EUROPEAN COMMISSION Brussels, 18.5.2022 COM(2022) 236 final COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Short-Term Energy Market Interventions and Long Term Improvements to the Electricity Market Design – a course for action







































1.Introduction Over the recent months, electricity prices in Europe have rapidly risen to a level much higher than in recent decades. This dynamic is intrinsically linked to the high price of gas, which increases the price of electricity produced from gas fired power plants, which are often needed to satisfy demand. Prices started rising rapidly last summer when the world economy picked up after COVID-19 restrictions were eased. Subsequently, Russia’s invasion of Ukraine has exacerbated this situation. Energy is an essential commodity for households and industry. This demands a clear policy response. At the same time, the current crisis shows the crucial importance of delivering Europe’s Green Deal ambitions and of reducing dependence on fossil fuels, and notably on gas imports. Any measures must keep the long-term objective of climate neutrality in sight and avoid lock-in effects. High gas and electricity prices can have significant negative social, distributional, and employment effects. Vulnerable and low-income households are hit particularly hard when both, gas and electricity prices, rise, affecting household budgets negatively. The Toolbox presented by the Commission in October 2021 was designed to allow a co-ordinated approach to protect those most at risk and set out medium-term measures for a decarbonised and resilient energy system. On 8 March 2022, the REPowerEU Communication outlined a series of measures to strengthen the Toolbox to respond to rising energy prices. The Commission undertook to investigate all possible emergency measures to limit the contagion effect of gas prices on electricity prices and assess possible measures to optimise the electricity market design. Russia’s invasion of Ukraine has been a stark reminder of the implications that Europe’s strategic dependence on fossil fuels (gas, oil and coal) imports from third countries can have on the Union’s energy markets and security of supply. Based on the Commission’s communications, EU leaders agreed in Versailles on 10-11 March to phase out the Europe’s dependency on Russian energy imports as soon as possible and invited the Commission to put forward a plan to ensure security of supply and affordable energy prices during the next winter season by end of March. On 23 of March the Commission addressed to the European Council and the other European institutions a Communication on short-term emergency options to address the high energy prices. On 24-25 March 2022, the European Council tasked the Commission to urgently reach out to energy stakeholders, and to discuss if and how the short-term options outlined by the Commission would contribute to reducing the gas price and address its contagion effect on electricity markets. Moreover, the European Council called on the Commission to “submit proposals that effectively address the problem of excessive electricity prices while preserving the integrity of the Single Market and its level playing field, maintaining incentives for the green transition, preserving the security of supply and avoiding disproportionate budgetary costs.” The aim of this Communication is to: ·Propose further short-term measures going beyond the toolbox that the EU or Member States can take in the gas and electricity sectors to tackle effectively the impact of sustained high energy prices on consumers and companies. ·Identify possible measures for the eventuality of a disruption to the supply of Russian gas. ·Set out a way forward to optimise the functioning of the European electricity market so that it is better suited to withstand future price volatility and fit for the future decarbonised energy system, with an increasing share of renewables in electricity production. 2.Market Expectations Gas and electricity prices have reached record levels in 2021 and hit all-time highs following the Russian invasion of Ukraine in the first weeks of March 2022. Gas prices, historically below 30 EUR/MWh, were recently around 100 EUR/MWh, peaking occasionally at more than 200 EUR/MWh. Consequently, wholesale electricity prices also increased strongly over the same period, due to gas-fired power plants often driving the price in EU power markets. For instance, German power prices, historically below 75 EUR/MWh, have averaged around 180 EUR/MWh this year so far, and have occasionally reached more than 400 EUR/MWh. The market actors expect energy prices to remain high for the rest of 2022 and until 2024-2025, albeit to a lesser extent. Gas prices are currently expected to be at around 100 EUR/MWh until the end of next winter and to remain significantly above the long-term average for the foreseeable future, with expectations on electricity prices evolving accordingly. This forecast factors in the uncertainty in the market due to the current geopolitical tensions and the war in Ukraine. Further disruptions of Russian gas supplies to the EU in the forthcoming weeks or months may result in again higher levels of gas prices.

