COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Launching the public consultation process on a new energy market design
Date: 2015-07-15
Institutions: Directorate-General for Energy, European Commission
Subjects: EU investment, climate change, electrical energy, energy policy, innovation, reduction of gas emissions, renewable energy

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 15.7.2015  COM(2015) 340 final   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Launching the public consultation process on a new energy market design {SWD(2015) 142 final}  
 
 
1.  A VISION FOR THE TRANSITION OF THE ELECTRICITY SYSTEM  

In its Political Guidelines, the Juncker Commission made the development of a resilient 
Energy Union with a forward-looking climate policy one of its strategic objectives. 

This ambition was confirmed in the Commission Work Programme for 20151 and further 
detailed  in  the  framework  strategy  Resilient  Energy  Union  with  a  Forward-Looking 
Climate  Change  Policy2  with  the  aim  of  setting  the  conditions  for  a  reliable  and 
affordable energy for all, to apply the efficiency first principle and to make the European 
Union  the  world  leader  in  renewable  energy.  Achieving  these  goals  will  require  a 
fundamental  transformation  of  Europe's  energy  system  including  the  redesign  of  the 
European electricity market, providing more predictability linking wholesale and retail as 
well  as  attracting  further  investments.  This  will  contribute  to  delivering  a  new  deal  for 
Europe's  energy  consumers  as  spelled  out  in  the  adjacent  Communication  COM(2015) 
339.   

Europe's  electricity  system  is  in  the  middle  of  a  period  of  profound  change.  Since  the 
adoption of the Third Internal Energy Market Package3, electricity policy decisions have 
enabled competition and increasing cross-border flows of electricity. Wholesale markets 
are  increasingly  characterised  by  fair  and  open  competition,  and  –  though  still 
insufficient – competition is also taking root at the retail level. With the introduction of 
so  called  "market  coupling"  and  "flow-based"  capacity  allocation,  electricity  can  more 
efficiently  be  traded  across  Europe.  At  the  same  time  electricity  generated  from 
renewable sources has become one of the most important sources of electricity thanks to 
the  Renewables  Directive4  and  the  efforts  of  Member  States,  heralding  a  transition 
towards a low-carbon energy system. 

These  are  all  elements  of  a  future-oriented  energy  system,  but  Europe  still  faces 
considerable challenges before its energy landscape is fit for purpose. In order to manage 
these changes and benefit fully from them we must look again at how Europe's electricity 
system and markets are organised and regulated. 

1   COM(2014) 910 final of 16.12.2014. 

2 .  COM(2015)80 final of 25.02.2015. 

3   Notably the Third Energy Package consisting of Directive 2009/72 of the European Parliament and of 
the  Council  of  13  July  2009  concerning  common  rules  for  the  internal  market  in  electricity  and 
repealing Directive 2003/54/EC, OJ L 211, 14.8.2009, p. 55–93; Regulation (EC) No 714/2009 of the 
European Parliament and of the Council of 13 July 2009 on conditions for access to the network for 
cross-border exchanges in electricity repealing Regulation (EC) No 1228/2003. OJ L 211, 14.8.2009, 
p.  15–35;  Regulation  (EC)  No  713/2009  of  the  European  Parliament  and  of  the  Council  of  13  July 
2009 establishing an Agency for the Cooperation of Energy Regulators. OJ L 211, 14.8.2009, p. 1–14 
as well as Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on 
the promotion of the use of energy from renewable sources and amending and subsequently repealing 
Directives 2001/77/EC and 2003/30/EC. OJ L 140, 5.6.2009, p. 16–62. 

4   Directive  2009/28/EC  of  the  European  Parliament  and  of  the  Council  of  23  April  2009  on  the 
promotion  of  the  use  of  energy  from  renewable  sources  and  amending  and  subsequently  repealing 
Directives 2001/77/EC and 2003/30/EC. OJ L 140, 5.6.2009, p. 16–62. 

