Reforming New European Market Design
The EU Electricity Market Design (EMD) reform is a new European Union initiative to modernize and improve the functioning of the electricity market in Europe. Its main goals are:
As envisioned, the development of cPPAs will be based on several initiatives. The first is to increase the share of direct cPPAs in the market structure. It is also important to support the creation of legal standards for such agreements.
Another important aspect is the development of bilateral CfDs (Contracts for Difference). The purpose of the EMD reform is to clarify how member states can support the development of renewable and low-carbon energy sources by providing predictability of revenues from new investments through bilateral Contracts for Difference (CfDs) (usually for more than 10 years). This type of contract provides greater price stability for consumers, as the fees charged by member states when market prices are higher than the price contracted with generators revert to consumers when prices are high, and vice versa.
Not to be overlooked is the increase in liquidity and development of the futures market (from 3 years forward) to provide consumers and suppliers with the price benchmark needed to establish a “fair price”, as well as enabling better hedging of contracts. Particularly important will be the development of futures products based on wind and PV profiles.
Another is to allow consumers to contract directly with green energy producers through energy sharing. The reform concept is to allow energy sharing among active customers to give a broader group of consumers a chance to hedge against volatile prices in the wholesale market and control their energy bills. As a result, cPPAs will become increasingly popular among smaller customers.
The EMD reform also seeks to remove administrative and regulatory barriers in the electricity market. This will bring tangible benefits to companies that want to enter into cPPAs, eliminate unnecessary restrictions, facilitate negotiations and implementation of these types of agreements. The process of concluding cPPAs will become simpler and more efficient. Currently, the lack of unified market standards results in a prolonged negotiation process. In addition, in the meantime, there are often significant market changes that reorganize the original expectations of the parties. It will also be crucial to introduce definitions of cPPAs in national legislation.
The reform also emphasizes support for innovation and technological development, improving energy efficiency and developing smart grids. This creates opportunities for companies to engage in innovative energy projects and use advanced technologies under cPPAs. Companies can gain access to cutting-edge solutions that will increase energy efficiency and reduce CO2 emissions.
In conclusion, according to the EU Electricity Market Design reform, cPPAs will become increasingly important in the structure of contracts in the market, and their popularity in Europe will increase. The directions of the planned changes meet the reported needs of generators, and the revenue side and project financing will also be secured. In turn, companies will have more opportunities to use renewable energy and energy price stability will be ensured. The cPPAs will become more standardized, and better price benchmarks will facilitate the negotiation process for a fair price for both parties to the contracts.
Tomasz Bodetko
Head of Origination PST Trade