The European electricity market is going green
Part two of the legislative package ‘Clean Energy for all Europeans’ is preparing the internal market in electricity for a growing share of renewables. This means more competition and flexible electricity rates for consumers.
More competition, more flexibility, more choice for consumers. In a nutshell, that’s the effect of the new EU rules on the internal market in electricity that are to be passed this spring. The revised rules are designed to prepare the internal market in electricity for growing shares of renewables and to ensure that all EU citizens have access to a secure and affordable supply of electricity.
The new rules take the form of eight Directives and Regulations that take up more than a thousand pages and were approved after two years of intense debate between European energy policy makers. Part one of the extensive legislative package ‘Clean Energy for all Europeans’ had been approved last summer. It mainly sets new pan-European energy and climate targets for 2030 (click here for more information). Following informal agreement in the trilogue negotiations last December, the Committee of Permanent Representatives (COREPER) of the Member States also agreed to the associated rules on the electricity market, in favour of the European energy transition. Final approval of the texts by the Council and the European Parliament is planned to be secured prior to the elections for the European Parliament this May.
Below, you will find an overview of the key effects of the Electricity Market Directive and Regulation and the Risk-Preparedness Regulation.
Utilities must offer flexible rates
All utilities having more than 200,000 customers will soon have to offer flexible rates. These are particularly attractive to consumers using smart meters. They will be able to select a tariff that allows them pay less for electricity consumed during off-peak hours, meaning they can adapt their patters of consumption accordingly. For instance, you could charge your electric vehicle whenever electricity prices are at their lowest level. By the same token, this will give utilities a possibility to steer demand, something that will be crucial in an electricity market dominated by volatile wind and solar energy.
It will become easier for unused capacity to be sold on
Large-scale consumers can lower their electricity bills by adopting more flexible use patters and by selling unused capacity on the market. Cold stores, for instance, could set their temperatures to minus 19 degrees Celsius instead of minus 20 at certain times. If it makes to economic sense for a consumer to sell their unused capacity themselves, they can turn to ‘aggregators’. These are businesses that pool small capacities from different customers and sell them on the market. The new Electricity Market Directive is the first to set out some rules underpinning the work of independent aggregators, i.e. aggregators that are not affiliated with utilities. This will give a fresh boost to the market and make it possible for small amounts of capacity to be used.
Electricity from renewables will be traded in units of 15 minutes everywhere in the EU
The market will also receive fresh impetus by the fact that electricity will be traded in 15-minute units everywhere in Europe – something that will also help integrate renewables into the market. Whilst this has already been possible in Germany, the smallest electricity unit on sale in some other EU countries has been one hour. This has put electricity from renewables at a disadvantage, given that its availability is less predictable. Having smaller units will make it easier for electricity from renewables to be sold across Europe, including in cross-border trade.
Energy security will be more of a European project
The EU Member States have acknowledged that it is easier to achieve a high level of energy security at a lower price if we look at supply and demand at a European level. This is why they have decided to jointly address any gaps. For instance, Member States are to take into account the power-plant capacity available in their neighbouring countries as they design action to ensure energy security. This will reduce the required amount of reserve capacity and lower costs. The necessary action will be underpinned by a European energy security report. The new Risk-preparedness Regulation also stipulates that Member States must draw up risk-prevention plans detailing national and cross-border action to be taken to prevent and address potential crises.
The Regional Cooperation Centres will take on new tasks and become involved in energy security and electricity trade. These centres bring together the Transmission System Operators from the respective regions for calculating the daily capacities up for trading.
Strong support for cross-border electricity exchange
The new Electricity Market Regulation stipulates that interconnectors must be opened to a larger degree for cross-border trade (to learn more about how these interconnectors work, please click here). Under the new Regulation, the trade capacity levels are to be incrementally raised until they reach 70%. This is to help boost the pan-European trade in electricity. Due to its geographical position at the heart of the continent, Germany has a key role to play in this.
There is also the question of how Member States are to deal with internal bottlenecks in their grids. After all, more cross-border trade in electricity translates into more pressure on the grids. Up until now, Member States have usually responded by shutting down interconnectors and giving priority to national trade in electricity. The new Electricity Market Regulation stipulates that Member States must attain a minimum rate of 70% made accessible for cross-border trade in electricity.
Member States experiencing internal gridlock will be able to decide if they want to split up their electricity market into several bidding zones (which, in the case of Germany, would mean having different prices in different parts of the country) or whether they prefer to table a plan of action on how they are planning to eliminate these gridlocks. Member States opting for the second possibility are granted an interim period up until 2025, by which time they must incrementally open up their interconnectors from the current use levels to the 70% mark.
These requirements are a major challenge for Germany. However, the energy transition requires us to engage in cross-border trade in electricity so that renewables can be successfully integrated into a system that also remains cost-efficient. The transition period buys Germany time for expanding its grid.
Waving goodbye to subsidies for carbon-intensive power plants
The new rules also set out minimum requirements for capacity markets. In a capacity market system, power plant operators are paid for making capacity available in case it is needed. The Electricity Market Regulation sets out certain rules designed to limit market distortion caused by such capacity markets. Germany decided against establishing such capacity markets years ago. Instead, the country has worked to strengthen its electricity market, so that it provides sufficient incentives for sufficient capacity to be made available.
The new Regulation also introduces an Emissions Performance Standard (EPS). This is to prevent highly carbon-intensive coal-fired power plants from participating in capacity mechanisms. The new standard will apply as of 2020 for new plants and as of 2025 for existing ones. It sends a clear political signal for climate-friendly investments in Europe. Put differently: investments in power plants that fail to meet the EPS will soon no longer pay off.
Renewables installations of a certain minimum size must sell their electricity themselves
Everywhere in Europe, operators of renewables installations will soon have to take care of marketing their own electricity. This is already the case in Germany, where there is a market premium. Small installations with less than 400 kilowatts of capacity (200 kW as of 2026) are exempt from this rule and benefit from fixed feed-in tariffs. In Germany, this type of fixed feed-in tariff already applies for installations with less than 100 kilowatts of capacity. The new EU rules will only apply if a Member State fails to deliver its national contribution to the EU renewables target, or if the share of renewables in that Member State’s electricity sector is less than 50%. Otherwise, it is up to the Member States to decide if they want to exempt small installations.
Priority feed in for renewables – all across Europe
The principle of priority feed-in for renewables is being strengthened. There is now a clear rule stipulating that renewables will be given priority whenever there is a bottleneck in the grid anywhere in Europe. Renewables are also the last to have to reduce their output in cases where there is a redispatch (for more information about this, please click here). In the event that an installation has to reduce its output, its operators are entitled to compensation. This is already the law in Germany, but the situation elsewhere in Europe had not been clear.
When will the new rules take effect?
The three Directives and Regulations are likely to enter into force this summer. As of then, the provisions of the Risk-Preparedness Regulation will be directly applicable in the Member States. Similarly, the provisions on trade capacities and bidding zones set out in the Electricity Market Regulation will apply as soon as the Regulation enters into force; all other provisions will apply as of 1 January 2020. In the case of the Electricity Market Directive, Member States will have until the end of 2020 to transpose the provisions into national law.