12/06/2023
In March this year , the European Commission submitted a draft reform of the electricity market. Compared with Spain, France, Greece and other countries previously proposed radical plans including market segmentation and price limits, the draft aims to establish long-term contracts that adapt to the development of renewable energy, Capacity mechanism and other means to promote larger-scale green power investment and enhance the flexibility of the power system, to enable consumers to share the results of renewable energy cost reduction, while enhancing the competitiveness of European industries.
In 2022 , due to the impact of the conflict between Russia and Ukraine, the import of natural gas from Russia will be greatly reduced, superimposed on the EU's denuclearization process and the decline in water and electricity supply, causing the EU to be impacted by power shortages and soaring electricity prices. The rise in natural gas prices has pushed natural gas units to become priced units in the spot market, while renewable power generation, nuclear power, coal power and other units have obtained excess returns through "free riding", which has brought a heavy burden to consumers, so marginal cost pricing The short-term market has become the target of public criticism, and the EU countries have therefore put forward the requirement of reforming the current electricity market.
However, according to the assessment of institutions such as ACER ( Agency for the Cooperation of Energy Regulators ), the European Union's market structure based on the spot market plus the unified electricity market is not responsible for the crisis. On the contrary, the current market can effectively detect short-term price signals, promote cross-border power trading and backup sharing, reduce power costs and price fluctuations, and save consumers about 34 billion euros in electricity costs in 2021 . Although the current electricity market structure is not designed for crisis response, the short-term market did not fail during this energy crisis, but played its due role in guiding supply and demand and optimizing operation.
According to the assessment, measures such as taking relief measures, imposing windfall profits tax, setting unit price limits, and even dividing the market will distort prices, and the more serious the price distortions are in order, they will not fundamentally overcome the problem of rising electricity prices, but will hinder them. Supply security, distorting cross-border electricity trade, jeopardizing investor confidence. The primary culprit of the power supply crisis is the primary energy shortage. The more effective measures to curb the rise in electricity prices in the short term are to expand the supply of natural gas and moderately intervene in the natural gas market. With the fall of natural gas prices, the electricity price in the EU has basically returned to the level before the Russia-Ukraine conflict ( 100-150 Euro / MWh), but it is still significantly higher than the average value of previous years.
However, this does not mean that the EU electricity market does not need to be reformed. On the contrary, due to the characteristics of high investment cost and low marginal cost of renewable energy (especially new energy), which do not match the short-term pricing mechanism based on marginal cost, the short-term market cannot reflect In terms of long-term costs, renewable energy has no guarantee of stable income, and it is difficult to motivate optimal investment in renewable energy. Therefore, the power market reform draft issued by the EU focuses on establishing long-term electric energy market and capacity market mechanisms including contracts for difference, PPA and power forward, so as to better adapt to the development of renewable energy.
2. The reform focuses on the long-term market, and the new energy storage benefits hugely
The main function of the short-term market is to achieve optimal cost operation based on the existing power generation - load structure, while the long-term market can hedge price risks, reduce electricity price fluctuations, and form long-term and stable investment signals for the development of renewable energy. However, the long-term (more than 3 years) market in the current EU electricity market lacks liquidity, which limits its role. Improving the long-term market has become the main direction of electricity market reform.
(1) Long-term electric energy market and its role
1. Two-way CFD
Two-way contract for difference ( CfDs : contracts for difference) is a government-mediated procurement scheme. CFDs involve a strike price and a reference price (usually the spot price). When the reference price is lower than the ex*****on price, the holder of the contract for difference obtains the differential income, and the differential income is paid by the government; otherwise, the government obtains the differential income. As a result, CfD contract holders can obtain fixed electricity prices, the ex*****on price is determined by competitive auction, and the contract period is usually 15-20 years.
Since the contract for difference is designed and guaranteed by the EU countries, it has certain planning attributes, which may reduce the efficiency of the market and also make the government bear the risk of paying the difference. The government indirectly decides the support for different renewable energy generation technologies, and it is still a problem to strike a balance between technologies; a long-term market with a single price will lead to the loss of location and time information of generating units, which may lead to the lowest long-term cost power source (such as Photovoltaic) accumulate in resource-rich areas and at specific times, causing grid congestion and consumption problems, and rapidly reducing the value of power generation resources. Therefore, while promoting the long-term market, reasonable government planning and matching of different power sources are also very important.
2. Multi-year Power Purchase Agreement ( PPA )
Unlike contracts for difference, where governments and public institutions act as intermediaries, PPAs are multi-year contracts signed between power generators (generally renewable power generation) and electricity sales companies and users, which is a purely commercial act. PPA can provide stable income for renewable power generators, improve the financing ability of investors, and also play a good role in hedging user-side price risks. However, there is a performance risk of the buyer in the PPA contract. The government can reduce the performance risk of the PPA contract by strengthening credit supervision, establishing a guarantee mechanism, and improving insurance. At the same time, the government can promote the development of PPA contracts by providing priority approval rights for projects awarded PPA contracts.
PPA contracts also have certain limitations on the user side, because those who can provide power generators with long-term stable power purchases and guarantees are generally large power users. However, in order to allow small and medium-sized users to share the benefits brought about by the development of renewable energy, the government encourages standardized and more transparent PPA contract formats, and enables smaller users to aggregate to form a user pool and sign a PPA market with power generators to reduce performance risks.
Since the PPA contract has stronger market attributes, it may become an important mechanism for the development of renewable energy. By the end of 2021 , about 17.5GW of renewable power generation capacity signed PPA contracts (Figure 1 ), the proportion is still very low. But a study by the European Investment Bank ( EIB) and the European Commission estimates that PPAs will cover 10%-23% of wind and PV capacity by 2030 .
Figure 1 Renewable energy capacity of PPA contracts signed by the EU ( ACER : Final Assessment of the EU Wholesale Electricity Market Design )
In addition, the EU is also trying to increase the liquidity of power forward ( Forward ) contracts to stabilize price expectations. Electricity forward contracts are financial derivatives for electricity commodities. Forward contracts of more than 3 years can effectively hedge electricity price risks.
