The European Union's reform of its electricity market design has now completed its legislative journey. After the Council's final approval in May, the package was published as Regulation (EU) 2024/1747, dated 13 June 2024, amending the 2019 electricity regulation, alongside Directive (EU) 2024/1711 amending the electricity directive. The reform was born in the crisis of 2022, when gas prices pushed wholesale electricity prices to record levels and several governments, led by Spain and France, argued that the market itself was broken. Some wanted to abandon marginal pricing, under which the most expensive plant needed to meet demand sets the price for all generators in a given hour.
That did not happen. The reform keeps the short-term market intact and instead tries to shield consumers and investors from its volatility through longer-term contracts. Our view is that this was the correct choice. Marginal pricing is how Europe dispatches the cheapest available plants each hour across a continent of interconnected grids, and replacing it would have damaged the efficiency of trade without solving the underlying problem, which was dependence on gas. The real test of the reform will be whether member states and buyers actually use the long-term instruments it promotes.
What the reform does
The centrepiece is the two-way contract for difference. When member states provide direct price support for new investment in low-carbon, non-fossil generation, such as wind, solar, geothermal, hydropower without reservoirs and nuclear, the support must take the form of two-way contracts for difference or equivalent schemes. Under such a contract the generator receives a guaranteed strike price. When the market price is below the strike, the state pays the difference. When the market price is above it, the generator pays the excess back. The obligation applies to support contracts concluded from 17 July 2027, giving governments time to adapt existing schemes.
The two-way design matters. During 2022, renewable generators with one-sided support kept the full benefit of extremely high market prices while consumers paid them. A two-way contract caps those windfalls and returns them, which governments may pass to consumers. It also gives investors a stable revenue, lowering the cost of capital, which is the largest cost component for wind and solar projects.
The reform also promotes power purchase agreements, the long-term contracts between generators and large buyers. Member states are expected to remove barriers to PPAs and may support guarantee schemes that reduce the credit risk for smaller buyers. Consumers gain rights to fixed-price contracts and to energy sharing, so that households and communities can share electricity from jointly owned installations. Suppliers face stronger expectations to hedge, reducing the risk of the supplier failures seen in 2021 and 2022.
There is a crisis mechanism as well. The Council can declare a regional or EU-wide electricity price crisis when certain price conditions are met, which allows member states to set regulated prices below cost for households and small businesses for a limited period. Capacity mechanisms, which pay plants to be available, are no longer treated purely as temporary measures of last resort, and member states must assess their flexibility needs and set indicative targets for non-fossil flexibility such as storage and demand response.
Why keeping marginal pricing was right
The argument against marginal pricing in 2022 was emotionally powerful. Consumers were paying gas-set prices for power produced by wind, hydro and nuclear plants with much lower costs. But the price in a given hour reflects the cost of the last unit needed, and that signal is what tells flexible plants when to run, storage when to charge and discharge, and interconnectors which way to flow. Any alternative, such as pay-as-bid pricing, would have changed bidding behaviour without lowering costs much, because generators would bid their expectation of the clearing price.
The problem in 2022 was not the market design. It was that Europe relied on gas for the marginal hours, and gas had become scarce and expensive. The durable solution is to have less gas at the margin, which requires more renewables, storage, flexibility and interconnection. Long-term contracts help finance those investments while letting the short-term market continue to do its job.
Where the reform may fall short
The main weakness is that it relies on take-up. Contracts for difference only matter for new projects with public support, and the mandatory form only applies from 2027. PPAs remain concentrated among large, creditworthy corporate buyers. Small and medium enterprises, which were among the worst hit in 2022, still struggle to sign long-term contracts because they are seen as credit risks and lack the scale to negotiate. Unless member states actually deploy the guarantee schemes the reform encourages, the PPA market will continue to serve mainly large corporations.
The second weakness is flexibility. Assessing flexibility needs and setting indicative targets is useful, but indicative targets are weak tools. Europe's growing share of solar is already producing more frequent negative prices in the middle of the day and steep evening ramps. The reform recognises that problem without imposing strong obligations to solve it.
The third weakness is the crisis mechanism. It gives governments a legal route to regulate prices in a future crisis, which is sensible. But regulated prices below cost must be paid for, either by the state or by others in the market. The design limits duration and scope, but a future crisis will test whether governments respect those limits.
Our assessment
The EU's market reform is a pragmatic, evolutionary package. It keeps the efficient short-term market that underpins cross-border trade and focuses on giving consumers and investors protection from volatility through contracts. That is the right trade-off. Its success now rests on implementation by member states: designing contracts for difference well, building guarantee schemes for PPAs, and taking flexibility seriously. Europe will not know whether the reform works until the next price shock. The aim between now and then should be to ensure that, when that shock comes, a much larger share of consumption is covered by long-term contracts and much less of it depends on gas.