplatformifrequiredbysomemarketparticipants.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential47RemovingbarrierstoTransparencyandPublicguaranteesVoluntarypan-EUPPAStimulatingdemandAconsumerprotectionandengagementframeworkPPAsStandardisationplatformandsupplyAninvestmentframeworkKeyrecommendationstoestablishaprivateframeworkforRESandlow-carboninvestment:PowerPurchaseAgreements(5)OverviewofrecommendationsKeyconsiderationsforimplementationEncourageentitiestoTheseentities(e.g.suppliers,generators,flexibilityprovidesorPPAaggregators)couldsellasetofstandardisedsupplyservicestocoverthefinancialderivativeswithdifferenttimehorizonsdesignedtohedgetheshapingandbalancingrisksfortypicalbalancing/shapingriskwindorsolarprofilesinagivenzone.againstremunerationunderthelongterm–Tofacilitatethis,marketoperators,suchasthePPAplatformoperator,couldofferatradingplaceforsuchproductsanddefinetheirstandardfeaturesinconsultationwithmarketparticipants.Theseentitiescouldalsoofferbalancing/shapingservicestothePPApartiestocomplementoutputstomeetPPAprofiles,whichcouldbebackedupbyflexibleresourcessuchasstorageordemand-sideresponse.–AsmarketparticipantssigningaPPAarestillexposedtobalancing/shapingrisks,thisrecommendationaimstofostermarketpartiestoofferandpotentiallytostandardisehedginginstrumentsandbalancing/shapingservices,andreducetransactioncosts.EnvisageusingpublicMemberStatescoulddecidetoimposeaminimumlevelofPPAsupplyforthepublicsector’sconsumption.entitiesasanexample,byAsalargeconsumer,procuringelectricityforpublicsectorusethroughPPAswouldstimulatedemandforsuchcontractingpartoftheircontractswithrenewables.electricityconsumptionthroughPPAsDevelopinggovernmentcontractscanalsoimprovethestandardisationofPPAsbysettingreferencecontractsforpublicsectordemandandbeyond.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential48AconsumerprotectionandengagementframeworkAninvestmentframeworkKeygapswiththepublicframeworkforRESandlow-carboninvestmentThereiscurrentlyawidevarietyofsupportschemesTheoptimaldesignsofcontractingschemesfornewassets,adaptedtotheimplementedinMemberStatesdifferentconsideredRESandlow-carbontechnologies,shouldbeidentifiedtoreducecurrentmarketdistortions,andcontributetoprotectingconsumers•Supportschemesareevolvingintocontractingschemestode-riskinvestmentinRESandlow-carbontechnologies,Thecontractingframeworkcouldbebasedonacontractfordifferencetomeettheincreasedrenewableenergytargetsatthelowestdesign.Forinstance,two-sidedcontractsfordifference(CfDs)designhelpprotectcostsforsociety,andconsideringthecostreductionoftheseconsumersandhavebeenincreasinglyusedacrossEurope.technologiesTheuseofthesetwo-sidedCfDscouldavoidex-postinterventionsofTheallocationofpublicde-riskingschemes’costsandgovernments,especiallyincountrieswheretheneedtofurtherprotectconsumersbenefitsshouldbetreatedadequatelytoensuretheirislikelytoappear.efficiencyHowever,thesearenottheonlyschemesthatcouldbeenvisagedandcould•ThelargeshareofRESdevelopmentismostlybasedonbeadequate.E.g.,forcapital-intensivetechnologieswithlongconstructiontimes,technologieswithlowvariablecosts,aswellasvariableandschemesbasedonthedefinitionoftheremunerationofanassetbasecouldbecorrelatedgeneration.considered.•Thiscouldleadtoa‘cannibalisation’effect,meaningthatPublicde-riskingschemesfornewassetscouldalsobringthebenefitsoflong-thedevelopmentofthesetechnologieswoulddampenpricestermcontractingtoconsumers.atwhichtheywouldbeabletoselltheirelectricity,thereforemaintainingorevenincreasingtheneedforde-risking•However,thesecancreatemarketdistortionsforwhichthecostsincreasewithmechanisms.thepenetrationofrenewables.