Energy market regulation in Europe amidst rising prices
High energy prices have sparked concerns over energy security and supply, and as a result, the European Commission (EC), member states, and fuel suppliers have had to act quickly to protect consumers.
In this article, we’ll take a closer look at how rising gas and electricity prices have evolved the European energy market and highlighted the need for regulatory reform.
The energy markets in Europe
The EU’s internal energy market is made up of several wholesale markets, including long-term, spot, balancing, and transition re-dispatch markets. Within each market, electricity is bought by fuel suppliers and sold by producers. It’s then delivered on the same day, the next day or several months in advance.
Although the EU has only one internal energy market, there are essentially two different systems at play, with each member state setting its own rules.
The ‘energy-only market’ (EOM), which was introduced in Germany in 1998 only compensates producers for the energy that is actually generated. When demand surpasses the available supply, market prices increase, so the system favours lower-cost electricity generation from renewable technologies like solar PV or wind turbines.
The ‘capacity market’ was introduced in the EU in 2014 to help decarbonise electricity supplies while keeping consumer costs affordable. It was initially adopted by the UK, and is now used by countries like France, Finland, Germany, Greece, and Italy.
Under this system, fuel suppliers buy certificates from producers, which allow them to use a fixed amount of electricity over a certain period of time. The system aims to provide greater security of supply.
How energy regulation models differ across member states
In Germany, the electricity market is part of the private sector. Power is generated by both fossil fuel and renewable power plants with energy prices varying depending on the energy sources, subsidies, and taxes.
The Energy Industry Act (EnWG), sets out the regulatory framework for the electricity sector, including the calculation of network fees. The EnWG also sets the rules for basic supply and over the last few years, its focus has been on promoting the use of renewable energy and low-carbon power generation methods.
The French energy market used to be governed by Electricité de France as a state monopoly, however, in the last two decades, the market has been opened up to competition. The public electricity network is now operated by Enedis, which oversees the grid development and electricity tariffs.
The Spanish electricity regulator is the Comisión Nacional de Energía (CNMC). The electricity sector in Spain has also become more liberalised over the last two decades with European directives creating a sole internal electricity market. Electricity activities are overseen by private entities on the basis of free competition and there are no state-owned entities that are controlled by local authorities.
In Finland, the electricity wholesale market is regulated by Energy Authority. The market is part of the North European electricity market, which includes Finland, Denmark, Norway, Sweden, Estonia, Lithuania and Latvia. Finland’s governance policies have a particular focus on the security of energy supplies and meeting climate change targets.
The EU’s response to the surge in energy prices
In response to Europe’s rising energy prices, the European Commission implemented a number of initiatives, all of which are outlined on the EC’s website.
The most notable initiative is the REPowerEU plan, which outlines the EU's commitment to phasing out its dependency on international fossil fuels. In short, the plan aims to promote energy conservation by encouraging clean energy production, and diversifying European energy supplies.
In March 2022, the Commission also proposed a new regulation to safeguard the security of Europe’s gas supply by ensuring reasonable prices for consumers and businesses by restocking gas storage facilities. A few months later, it published its Save Gas For a Safe Winter document, which focused on demand reduction measures.
Another notable initiative, Digitalising the Energy System, was proposed in October 2022, suggesting that digital tools like smart meters, internet of things devices, and electric vehicles could help consumers reduce their reliance on fossil fuels and reduce their energy bills.
How EU member states have helped protect consumers
In September 2022, the French government unveiled a €45 billion plan to safeguard both households and businesses from potential surges in energy prices. An initial price cap of 4% was placed on gas and electricity rates, which was raised to 15% from January 2023. Moreover, a directive was also issued to Electricité de France (EDF), mandating an increase in the allocation of nuclear power sales to smaller competitors in the market.
Meanwhile, Germany initially introduced a support package valued at €100 billion. This allocation was later increased to a substantial €200 billion fund dedicated to alleviating gas prices. The gas relief fund included an 80% price cap on gas and electricity prices for both businesses and households alike.
In Spain, the European Commission recently granted the country €350 million. The initiative, which will run until June 2026, will go towards the development of electricity storage facilities. The funding will also be used to increase the share of renewable sources within the electricity grid, simultaneously addressing the issue of excessive production.
The Commission also granted Finnish authorities €10 million to help ensure electricity producers have access to sufficient liquidity.
The complexities of communicating price caps to consumers
Given the differences in energy regulation between member states, implementing national energy price caps to ensure all consumers benefit fairly has proven to be a challenge.
In December 2022, the EC agreed that price caps would be triggered if electricity prices exceeded €180 per megawatt hour for three days. However, many member states introduced price caps before the agreement.
Price caps calculations in Germany are particularly complex. The cap on gas at 12ct/kWh for households and small businesses is applied on consumption levels equalling 80% of their estimated annual consumption. Consumption beyond this 80% is charged at the much higher market rates.