In the short-term, the phasing-out of dependence on Russian natural gas imports will result in adjustments of demand and supply conditions and volatility in prices. Price levels will continue to be high with diversification exerting upward pressure. At the same time, the accelerated development of renewable energy sources and significant energy savings/demand response measures as presented in the REPowerEU plan should help mitigate these effects and contribute to lower electricity prices in the medium-term. Source: day-ahead and forward contracts TTF prices– S&P Global Platts 3.Short Term Intervention Measures Following up to the March European Council’s mandate , the Commission conducted a targeted outreach and collected the views of a wide range of energy stakeholders on possible short-term interventions. In particular, the Commission organised on 26 of April, a targeted stakeholder consultation meeting with the participation of market actors, non-governmental organisations, network operators, the Agency for the Cooperation of Energy Regulators (ACER) and national regulators, think tanks and academics (see annex for details). The consultation highlighted that there is a large convergence on key points. First, there was support for designing short-term temporary measures so as to avoid unintended consequences on security of supply, decarbonisation and the integrity of the European energy market. Stakeholders expressed a strong preference for the widest possible use of the Toolbox, with special emphasis on measures directly targeting household consumers and businesses. Second, the outreach to stakeholders revealed concerns about the risk of significant distortions stemming from interventions directly affecting wholesale market functioning. Energy stakeholders consider that the current price formation ensures an efficient use of resources, starting with the cheapest and least polluting generation, which becomes more important as resources become scarce. Stakeholders also feared that interventions into price formation could increase gas demand in the EU, undermining the energy transition and the European Green Deal objectives and endangering the EU’s security of supply. Short-term price interventions could remove the interest of market participants to hedge against the risk of high prices in the future. European energy markets are highly integrated. Member States rely on these well-functioning and interconnected markets to ensure their security of supply and reduce the overall cost of the system. ACER has estimated that the average yearly gain from the integrated electricity market for European consumers is about EUR 34 billion per year. These social welfare gains are particularly important in crisis times as they lead to considerable savings for consumers. According to ACER, more than one third of the total benefits achieved from cross-border electricity trading in Europe in 2021 correspond to the last quarter of 2021, when electricity prices were at their highest. Stakeholders stressed that any interventions in energy markets need to preserve the core of the internal market, namely the efficient allocation of resources and security of supply through trade and solidarity. Therefore, if price-related market interventions in wholesale market were considered despite their significant downsides, and leaving aside the current legislative framework, stakeholders signalled a preference for intervening in gas markets as opposed to the electricity markets. Whenever considering such interventions, stakeholders underlined that it would be important to carefully assess their possible implications to the supply of gas to the Union, due to the global nature of the market, in particular LNG markets, and to indicate clear time limitations to design these interventions as temporary measures. In its final report, published on 29 April 2022, ACER also looks into various exceptional measures contemplated in the context of the current emergency situation as well as possible structural measures to hedge electricity consumers from possible future prolonged periods of high energy prices and cautions against the distortive effects of direct wholesale market interventions in the current crisis context. Member States’ electricity and gas sectors vary significantly based on their economic situation, energy market and cost structure, the generation mix and the levels of interconnection as well as geographical location which has gained additional meaning with the Russian war in Ukraine. The most appropriate strategies for a crisis response consequently vary significantly between Member States and must consider the different national and local situations. The Commission invites Member States to continue to implement the measures of the Toolbox, as they constitute the first and most fundamental line of action and support to address the crisis at the level of consumers most affected already by the crisis. In line with the measures presented in the Toolbox, Member States, to the extent that they have not done so already, could provide time limited compensation measures and direct support to energy-poor end-users including groups at risk. Reductions in electricity demand would also have a clear price-reducing effect. Member States should incentivise demand reductions in line with the actions proposed in the EU ‘Save Energy’ plan. Long term PPAs can also be instrumental in ensuring stable prices for certain consumer categories. Further to the measures of the Toolbox, which continue to apply, the Commission proposes below additional short-term interventions in gas and electricity markets. All these additional temporary measures can be extended to cover the next heating season. a)Gas Market Interventions to Address the Cause of the Crisis