•Thecostsofpublicde-riskingschemes,togetherwith•Theenergycrisishasshownthatrenewablesupportschemeswithuncappedgridcosts,couldrepresentalargeshareoftheupsiderevenuesinthecaseofhighpricesmaynotberesilientandcouldconsumers’bills.triggerfuturepolicyinterventions.compasslexecon.comConfidential49AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstoestablishapublicframeworkforRESandlow-carboninvestment(1)OverviewofrecommendationsKeyconsiderationsforimplementationAllocatepublicde-riskingAllocatepublicde-riskingcontractsusingmarket-basedtenderscontractsfornewRESandTheEUlegislationshouldalsospecifythattheparticipationinthesetendersshouldnotbemandatorytoallowforlow-carbonassetsthroughacompetitiveprocessandmarket-driveninvestmentsharmonisetheirdesignacrossEuropeExemptionsfromthecompetitiveallocationprocesscouldbeallowedforspecificcapacitiesforinstance,suchassmall-scaledistributedresourcesorintheabsenceofpotentialcompetitionAtoolboxapproachcanbetakenonthedesignofsupportschemesacrossMemberStates,toincreaseharmonisationofde-riskingschemesacrossEuropewhileleavingfreedomtoMemberStatesontheirimplementation.–ThiswouldhelpminimisemarketdistortionswherepossibleandalignEUcountriesonbestpractices.DevelopguidanceonbestForinstance,theseschemescouldbebasedon(two-sided)contractsfordifference,butdifferentoptionsarepossiblepracticesforthedesignoffortheimplementationofschemestode-riskRESandlow-carboninvestments.publicde-riskingcontracts,leavingdecisionsonForCfDs,thedesignshouldconsiderthefollowingpoints:detaileddesignuptoindividualcountries–Producttype–Energyprofile–Timehorizon–Technologicalspecificity–Counterparty–Efficientsystemincentives–Referencemarket(s)–Contractualconditions,includingterminationcompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential50AconsumerprotectionandengagementframeworkAninvestmentframeworkKeydesignchoicestoestablishadequateframeworksforRESandlow-carboninvestment-Guidanceforthedesignofpublicde-riskingcontractsDevelopguidanceonbestpracticesforthedesignofforpublicde-riskingcontracts,leavingdecisionsondetaileddesignuptoindividualcountriesAsregardsCfDs(althoughsomegeneralprincipleswouldalsobeapplicablepotentiallytootherschemes),thedesignshouldconsiderthefollowingpoints:ProducttypePhysicalcontractFinancialcontractCounterpartyReferencemarketLessimpactsonshort-termoperationsEnergyprofileMemberStateCentralentitySupplier/thirdpartyConsumerThecostandbenefitallocationisakeycomponentoftheconsumerframework,dependingonthecounterpartyDayaheadmarketHybridapproachLongtermmarketsMaydriveliquiditytoDACouldhelpfosterliquidityinforwardmarkets,butalsoincreasemarketriskPhysicalproductionStandardisedprofileShareofprofileIncentivesforavailabilityintimesofImprovedincentivesforefficientsupplyshortness,riskmitigationagainstdispatchaswellastobalancebetweenriskofnotbeingdispatchedpublicandprivatecontractsOtherkeydimensionsinclude:timehorizon,technologyspecificity,efficientsystemincentives,contractualconditions,terminationconditions,etc.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential51AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstoestablishapublicframeworkforRESandlow-carboninvestment(2)OverviewofrecommendationsKeyconsiderationsforimplementationAssesswhichoptionsforThisassessmentshouldconsiderinparticulartheirimpactsonpricesignalsandincentivesforconsumers,thefaircounterparty(ies)intheallocationofrisksandtheimpactsonsuppliersandtheinterplaywiththeretailmarket.applicationofthelong-termpubliccontractingschemesSeveraloptionsarepossibletodesigntheimplementationoftheseschemes,whichallpresentadvantagesandwouldbethemostsuitabledisadvantages.ThelistbelowisnotexhaustiveanddoesnotincludethemanydifferentsolutionsMemberStateshaveinadditiontoelectricitymarketregulationwhenitcomestofinancingpublicmeasuresanddecisions.Someexamplesare,however,listedtoillustratesomeofthepossibleoptions:1–Long-termcontractcarriedoutonbehalfofconsumers,withcostsandbenefitsallocatedeitheracrossallconsumersortoasubsetthroughleviesorchargesembeddedingridtariffs.2–Long-termde-riskingschemescarriedoutonbehalfofconsumers,withcostsandbenefitsallocatedthroughsuppliers.Thecostsorbenefitsgeneratedbythecontractinagivenperiodcouldbedistributedacrosssuppliers,forinstanceproportionallytotheircustomers’loadduringthatperiod.Thesupplierswouldthenpassonthecostsorbenefitstotheirconsumers3–Resaletosuppliers/consumersviacentralisedauctionsoflong-termcontractslices.Suppliers/consumerswouldbeabletoaccessmedium-termcontracts(1-3yearsforexample),throughvoluntary,open,andcompetitiveauctionsorganisedbyacentralpublicorprivateentity.•Thiscentralentitywouldsourcethiselectricitybyactingascounterpartytolong-termcontractswithRESandlow-carbonsourcesthroughtenders.Theselong-termcontractswouldthenbebrokendownintoshortercontractsandauctionedtothesuppliersorconsumers.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential52AconsumerprotectionandengagementframeworkAninvestmentframeworkKeydesignchoicestoestablishadequateframeworksforRESandlow-carboninvestment-Theallocationofthecostsandbenefits123Long-termcontractcarriedoutonbehalfofLong-termde-riskingschemescarriedoutonLong-termde-riskingschemescarriedoutonconsumers,withcostsandbenefitsallocatedbehalfofconsumers,withcostsandbenefitsbehalfofconsumerswithresaletoeitheracrossallconsumersortoasubsetallocatedthroughsupplierssuppliers/consumersviacentralisedthroughleviesorchargesembeddedinauctionsoflong-termcontractslicesgridtariff•Alleviatessomeoftheriskslinkedtothe•Thecosts/benefitsdistributionacross•Thisoptionreducesthesupplierriskswitchingofconsumersacrosssupplierssuppliers,forinstanceproportionallytoexposurewithlong-termcontractsandtheircustomers’load-thenpassedtotheirwouldlevelthefield–butashareofthe•However,thecostsandbenefitsshouldbeconsumers.riskistransferredtothecentralentityallocatedatsufficientlygranular.intervals,toavoidfiscalissuesand•Thisalleviatessomeoftheriskslinkedto•Voluntaryparticipationinthecompetitiveinefficiencieswithlaggedpayments.theswitchingofconsumersacrossauctionscouldalsocreateanadditionalsuppliers.riskthatthevolumescontractedonthelong-•Ifnotdoneproperly,thisallocationtermarenotboughtbysuppliers/consumerscoulddampenpricesignals.Itshouldnot•Supplierswouldbeabletocombinethesedistorttheratiobetweenpeakandoff-peakcostsandbenefitswiththerestoftheir•Riskofinterferencewithforwardmarketspricesortheincentivestoconsumeinoff-sourcingcostsinadynamicwaypeakperiodswhenthereisabundantRESandlow-carbongeneration•However,itmaycreateuncertaintyonthecostsandbenefitstorecoverandonthe•Ifcostsandbenefitsareallocatedinlongbalancingofthesuppliers’portfolio.intervals,thensuppliersandtheirconsumerscouldfacerisksduetothe•Costsmaybeallocatedtoconsumersasynchronousnatureofmarketcostswithlessprice-elasticdemandandraiseandpublicde-riskingschemesconcernsregardingthefairnessofallocation.compasslexecon.comConfidential53AconsumerprotectionandengagementframeworkAninvestmentframeworkKeyrecommendationstoestablishapublicframeworkforRESandlow-carboninvestment(3)OverviewofrecommendationsKeyconsiderationsforimplementation1Thecostsandbenefitsofpublicde-riskingschemesfornewinvestmentsshouldbepassedthroughtoretailersandconsumersinaproportionateandnon-discriminatoryway,andmayexclude,undercertainInthecaseofoption1:conditions,volumessourcedthroughPPAs.AllocatethecostsandTheallocationcouldbeproportionaltotheoverallconsumption,theconsumptionduringtighterperiods,thebenefitsofpublicde-riskingsubscribedcapacity,throughafixedcomponent,orthroughacombinationofthesepossibilities;however,allschemesfornewtheseapproacheshaveprosandconsinvestmentsinawaythatcontributestohedgingfor–Forinstance,anallocationproportionaltotheconsumptioncouldbedeemedequitablebutdampenpricesignalsconsumerswithout(reducingtheratiobetweenpeakandoff-peakprices)andincentivestoelectrification.increasingtheriskforretailerswhilenot–Conversely,apurelyfixedcomponentwouldlimitnegativeimpactonincentivesbutcouldraiseacceptabilityissues,preventingthedevelopmentespeciallyforsmallerconsumers.ofofferswithordistortingtime-differentiatedsignalsEveniftheallocationofthecostsandbenefitsarebasedonconsumption,thereisavarietyofavailableapproachestopreservetheabilityforsupplierstoprovidepricesignalstoconsumersAlternatively,costsandbenefitscouldalsobeallocatedtoconsumersthroughfixedrebatesorfixedfees(overagivenperiod,e.g.,amonthorayear)sothatactualconsumptioncanstillexposedtoshort-termsignals.Theallocationtoconsumersshouldbedynamic,i.e.,updatedonaregularbasis,sothatthebenefits–usuallylinkedtohighpricesinthemarket–maybedistributedtoconsumerstobalanceanincreaseinpricesduetothesehighprices,andviceversa.–Thisway,consumersmaybenefitfromstablecostsofRESandlow-carbontechnologies.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential54AninvestmentframeworkKeygaps:Capacitymechanismsarenotafullpartofthecurrentmarketdesignframework,leadingtouncertaintyforinvestorsandheterogeneityCapacitymechanismsinEuropeToday,powermarketsintheEUarebasedontheEnergy-Onlymarketdesignmodelwheredayaheadmarginalpricingensuresefficientdispatchandcontributes(tosomeextent)toprovidingCapacityCapacityinvestmentsignals.marketpaymentStrategicNocapacityManycountriesalreadyhavedeemeditnecessarytointroducecapacitymechanismstoprovidereservemechanismthedesiredlevelofsecurityofsupplyandtosupportinvestmenttodoso.Targetedsupportschemesarealsoconsideredorimplementedonstorageanddemand-sideresponse.–ThesemechanismsareheterogeneousacrossEurope,butmostinvolvesomeformoflong-termcontracts.Stateaidapprovalisrequiredfortheintroductionofcapacitymechanisms:itaimstoensurethesemechanismsareproportionatetotheirgoalintermsofsecurityofsupply,butthecurrentstateaidframeworkcanalsocreateuncertaintyoncapacitymechanismsstability.–Moreover,currentlegislationdefinesthemastemporaryadditionstotheenergy-onlymarketmodelandasalast-resortmeasuretoaddresssecurityofsupplyconcerns.Simplifyingproceduresforamoresystematicex-anteapprovalofCMswouldincorporatethesemechanismsdirectlyintothemarketdesign.Todoso,theapprovalprocessshouldbebasedonpre-definedguidelines.Asthesecurityofsupplyissuebecomesmorecomplexwithgrowingsharesofvariablegeneration,thesystemneedswillnolongerbeonedimensionandfocussedoncapacityadequacy.–Ensuringadequateinvestmentinfirmandflexibletechnologieswillbenecessarytomaintainsecurityofsupply.Ifthesystemneedsassessmentidentifiesadditionalneedsforflexiblecapacities,suchasrampingconstraintsorinertia,whichwouldunlikelybecovered,adequateprocurementproceduresmayneedtobeestablished.compasslexecon.comConfidential55AninvestmentframeworkKeyrecommendationstoguaranteesecurityofsupply:CapacityMechanisms(1)OverviewofrecommendationsKeyconsiderationsforimplementationStructurallyembedCapacityCapacityMechanismsshouldbeembeddedthrough:Mechanismsinthemarket1.AchangeinEUlegislationandregulationstostreamlineandautomatetheapprovalprocessifdesigndesignrequirementsaremet.•EUmemberstatescoulddecidewhethertoimplementcapacitymechanisms1.ThemodificationofEUlegislationandregulationswhichsettheirlast-resortandtemporarycharacter.AsCMswouldbeanintegratedpartofthemarketdesign,theyshouldnolongerbeseenasalastresortandtemporarysolution,whichmaydeterinvestmentstoensureadequacyandsecurityofsupply.Developguidelinesto:Specifymeasurestoensurethatthesemechanismsarecompetitive,market-wideandtechnologicallyopen,remuneratingall–existingandnew–capacities(includingDSRandstorage)basedoftheirrespectivecontributionto•fosterharmonisationofsystemneeds.capacitymechanisms,andProvideforlong-termcontractstobeawardedastheoutcomeofthecapacitymechanisms,tonew-builtplants,•simplifytheapprovalDSRorstorageorformajorrefurbishmentworksofexistingplants.Differentstandarddurationofthelong-termprocess,contractscouldbeaccessiblebasedonobjectivecriteriasuchasthelevelofinvestmentsandothereligiblecosts.