Whereas prices for large businesses are capped at 7 ct/kWh for gas, and are applied to 70% of their consumption from the previous year.
Electricity prices for households and small businesses are capped at 40 ct/kWh for 80% of the estimated consumption, and at 13 ct/kWh for large businesses for 70% of the previous years’ consumption.
Communicating these calculations to consumers in an understandable way will undoubtedly be challenging and fuel suppliers will need to take a customer-centric approach.
Meanwhile, in France, the government introduced a ‘tariff shield’ to ensure that all consumers would have the same level of energy security. It guaranteed the same energy price level for everyone, regardless of their income and consumption. However, the process has highlighted a social injustice, where the richest households consume twice as much energy as the poorest, and receive more than double the subsidy.
Before the EU agreed the price cap and trigger points, both Spain and Portugal introduced the ‘Iberian exception’ gas price cap, which applies exclusively to gas for power generation.
According to a document published by research company EsadeEcPol, the average Spanish household has saved €69 since the cap was introduced, which could amount to total savings of €690 million across Spain. However, the price cap has had a negative knock-on effect as there has been more gas-fired power generation across the country. In turn, this has allowed France to import cheaper electricity.
In Finland, the Ministry of Economic Affairs and Employment confirmed that price caps will be based on electricity costs in excess of €100 euros per month with a monthly maximum limit of €700 euros. However, several experts have expressed reservations, saying that the caps would discourage households from saving electricity and actually make the electricity shortage worse.
Needless to say, fuel suppliers need to communicate their fuel cap prices to consumers carefully. It’s clear that in some member states, some households will receive more support than others, and energy companies need to be prepared to explain how the calculations have been made.
Communicating price caps to consumers is challenging, and many fuel suppliers would benefit from using a customer-centric platform like triPica that puts customer experience first. One of the inevitable consequences of price caps is that suppliers will need to effectively manage an influx of calls to their service centres.
In order to meet keep up with ever-changing regulations and the requirements of a volatile market, fuel suppliers need a flexible platform that enables them to adjust their prices and billing logic immediately.
The next step: a reform of the EU energy market design
On the 14th March 2023, the European Commission presented a proposal to revise the EUs electricity market design with the aim of making it more resilient and less prone to market manipulation. It also aims to protect European consumers from rising electricity costs.
The proposal advocates the use of long-term Contracts for Difference and Power Purchase Agreements to accelerate the use of renewables in the energy system.
Likewise, the Commission set out a proposal to transition the EU gas sector towards low-carbon gases such as biomethane and hydrogen. It aims to reduce injection costs of low-carbon gases into the wholesale market by 75% and to terminate long-term contracts for fossil fuel gases from 2049.
The new gas package also aims to encourage better network planning to make the EU’s energy infrastructure more cost-effective.
How member states are reacting to the EU energy market reform
Following the EC’s proposal, the member states have failed to reach an agreement on certain elements, including how much countries can subsidise existing power plants using the new, fixed-price power contracts.
However, time is of the essence as all EU countries must negotiate with the European Parliament before the elections in June next year.
During initial negotiations in Brussels, Poland requested an amendment to allow coal power plants that started operating before 2019 to continue until 2028. However, the request was blocked on the basis that it would pose a significant risk to the EU’s transition away from fossil fuels.
The market reform proposal has been met with mixed reactions in Germany with its renewable industry association BEE, criticising subsidies for low-carbon electricity generation facilities that could lead to ‘market distortions’.
However, industry association BDI and lobby group BDEW are satisfied that no drastic changes had been proposed to the market reform.
France welcomed the proposal with French Energy Minister Agnès Pannier-Runacher saying it “provides concrete tools to allow consumers to benefit from the costs of the plants that supply them’’. The country was particularly pleased with the introduction of CfDs.
However, France also wants the reform to be completed by the end of 2023, in contrast to Germany’s preference to wait until the Parliamentary elections in 2024.
Spain, on the other hand has proposed allowing subsidies for existing power plants, but with conditions such as extending plant capacity to avoid market distortions.
The EU member states and lawmakers are currently negotiating the final law. For the reform to be passed, the final proposal must be approved by the European Parliament and a majority of at least 15 countries.
The need for energy companies to be customer-centric and adapt quickly to market changes
The market reform has a strong focus on empowering consumers by providing a wider choice of contracts and more transparency over how their energy costs are calculated.
Fuel suppliers will therefore need to provide clear information on the advantages and risks of different types of contracts.
Consumers will also have the option of combining fixed and variable pricing for electricity, as well as being able to share their energy with neighbours.
Energy companies will therefore need to have clear policies and eligibility clauses in place given that consumer contracts could become more complex. Overall, fuel suppliers will need to provide a positive customer experience to retain customers and avoid losing out to competitors.
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