The Summer Energy Package

The Commission unveiled a redesign of European electricity market along with a ‘new deal’ to empower EU energy consumers, in two new Communications presented in July.

The Commission considers a new energy market design, based on a flexible and decentralised system, is necessary if the EU wants to meet its climate and energy targets. This also will require new products and services to be developed and deployed, while delivering jobs and focusing on energy efficiency.

The Commission’s Communication outlines the key elements of its plans for the redesign of the electricity market: removing obstacles for renewables, encouraging investment, reducing energy consumption and promoting demand-side flexibility instruments. The Communication simultaneously launches a public consultation on the design of the new electricity market.

The second Communication sets out the Commission’s strategy to put consumers at the centre of the new energy system. However, to empower citizens the lack of information and transparency needs to be addressed and participation in the market enabled through new technologies.

Both Communications are a part of the ‘Energy Summer Package’, and follow-up the Commission’s flagship Energy Union Strategy, launched in February 2015. As part of the package, the Commission also proposes a new Regulation on energy labelling and a revision of the European Emissions Trading System (ETS).

(1) A New Electricity Market Design

The Commission envisages a new market design to promote an interconnected EU-wide electricity market, with regional cooperation and coordination, and the development of renewables, with the aim of ensuring the security of supply of electricity in Europe.

(a) Delivering the New Electricity Market for the EU

According to the Commission, the first objective is to making the market work efficiently and effectively. The Commission therefore proposes the setting up of cross-border short-term markets, adapted to large-scale cross-border flows and high volumes of variable renewable production.

The Commission also wants constraints on pricing to be removed, intraday lead times and trading intervals to be shortened and gate closure times to be brought closer to real time. Energy storage needs to be deployed to accommodate variable renewables.

The Commission also wants long-term markets to be open for all market actors to be able to flag good investment opportunities and for suppliers and producers to be able to hedge against price volatilities and to manage price swings on spot markets. Long-term contracts, which can mitigate investment risk, should also be promoted.

The new market design should facilitate investments in renewables by properly addressing the key investment factors, namely geographical location, grid availability, public acceptance as well as administrative conditions. The Commission wants appropriately defined price zones to signal where and when electricity should be generated from renewable sources.

With regard to support schemes, the Commission believes in market-based approach, with market-based schemes addressing market failures and ensuring cost-effectiveness while avoiding market distortion. The Commission also calls for a more regional approach to renewable energy, not confined to the Member States.

The Commission also notes that infrastructure links are still missing for a truly integrated internal market. Energy infrastructure projects, and projects aimed at integrating the national electricity markets, such as the projects of common interest (PCIs) should be funded by the Connecting Europe Facility and the European Fund for Strategic Investment. The European Investment Advisory Hub would then provide expertise and technical assistance.

The Commission also wants the retail electricity market to enable all consumers to participate in the EU energy transition. By linking retail and wholesale markets, so that price differences on the wholesale level are reflected on the retail level, conditions for optimal demand response should be created.

(b) Regional Cooperation in an Integrated Electricity System

The European Commission calls for increased coordination and cooperation between all actors in the internal energy market of the EU by promoting regional cooperation in national policymaking. This would involve Member States and neighbouring countries to coordinate and cooperate when developing energy policies with the aim of achieving EU-level targets, strengthening energy security and further integrating the internal market.

Regional cooperation will also require improving interconnections notably in the Baltics, the Iberian Peninsula, the Northern Seas and Central and South Eastern Europe. Links with the southern Mediterranean and Western Balkans should also be considered. The Commission proposes that revenue from transporting electricity from low-price areas to high-price areas could be used to improve the interconnectivity.

The Commission also calls for increased coordination between transmission system operators. Regional Cooperation Initiatives (RSCIs) should be given decision-making powers, to develop a pan-European coordination of system operation. The Commission also suggests strengthening the European Network of Transmission System Operators for Electricity (ENTSO-E), which currently coordinates Transmission System Operators (TSOs).

Next, the Commission wants the revenue framework to provide the right incentives for all transmission system operators. Distribution System Operators (DSOs) must therefore be involved in the EU regulatory bodies and to ensure cost-efficiency the Commission calls for closer cooperation between TSOs and DSOs.

The regulatory framework also needs to be adapted to integrated markets. The European Commission proposes enhancing the role of the Agency for the Cooperation for Energy Regulators (ACER), and to give ACER regulatory powers to ensure regulatory oversight. Furthermore other entities currently not subjected to oversight should be integrated in the regulatory framework.