•whilekeepingsufficientSpecifymeasurestoensurethatthesemechanismsshouldhaveanefficientinterfacewithenergymarkets.flexibilitytoaddressTheirrulesshouldavoiddistortingenergymarkets,suchaswitheligibilitycriteriaoractivationrules.nationaladequacyneedsandspecificities.–Inaddition,thedesigncouldintegratefeaturestohedgeconsumersagainstpricespikes,e.g.throughreliabilityoptions.However,modalitiesofimplementationshouldbecarefullyanalysedastheymaynotbeadaptedtoalltechnologies,particularlystorage.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential56AninvestmentframeworkKeyrecommendationstoguaranteesecurityofsupply:CapacityMechanisms(2)OverviewofrecommendationsKeyconsiderationsforimplementationConsidertheintroductionofThiswouldensureadequatesupplyofthedifferentsystemneeds(linkedtoflexibility)iftherewouldbeariskthataprocurementmechanismsuchneedswouldnotbemet.allowinglong-termcontractingforflexibleThiswouldnotreplacetheprocurementofshort-termoperationalreservesthatcurrentlyvaluestheflexibilityofresourcesresourcesforquickadjustmentsofgeneration/consumptionlevelsbutwouldaimtoguaranteethatavailableresourcesaretechnicallyabletoprovideallsystemneeds.Suchmechanismscouldbefurtheranalysedtocomplementthetraditionalcapacitymechanismsandcouldeitherbeseparateorcombinedintoamulti-product‘capabilitymechanism’.Insuchacase,theyshouldbetechnologicallyopen.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential576.3Annex-AconsumerprotectionandengagementframeworkDetailedrecommendations58AconsumerprotectionandengagementframeworkKeygaps:AneedtobringbenefitsofRES/low-carbongenerationmoredirectlytoend-consumerswhilefosteringconsumerengagementThereistypicallyamismatchbetweenthetimeframeforhedgingbetweenTheneedtointervenetofosterhedgingandtheconsumers/suppliersandproducers.typesofmeasuresdiffersdependingonconsumers.Whereasgeneratorsneedtosecurepartoftheirrevenuesover10-15yearsori.Largerconsumers:largeconsumersmayhaveanlongertomakenecessaryinvestmentsbankable,consumerstendnottohedgeorenterinterestinlong-termhedgingandcontracting,intolong-termcontracts–exceptsomespecific,largerconsumers–throughtheirsupplierornot,butsometimesfinditSuppliersusuallydonothedgebeyond1-3yearsintheabsenceoflong-termdifficulttodoso,dependingontheirnationalcommitmentoftheircustomers.circumstances.Theremovalofregulatorybarrierstolong-termcontractingforconsumersandthe•Fortheseusers,interventionsshouldfocusonintroductionofanenhancedandliquidlong-termcontractingframeworkservesastheremovalofexistingbarrierstolong-termonewayforconsumerstodirectlyreceivethebenefitsfromlessvolatileenergycontractsandtheimprovementofforwardcosts.marketstofacilitatetheirself-protection.Thisispossiblewhilestillprovidingefficientshort-termsignalsfosteringactiveii.Smallerconsumers:thereareavarietyofsmalldemandparticipationinshort-termmarkets.consumerprofiles,andtheconsumerprotectionDifferentconsumershavedifferentcharacteristics,differentcapabilities,differentriskframeworkshouldrecognisethesedifferences.profiles,etc.