Members' Research Service By / March 2, 2023

Reforming the EU electricity market [Policy podcast]

The 2022 energy crisis, which followed Russia’s invasion of Ukraine, brought multiple challenges relating to energy security and affordability.

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Written by Agnieszka Widuto.

The energy crisis of 2022 has brought new challenges for the EU electricity market. Concerns over very high prices (driven in part by their coupling with gas prices), security of energy supply, and the need to increase decarbonisation have sparked discussions on the need to redesign the EU’s electricity market.

The EU has already taken a number of short-term measures to contain the energy crisis. The REPowerEU plan of May 2022 was introduced to phase out Russian fossil fuel imports, diversify supplies, boost energy savings and accelerate the clean energy transition. Other measures, focusing more specifically on electricity, included a Council regulation of October 2022 on an emergency intervention to address high energy prices, which introduced electricity demand reduction targets and set a revenue cap on inframarginal electricity producers, i.e. those producing electricity below the cost of the most expensive ‘marginal’ fuel source.

More long-term structural electricity market reform aims to make the market more resilient, contain excessive price volatility and ensure secure energy supplies, especially from clean sources. The reform is expected to focus on the following areas: making electricity bills less dependent on short-term fossil fuel prices, e.g. by reducing the role of gas in short-term markets; pricing inframarginal technologies on the basis of their true production costs; boosting the role of renewables; better protecting consumers against price volatility and empowering them to produce and share electricity; and improving market transparency, surveillance and integrity. There is also an ongoing discussion as to whether the current merit order system based on marginal pricing, effectively responsible for coupling electricity prices with gas prices, should be reformed.

The Commission is expected to present its legislative proposal on the electricity market reform in mid-March 2023.

Read the complete briefing on ‘Reforping the EU electricity market‘ in the Think Tank pages of the European Parliament.

Listen to policy podcast ‘Revamping the EU electricity market’ on YouTube.

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