(c) Security of Supply

The Commission is concerned about Member States introducing capacity mechanisms to tackle anticipated inadequate generation capacity as these mechanisms could distort the market. An inquiry has been launched into this and a draft report will be published by the end of 2015.

For now, the Commission proposes an alignment of methods to determine system adequacy taking into account as many factors as possible, to determine whether there is need for capacity mechanisms as the determination of generation adequacy is different in the Member States. The Commission wants to work with Member States to develop a clear system of reliability standards.

The Commission also proposes a framework to opening capacity mechanisms across borders through the development of EU-rules on cross-border participation where capacity mechanisms are implemented. The Commission also suggests that a European reference model for capacity mechanisms could help improve cross-border participation and minimise distortions in the market.

(2) The New Deal for Energy Consumers

The ‘new deal’ for consumers is based on a three-prong strategy (a) Providing better information for consumers (b) Giving consumers a wider choice of action (c) Maintaining high levels of consumer protection.

(a) Better Information for Consumers

The Commission proposes improving transparency and providing up-to-date billing information by working together with national regulators. Consumers should also have easy access to their real- or near-time consumption data, for example through so-called smart meters, to make them more aware.

The Commission also wants to ensure that the new retail energy market does not create new burdens for consumers. It therefore wants smart technologies to be used to simplify consumer involvement.

These new technologies will need to meet European standards. The Commission therefore plans to use European Structural and Investment Funds, as well as the European Fund for Strategic Investments to support research into smart home and grid technologies to finance their deployment.

Furthermore, the Commission wants energy poverty to be tackled, by improving energy efficiency. The Commission counts on the Member States to fulfil their obligations, but wants to help by considering data collection and monitoring of energy poverty.

(b) Giving Consumers a Wider Choice

The Commission wants consumers to be given a wide choice of action to freely choose the best energy deal and energy source by making a switch of supplier and energy contract easy, quick and reliable, based on transparent and trustworthy information.

While the Commission welcomes the shortening of switching times, it is considering removing switching fees and penalties as well and wants to cooperate with national authorities to develop transparency and criteria for energy comparison tools. The Commission is also discussing with Member States about the phase-out of prices regulated below cost, while protecting vulnerable consumers.

The Commission also believes that energy efficiency and demand response are good options for balancing supply and demand. A key enabler of demand response is consumers’ access to price signals that reward flexible consumption, for example through contracts based on dynamic pricing.

Furthermore the Commission believes that self-generation and consumption should reduce energy bills and that decentralised renewable energy generation would complement centralised generation.

The Commission also proposes an increase in consumer participation through intermediation. As consumers are increasingly being helped by different kinds of companies and consumer organisations to achieve better energy deals, it believes there are further opportunities for local energy initiatives. Therefore, the Commission wants to work through the Covenant of Mayors to facilitate this.

(c) Maintaining Consumer Protection

The third objective, part of the empowering strategy, is maintaining full protection for consumers. The Commission wants to assess the implementation of energy consumers’ rights and develop detailed guidance in collaboration with consumer organisations and regulators.

However, the Commission stresses that the primary responsibility for enforcing and protecting energy consumers’ rights remains with the Member States.

The Commission predicts that ICT will increasingly integrate into energy systems. While the Commission wants Consumers and designated third parties to have immediate access to consumption data, privacy and data security must remain key in the energy sector.

The Commission highlights its Recommendation from October 2014 on how to carry out an impact assessment for data protection. In the meantime the Commission points out that two proposals for the Network and Information Security Directive and for a General Data Protection Regulation are currently under discussion.

Next Steps

The public consultation on the Communication concerning the new Energy Market design will close on 8 October 2015. Based on the feedback, the Commission will reflect on possible policy options and prepare proposals during the second half of 2016.

The Commission is considering amendments to the Electricity Directive, the Electricity Regulation, the ACER Regulation, the Infrastructure Regulation, the Energy Security of Supply Directive, the Energy Efficiency Directive, and the Renewables Directive. Furthermore the Commission considers that a number of network codes could be impacted as well.

The reviews of existing legislation notably the Energy Efficiency Directive, the Energy Performance of Buildings Directive, and the Renewable Energy Directive, the Network Codes and the planned new market design initiative, will provide help to identify where action is required at EU level in order to deliver the new deal for the consumers.

Nonetheless the Commission wants action at Member State level, and underlines that collaboration between industry, consumer organisations and national regulators will be crucial for effective governance of the Energy Union.

The Communications have been sent to the Council and the European Parliament. Either or both of these institutions can decide to formally respond to them.