•Whilesomemaybebetterinformedandmay–Thereisno‘one-size-fits-all’solution,andseveraloptionsshouldbemadeavailable,chooseknowinglytobeexposedtomarketrisks,seekingtousetheirflexibilitytorespondfromwhichinformedconsumerscanchosefreely,toensurearesilientandefficienttopricesignalsandoptimisetheirbills,somemarketdesign.maylackinformation,interest,ormeans(time,financially,technically)torespondtopricecompasslexecon.comsignalsorhedge.Confidential59AconsumerprotectionandengagementframeworkKeyrecommendationstoestablishanenhancedlong-termcontractingframework-AdequateinformationtoconsumersandsensibilisationtorisksOverviewofrecommendationsKeyconsiderationsforimplementationEnsureadequateArt.10ofElectricityDirectiverequiressupplierstoprovidefairandtransparentgeneraltermsandconditionsinformationtoconsumersinplainandunambiguouslanguagetoconsumersonproposedoffers,includingrisksundertakenwhensigninganewthroughastrictcontract.implementationofArt.10ofElectricityDirectiveImprovingconsumers’awarenessandaccesstoinformationcoulddriveengagementontheshortterm,aswellashedging.Didacticinformationandincreasing‘energyliteracy’coulddriveaggregatedPPAsacrosssmallusersforinstance.Inaddition,thereisapotentialtobetterinformconsumersonlong-terminvestmentintotheenergytransition.Forexample,rooftopsolarpanelshedgeagainstshorttermpricesthroughdirectelectricityproduction.Finally,consumersmaytakesubstantialrisksembeddedinthecontractualarrangements.Theyshouldthereforebeadequatelyinformedcompasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential60AconsumerprotectionandengagementframeworkKeyrecommendationstoestablishanenhancedlong-termcontractingframework-Suppliers’resilienceOverviewofrecommendationsKeyconsiderationsforimplementationConsideraflexibleresilienceNRAswouldbeabletochecksuppliers’resilienceagainstmarketshockseitherthroughfinancialrobustness,frameworkonsupplierstothroughriskhedginginconsistencywiththeriskstakendependingonthestructureoftheirportfoliosandguaranteetheirsolidityandcustomers’retailpriceorothermeans.ensurecustomers’protection,including:–Forinstance,consumersoptingfordynamicpricingmaynotrequirehedging,whileconsumerswithfixedpriceswould.i.regularstresstests,andAprerequisiteofthisresilienceframeworkistoensurethatbarrierstolong-termhedgingandsupplyinii.reportingrequirementsforwardmarketsareaddressed.towardsregulators.–Todoso,MemberStatescouldenvisagetodefinesuchaframeworkinsuppliers’licenseconditionsorintheregulation.DevelopingguidanceatEUlevelwouldbeusefultofacilitateharmonisationofprocessesandmethodologiesacrossMemberStatesandaccountforthefactthatsuppliersmaybepresentinvariousjurisdictions.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential61AconsumerprotectionandengagementframeworkKeyrecommendationstoestablishanenhancedlong-termcontractingframework-Enhancehedgingopportunities(1)OverviewofrecommendationsKeyconsiderationsforimplementationRelievenationalThismostlyconcernssmallerconsumers.Thisincludes:legal/regulatoryconstraintstolong-termconsumer1.constraintstothesigningoflong-termretailcontracts(whichwouldalsoincludePPAs),innationalcommitmentwiththeirlegislation(e.g.CzechRepublicorSpain),orsuppliers.2.insomecases,atoostrictapplicationofthecompetitionlaw,aswellas3.provisionsthatimpedeadequatemodalitiestoprotectbothconsumersandsuppliers,forinstanceincaseofearlyterminationonbothsidesonbothsidesofthecontract.LiftbarriersforsupplierstoThisalsomostlyconcernssmallerconsumers.Tohedgeoverthelongrun,suppliersneedsomeassurancethathedgelongertermandoffertheydonotover-procureelectricityiftheirportfolio’sconsumptiondecreases.Long-termassuranceoflong-termhedgingconsumercommitmentwouldunlockretailoffersbasedonconsumerloyalty.possibilitiesforconsumersFacilitatetheresaleoflong-termhedgedvolumesbymakingforwardmarketsmoreliquidandimprovingLTTRallocation(NB:whilecoveringthevolumeriskofconsumerswitching,supplierswouldstillbearsubstantialpricerisk).Allowcost-reflectiveterminationfees/othermechanismsforconsumerstocompensatetheirprevioussupplierforhedgingcosts.Thisfeecouldbedeterminedaccordingtoaregulatedmethodologyordeterminedfreelybythesupplierbeforesigningitsinitialcontractwiththecustomer.