High gas prices due to the increase in demand after COVID-19 and the uncertainty created by the Russian invasion in Ukraine are the root cause of the current crisis. Given the important role gas plays still today in power generation, finding ways to address the high gas prices will therefore also help to address the fallout in electricity markets as well as its social and employment implications. Increasing supply from both inside and outside the EU will have a significant impact in that respect. The Commission and Member States have recently set up the EU Energy Platform that will help secure energy supply at fair prices and reduce – and ultimately phase out – EU dependency on Russian gas. The Platform will aggregate gas demand in the EU on a voluntary basis to attract reliable supplies from global markets and to mitigate price effects. It will in turn also be instrumental for ensuring an adequate level of gas storage. At the same time, it has to avoid Member States competing with each other for the same supplies by ensuring that the same conditions are applied to different Member States by third countries. To address the impact of high prices for consumers, Member States can in the current circumstances extend retail price regulation for natural gas. This is particularly relevant when gas plays a particular role in heating and industrial feedstock . The volumes covered by such tariffs would have to be limited so as not to exceed the volume of the previous gas consumption of the consumers concerned. Emergency liquidity support measures help to provide relief for commodity traders and energy companies which are currently confronted with high margin calls on their derivative portfolio as a result of significant market volatility. If they contain State aid, those interventions need to take place in full respect of the respective provisions. They need to be limited, proportionate and transparent and must be targeted to avoid excessive distortions. The Temporary Crisis Framework for State Aid can be used by Member States for their targeted measures. Finally, those measures should not undermine the sanctions regime imposed on Russia. The European gas exchanges (e.g. TTF) have in recent times often seen extreme volatility in trading during the day. To address possible distortive effects on the price formation due to possible speculative moves it is possible to revisit the limits applied to this short-term volatility in their internal trading rules. b)Preparing for a Full Disruption of Russian Gas Supplies While the previous interventions are calibrated to address a situation of sustained high prices, a different set of measures may become necessary in the event of a sudden large scale or even full disruption of the supplies of Russian gas. To address a security of supply shock the EU has instruments in place, such as the national solidarity mechanisms and the emergency plans developed under the Security of Supply Regulation with both national and regional measures, reinforced regional cooperation on security of supply and the regular exchanges between Member States and the Commission in the Gas Coordination Group. Solidarity agreements and the solidarity mechanism foreseen in the Regulation are also part of the existing security of supply rules. However, these solidarity mechanisms are meant to be triggered in case of a national security of supply emergency. In case of further gas disruptions affecting several Member States at the same time, additional measures may be necessary. The existing tools could usefully be complemented with a coordinated approach to identify essential consumers which are not already protected under the existing legal framework and emergency plans. The Commission suggests establishing common principles in this regard to prepare for a possible wider disruption where gas markets no longer optimally match supply and demand and could leave some vital demand unsatisfied. This could call for a reduction of gas demand even in Member States less directly impacted so as to ensure supply for essential functions or sectors in more directly impacted Member States. The extent to which legislative changes would be required to ensure a harmonised approach in this respect would have to be assessed. In this context, the Commission invites Member States to accelerate the adoption of preparedness measures to a possible disruption to the supply of Russian gas. Such intervention may trigger the need for an administrative price for gas to be established in parallel, such as a maximum regulated price for natural gas delivered to European consumers and companies (EU price cap) to cover the period of a declared Union emergency. This type of price intervention would be limited to the duration of the EU wide emergency situation. One possibility would be to limit price formation during this disruption scenario by capping the price on European gas exchanges, but such a price cap can in general be introduced in different ways and can intervene at different levels of the gas value chain. Such an EU price cap in a major disruption scenario would have the advantage of limiting the damaging price effects of the disruption for consumers, companies and essential service providers to pre-established levels. It would however have to be ensured that the introduction of such a price cap does not worsen the EU’s ability to attract pipeline and LNG supplies from alternative suppliers, which will be vital in such a scenario as any reduction or limitation of alternative supply channels in an emergency situation would lead to a further deterioration of the shortage situation. Such a cap would also automatically limit the potential for price-driven reductions of gas demand, hence negatively impacting the supply-demand balance. If compensated and unless accompanied by significant curtailment, this type of intervention could require significant amounts to be financed. c)Electricity Market Interventions While the previous measures intervene in the gas market as the root cause of the high price problem, there are also further measures that can be applied on the wholesale electricity market, taking into account national and local contexts:

·First, in line with the Communication “Security of supply and affordable energy prices: Options for immediate measures and preparing for next winter”, the Commission considers that taxation or regulatory measures which are aimed at removing infra-marginal rents of certain baseload electricity generators created by the current crisis situation can be justified. Revenues can help finance targeted and temporary measures in support of vulnerable households, especially those at risk of energy poverty, and businesses. These measures should be non-discriminatory and designed in line with the guidance provided in Annex 2 to the REPowerEU Communication. However, in light of the outlook for electricity prices over the next months, and the need to maintain consumer relief measures in place for a longer period, the Commission considers that those measures can be extended beyond 30 June 2022 to cover the next heating season. ·Second, in addition to the measures already set out in Annex 1 to the REPowerEU Communication which remain applicable, a temporary extension of regulated retail prices to cover also small and medium-sized enterprises is acceptable. This extension would have to be limited in terms of the quantities covered so as not to trigger an increase of consumption. ·Thirdly, temporary national measures to subsidise the cost of gas used for power generation (e.g. to introduce a reference price for gas used for electricity production) with a view to lowering prices on the electricity market are considered by some Member States. Such measures should be designed in a way compatible with EU Treaties, in particular with regard to the absence of restrictions to cross border exports, sectoral legislation and State aid rules and notified to the Commission for approval. The Commission notes that, depending on their design, such measures may entail significant costs. These measures should be strictly limited in time and tailored for regions with very limited interconnection capacity, high influence of gas in price setting and consumers particularly exposed to wholesale electricity prices. The measures should also avoid penalising market participants which secured their electricity with forward contracts. Member States deciding to introduce such measures are invited to, inter alia, consult affected neighbours and stakeholders and determine and monitor the additional gas consumption and increased CO2 emissions resulting from the intervention. ·Finally, the increased trade flows across bidding zones due to crisis related price differences between such zones may lead to a considerable increase of congestion rents. These so-called congestion revenues must be used, as a priority, to ensure network capacity. These rents can in duly justified cases exceptionally be used to finance emergency measures targeting consumers, notably vulnerable households and those at risk of energy poverty and businesses, under the control of regulatory authorities. In addition, to accelerate as much as possible to the use of demand response, the Commission urges the effective and rapid implementation of the Electricity Directive, in particular provisions that support active consumers and demand response. The Commission has already initiated discussions with Member States to collectively address the challenges related to this implementation process. 4.A future-proof Electricity Market Design a.European Council Conclusions and ACER Report The European Council invited the Commission to put forward any necessary initiatives concerning the electricity market design, taking into account the final ACER report, published on 29 April 2022. ACER’s report concludes that the fundaments of the European electricity market design bring significant benefits to European consumers and calls Member States to rapidly implement any pending market regulations and rules. At the same time, the report indicates several ways in which the current market design can be complemented and improved to make it future proof and fit for a fully decarbonised electricity mix. ACER identifies a series of challenges ahead, particularly the need to accelerate investments in renewable generation, to ensure low carbon supply and demand response when variable renewable production is not available, to tackle rising price volatility and enhancing flexibility of the power system. As a response to these challenges, ACER identifies several options. First, competitive long-term markets would help to “insure” against risks. However, their current liquidity in the majority of markets is low (there are few offers to buy or sell), and products offered are limited (to up to two to three years ahead in some markets except for renewable power purchase agreements). Second, other tools can contribute to secure the needed investments, such as support schemes for renewables or other flexible resources, including demand response and storage. Commercial power purchase agreements could be promoted and facilitated, by opening them to smaller actors beyond vertically integrated companies, enabling cross-border contracts and designing State support schemes, in line with State aid rules where applicable, for financial guarantees to tackle counterparty risk. Those public support and commercial instruments could be combined. Third, enhanced coordination, including across borders between Member States, in investment decisions would support the Union in meeting its targets. Deepening market integration (across all electricity markets) is a no-regret option to further strengthen coordination at the EU level and reap more benefits. b.Possible Market Reforms