2 

 
 
                                                 
The  existing  market  concept  dates  from  an  era  in  which  large-scale,  centralised  power 
plants,  largely  fuelled  by  fossil  fuels,  had  the  key  aim  of  supplying  every  home  and 
business in a limited area – typically a Member State – with as much electricity as they 
wanted, and in which consumers – households, businesses and industry – were perceived 
as  passive.  Today,  the  move  towards  decentralised  generation  increases  the  number  of 
involved players and changes the existing market roles. The electricity market needs to 
adapt to this new reality; it needs to fully integrate all market players – including flexible 
demand,  energy  service  providers  and  renewables.  One  concrete  example  is  the 
flexibility  that  enables  industrial  consumers  to  participate  in  the  market  and  profit 
directly  from  increased  competition.  It  needs  an  effective  regulatory  and  governance 
framework which reduces the need for interventions such as capacity mechanisms. 

A fully functioning European market should allow electricity to move freely to where it 
is  most  needed,  wanted  and  valued,  reap  maximum  benefits  from  cross-border 
competition  and  provide  the  right  signals  and  incentives  to  drive  the  right  investments. 
Further,  it  should  ensure  that  electricity  is  only  dispatched  based  on  market  signals. 
Today, this is not always the case. While market coupling where it is applied has resulted 
in  an  increasing  correlation  between  wholesale  prices,  absolute  price  levels,  even  in 
adjacent markets differ significantly and price spreads are not shrinking. Further efforts 
are  also  needed  to  ensure  that  sufficient  interconnection  between  the  grids  become  a 
reality and to promote long-term stability for investments in the energy sector as a whole.  

The 2030 targets agreed by the October 2014 European Council5 – at least 40% reduction 
in  domestic  greenhouse  gas  emissions,  at  least  27%  renewables  share  of  energy 
consumption at EU level and at least 27% improvement in energy efficiency –  reflect a 
high  level  of  ambition.  This  means  that  changes  to  the  electricity  system  in  favour  of 
decarbonisation will have to continue and intensify. Reaching the European Union 2030 
energy and climate objectives means the share of renewables is likely to reach up to 50% 
of  electricity  produced.  Today  markets  are  not  sufficiently  flexible,  both  on  the  supply 
and on the demand-side to accommodate the increased share of renewable energy in the 
market. The new market design should ensure that energy markets can fully support this 
transition  at  minimum cost. This  can be  achieved  by removing  the remaining  obstacles 
for  renewable  energy  and  ensuring  the  market  provides  the  right  signals  for  sufficient 
investment  in  the  flexible  capacity  needed  to  accommodate  increasing  participation  of 
variable renewables in the system. A necessary step to achieve a successful and least-cost 
integration  of  renewables  is  through  well-functioning  short-term  electricity  markets, 
running  from  the  day  ahead  of  the  delivery  of  electricity  right  up  to  the  moment  of 
consumption, which give full access to flexible technologies.  

The potential for energy efficiency is being considered in all decision-making related to 
the development of the Energy Union (which gives prominence to the energy efficiency 
first  principle).  Nonetheless,  the  demand  for  electricity  is  forecast  to  increase  as 
consumers  switch  to  electricity  from  other  energy  sources.  Any  review  of  the  market 
design  must  therefore  create  conditions  that  are  conducive  to  further  reduce  the  EU's 
energy  consumption  while  allowing  for  the  cost-effective  integration  of  new  types  of 
flexible demand into the market. 

5   EUCO 169/14. 

3 

 
 
 
                                                 
Moreover, new enabling technologies such as smart grids, smart metering, smart-home, 
self-generation and storage equipment are empowering citizens to take ownership of the 
energy  transition,  using  these  new  technologies  to  reduce  their  bills  and  participate 
actively in the market. This needs to be promoted by the market. 

The  EU's  market  design  should  ensure  that  the  energy  needs  of  large  and  small 
consumers  can  be  met  by  innovative  companies  and  reliable  intermediaries  across 
Europe. They should take the opportunities offered by new technology and the focus on 
consumers  to  develop  and  deploy  new  products  and  services.  This  will  help  to  ensure 
delivering  a  new  deal  for  consumers  that  can  link  the  different  elements  of  the  Energy 
Union  Strategy:  delivering  jobs  based  on  research  and  innovation  and  putting  energy 
efficiency at the forefront of our policies. 