–Anotherapproachthatcouldbeinvestigatedwouldbetoallowforthenewsuppliertopaytheterminationfeesonbehalfoftheconsumertotheformeroneincaseofearlyterminationoftheinitialcontractbytheconsumers.–Inbothcases,regulatorymonitoringcouldbeimplementedtofosterconsumertrust.Suchterminationfeesmustbeinplaceincasesupplierswouldhavetheobligationtoofferfixedpricecontracts.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential62AconsumerprotectionandengagementframeworkKeyrecommendationstoestablishanenhancedlong-termcontractingframework-Enhancehedgingopportunities(2)OverviewofrecommendationsKeyconsiderationsforimplementationLiftbarriersforsuppliersto(continued)hedgelongertermandofferlong-termhedgingTogofurther,somememberstatescoulddecidetoprotectparticularconsumersegmentsagainstmarketpossibilitiesforconsumerspricevolatility.Todoso,theycouldimplementde-riskingcontracts,forinstancethroughspecificcontractingschemes.–Thiscouldbedelegatedtosuppliersthroughcompetitiveauctions,andnotleadtoasinglebuyermodel.•Forinstance,theso-called‘affordabilityoptions’couldprotectconsumersagainstsustainedpricespikesandremovetheneedforinterventionseenduringthecurrentcrisis.–However,theyraiseanumberofimplementationquestions,especiallytosettheadequateleveloftheoptionactivation,todefinecounterpartiesandtorecovercosts.•Shouldtheybeconsidered,theyshouldbecontractedinamarket-basedwayandpreventinganydistortionsincompetition.Anaffordabilityoptionisafinancialproducthedgingconsumersagainsttoohighpricespikes,aimingtoguaranteethatthepricepaidbyconsumersremainsunderacertainthreshold,toavoidaffordabilityissues.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential63AconsumerprotectionandengagementframeworkKeyrecommendationstoestablishanenhancedlong-termcontractingframework-EmpowerconsumersandfacilitateDSROverviewofrecommendationsKeyconsiderationsforimplementationImplementexistingInadditiontocompletingthesmartmeterrollout,allowconsumersandaggregatorstoparticipateinallmarketprovisionsoftheCleansegments.Thekeyenablersforgreaterconsumerengagementshouldbeputinplace,toallowconsumerwhowishandEnergyPackagetoliftcanactivelyparticipateintheenergysystem.Thisincludes:barrierstodemand-sideresponse•ThefullimplementationofrelatedmeasuresforeseenintheCleanEnergyPackage:Articles13,15,17and32oftheElectricityDirectivealreadyaddresstherightsofaggregationanddemandresponseparticipationinthemarket.Beforeconsideringadditionallegislation,wefeeltheCommissionshouldfocusonensuringthepropertransposition,implementation,andenforcementoftheexistingArticles.•ThesharingofgoodpracticebetweenMemberStatestofacilitateanefficientimplementationandfosterharmonisationacrosstheEU.•TheremovalofbarrierstoDSR,whererelevant,byenablingDSRparticipationinallelectricitymarketsegmentsandCRMs.Thisincludestheremovalofeitherexplicitorimplicitbarrierstotheirparticipation•ItisworthnotingthatreformsarealreadyunderwaywithrespecttoremovingbarrierstoDSR.InDecember2022,ACERsubmitteddraftframeworkguidelineonanewnetworkcodeondemandresponsetotheEuropeanCommissionasanadditionalsteptowardstheimplementationofbindingEUrules.EnsurethatconsumerscanThankstotheroll-outofsmartmeters(andrespectivedataaccess),short-termincentivescouldbeintroducedinhaveaccesstoanadequatevariousways,suchastime-of-usetariffs,criticalpeakpricing,dynamicpricing,anddynamicrebates.rangeofretailoffersencompassingshort-termNRAscouldmonitorthemarketforavailablechoicesalsoregardingthetypesofretailoffersandwhetherthereareincentivesanyregulatorybarriersthathinderretailerstooffernewproducts.compasslexecon.comEU-widemeasureOptionalfurtherMSmeasureConfidential64