Europe's Electricity Market Reform Keeps Marginal Pricing and Bets on Contracts. That Is the Right Trade
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. The reform keeps the short-term market intact and instead tries to shield consumers and investors from its volatility through longer-term contracts. 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.
During 2022, renewable generators with one-sided support kept the full benefit of extremely high market prices while consumers paid them. 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. 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.
Consumers were paying gas-set prices for power produced by wind, hydro and nuclear plants with much lower costs. It was that Europe relied on gas for the marginal hours, and gas had become scarce and expensive. Contracts for difference only matter for new projects with public support, and the mandatory form only applies from 2027.