Based on the conclusions of the ACER report and its exchanges with stakeholders, the Commission has identified a set of issues which deserve to be further analysed with a view to establishing whether any necessary legislative steps or guidance to Member States are required to optimise the functioning of the electricity market design. The issues relate to questions such as how to: ·protect end consumers and deliver affordable electricity in both short and long run; ·ensure the resilience of the electricity market and system in particular to cope with high amounts of variable renewables and a more decentralised production structure; and ·support the achievement of the European Green Deal. The following areas would be addressed in this process. Electricity as a basic right for vulnerable consumers Union legislation recognises that adequate heating, cooling and lighting, and energy to power appliances are essential services. The European Pillar of Social Rights includes energy among the essential services which everyone is entitled to access. With energy prices at an unprecedented level, the number of citizens facing energy poverty is likely to increase, and even those who do not classify as energy poor can experience lower standards of living. As announced in the October Energy Prices Communication the Commission has established the Coordination Group on Vulnerable Consumers and Energy Poor where Member States have already exchanged best practice on how to support and protect consumers in the current circumstances. The electricity market design could include ways to ensure that all citizens have access to the energy they need including ensuring that certain consumers have access to a minimum level of electricity demand at a reasonable price, regardless of the situation in the electricity markets. Protecting consumers against high prices and excessive volatility One way of mitigating the risk of future increases in power prices is to hedge. The simplest way to hedge is to engage in a supply agreement at a fixed price. There are established markets across the EU where electricity can be traded for forward delivery. However, some of those markets lack liquidity, namely for longer dated contracts, so regulatory interventions may be required to improve liquidity on forward power markets. The current crisis has demonstrated the benefits of market-based instruments to protect consumers against price risks. These instruments typically involve a contractual promise by a generator to make electricity available to certain consumer categories at pre-established conditions once the normal market price hits a certain level. They hence provide for a contractual insurance against price risk. As with any type of insurance, the reduction of the price risk in such constructions of course comes at a cost. Some Member States have already used these types of contracts as part of the capacity mechanisms that they use to ensure security of electricity supply. In this context the contracts have been referred to as reliability options. Academics have recently suggested an alternative contract called affordability options, designed to protect consumers not against short term price spikes but rather against sustained high prices. Following the rapid increase of wholesale power prices, some suppliers went bankrupt and were not able to honour their supply obligations. This meant that customers had to choose new suppliers at short notice and were often only able to negotiate terms which were less favourable. Requirements for suppliers to hedge part of their supply obligations and other regulatory requirements to ensure that suppliers are sufficiently robust to withstand future crises may be appropriate to ensure that customers can rely on their suppliers and do not pay more for the supply of electricity than they originally agreed to. Suppliers could also be required to have fixed priced offers available in their portfolio similarly to existing requirements to offer dynamic contracts to customers. Ensuring investments in firm and low carbon capacity To ensure long term security of supply and provide investor certainty, it will need to be further assessed whether capacity mechanisms have to become a long-term feature of the electricity system and what this would mean for their integration in the electricity market. These mechanisms would need to be designed to ensure investments in firm renewable and low carbon capacity compatible with the Union’s climate targets. Such capacity mechanisms could also integrate some of the contractual affordability mechanisms referred to above. The crisis has also shown that where generation is publicly supported, as is often the case for renewables, the support must be designed to ensure investment while avoiding excessive returns for investors in periods when market prices are high. Two-way contracts for differences (CfDs), under which the operator receives a top-up when market prices are low and returns it when they are high, have been used in some Member States to achieve this aim. Well-designed CfDs can contribute to making the electricity price formation more independent from the cost of natural gas and it may be useful to rely on this model as a default for new renewables investments and other public investments in generation (as for nuclear generation). Enhancing demand response and flexibility to reduce peak prices

Resources or infrastructure bringing more flexibility such as demand-side response and storage enable consumers to react to prices, consuming more when there is excess generation available and reducing their consumption when supplies are tight. This reduces overall costs and allows them to manage their costs and helps effectively integrate high shares of variable renewable energy. Investments in such flexible technologies, including the roll out of smart grids in accordance with the Electricity Directive, could be financed under Union funds and can reduce the need for more traditional capacity mechanisms which often finance gas-fired or other fossil generation. The Digitalisation of Energy Action Plan scheduled for adoption in September will propose measures to enhance data exchange and interoperability, and to support the development of digital tools for consumers. This will make it easier for consumers to valorise their flexibility, for example by responding to price signals or matching their consumption with their home production (e.g. from PV panels on their roofs). The Commission also proposes to accelerate the development and adoption of a new network code dedicated to demand response. Through greater empowerment of consumers, it is also important to promote collective and individual self-consumption schemes as stressed in the EU Solar Strategy to increase the generation of solar power in the EU in the coming years. Electricity and gas infrastructure Investments in electricity infrastructure are crucial for the functioning of the internal market. Cross-border capacity should be increased in regions where this is necessary to enable the free flow of electricity between Member States. Innovation in electricity and gas infrastructure does not appear to be explicitly incentivised or recognised in the national regulatory framework of many Member States. This is particularly an issue where the gains from innovative approaches are uncertain. Moreover, the national regulatory frameworks of many Member States appear to set barriers to innovation on electricity and gas infrastructure. For instance, sometimes they do not have specific provisions related to innovation or are designed in such a way that set out a bias towards capital expenditure (CAPEX) based solutions instead of operational expenditures (OPEX-solutions) or that deter TSOs from investments due to perceived high project risk and strict penalties for not meeting deadlines. Member States should remove those barriers to innovation and develop instead innovation-oriented regulatory frameworks, while avoiding fossil fuels based stranded assets. Reducing costs and windfall profits through locational pricing Another issue identified by ACER is the need for more attention to locational signals in the European market design. This entails creating different market prices in different places to reflect the local balance of supply and demand and the availability of transmission. A 2019 study identified cost savings of 4% from introducing locational pricing in Europe. The greater the increase of renewables in the energy mix, the more important these benefits are expected to become. A 2020 study anticipates 10% higher 2040 system costs in the absence of locational prices. The possible implications of mechanisms to strengthen locational price signals will be analysed further. Market surveillance and transparency Regulation 1227/2011 on wholesale market integrity and transparency (so-called REMIT) was designed more than a decade ago to ensure that consumers and other market participants can have confidence in the integrity of electricity and gas markets, that prices reflect a fair and competitive interplay between supply and demand, and that no profits can be drawn from market abuse. Although there has not been any evidence of market abuse as a cause of the current crisis, ensuring an up to date and robust framework to protect against such abuse is very important in periods of high prices and market volatility. The REMIT framework could be reviewed to explore the scope to more effectively mitigate the risks of market abuse by improved market transparency, enhanced market data quality and collection as well as better enforcement at EU level. 5.Conclusion The Commission invites the European Council to endorse the short term measures to address high prices proposed in this Communication. It also invites Member States, in line with the REPowerEU Plan, to accelerate preparedness measures for a possible disruption to the supply of Russian gas. Looking beyond the short term, the Commission considers that, based on the ACER report and its outreach to stakeholders, the current electricity market design delivers an efficient, well integrated market, allowing Europe to reap all the economic benefits of a single energy market, ensuring security of supply and sustaining the decarbonisation process. The Commission calls on Member States to ensure the full implementation of the electricity market legislation, in particular to ensure cost-reflective tariffs and the removal of barriers to the use of flexible resources, which will allow integrating variable renewable electricity and enhancing the flexibility of the grid to facilitate energy system integration. The Commission highlights the need to fast track the implementation of the REPowerEU plan to fast forward the phasing out of Russian gas and invest in a resilient energy system. The Commission will continue to support Member States in the preparation and implementation of reforms and investments to phase out the dependency on fossil fuel imports from Russia, inter alia, via the Technical Support Instrument. However, there are areas where adjustments to the EU electricity market design are necessary to take into account the future energy landscape and generation mix, new emerging technologies, geopolitical developments as well as the lessons learnt from the current crisis. Such adjustments should contribute to optimising the functioning of the electricity market design and make it better fit to drive a cost-effective decarbonisation of the electricity sector, deliver affordable prices for consumers and increase its ability to withstand price volatility. This Communication has identified a set of issues for which these adjustments seem warranted. Building on this preliminary work, the Commission will launch an impact assessment process and engage with Member States and a wide range of different stakeholders and national regulatory authorities to adjust the electricity market design and, where necessary, its legislative framework.