Our  aim  is  to  integrate  renewables  fully  into  the  electricity  system  by  ensuring  that 
markets are fit for renewables, promoting their participation in electricity markets on an 
equal footing with conventional generation.  

This will mean developing a new framework which delivers market arrangements: 

  suitable for an interconnected EU-wide electricity market providing clear price 

signals for new investments and facilitating the further development of renewables; 
to promote regional cooperation and coordination on energy policies; 
to enable cooperation on development of renewables, including on support schemes;   
to provide a truly European dimension to security of electricity supply. 

 
 
 

This initiative is one of the key action points of the Energy Union strategy6. It is adopted 
alongside the Communication on Delivering a New deal for Energy Consumers, with the 
aim at putting these at the centre of the future energy system and as its first deliverable 
the revised directive on energy labelling.  

2.  DELIVERING THE NEW ELECTRICITY MARKET FOR THE EUROPEAN UNION  

2.1.  Making the market work 

A  fully  functioning  European  wide  electricity  market  is  the  best  means  to  ensure  that 
electricity can be delivered to consumers in the most cost-efficient way at any time.  

2.1.1.  Establish cross-border short-term markets  

Electricity  is  not  worth  the  same  at  every  point  in  time  and  at  every  place  where  it  is 
produced  and  consumed.  Prices  should  reflect  this  fact  in  order  to  provide  correct  and 
meaningful  production  and  investment  signals.  This  means  inevitably  that  high  prices 
may occur when generation is scarce, which would also have the potential to kick-start 
"demand response". 

6   A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy 

COM(2015)80 final of 25.02.2015. 

4 

 
 
 
 
  
 
 
 
                                                 
Short-term  markets,  notably  intraday  and  balancing  markets,  must  be  at  the  core  of  an 
efficient electricity market design. They must be designed with the energy system of the 
future  in  mind  –  one  with  large-scale  cross-border  flows  and  high  volumes  of  variable 
renewable  production.  In  many  Member  States  the  market  functioning  could  be 
significantly  improved  by  introducing  market  coupling,  improving  cross-border  flows, 
strengthening  intra-day  trading  and  demand  response.  Constraints  on  pricing  should  be 
removed, intraday lead times and trading intervals should be shortened and gate closure 
times should be brought closer to real time. 

Secure  operation  of  the  grid  has  become  more  challenging  with  the  rapid  growth  of 
variable renewables, and both the demand side and conventional generation plants must 
be able and incentivised to respond to this flexibility challenge. Integrating storage in the 
electricity  market  would  further  increase  the  necessary  flexibility:  electricity  should  be 
stored when there is a surplus and prices are low; it should be released when generation 
is scarce and prices are high, smoothing out variable power production. 

To  this  end,  most  importantly,  an  EU-wide  system  for  cross-border  intraday  trading 
needs to be set up – as has successfully been done already for day-ahead trading. To be 
more effective and efficient, balancing markets will have to cover larger areas than they 
do  today.  This  will  reduce  the  need  for  back-up  generation  and  enable  the  European 
energy  system  to  use  the  potential  of  renewable  energies  to  the  full.  This  should  be 
complemented  by  common  approaches  to  managing  network  congestion.  A  limited 
number of wider balancing regions should be defined in a European perspective by the 
needs  of  the  network  and  not  national  borders.  Similarly,  wholesale  electricity  price 
zones should also reflect where there is transmission capacity and not simply the borders 
of Member States.  

2.1.2.  Foster long-term markets to enable investment  

From an investment perspective, long-term price signals are just as important as properly 
functioning  short-term  markets.  Another  important  investment  signal  related  to 
decarbonisation  is  the  reformed  European  carbon  market,  with  a  functioning  Market 
Stability Reserve and further measures as included in the ETS review proposal  adopted 
alongside this communication.  

We  must  ensure  that  these  markets  are  truly  open  to  all  market  actors.  Conventional 
producers, flexible demand, energy storage technologies, renewables, new energy service 
providers and not just incumbents, need effective access to long-term markets that signal 
what investment makes economic sense and where they should be located.  

In  some  markets,  the  large-scale  shift  towards  capital-intensive  electricity  production 
from wind and sun with marginal costs close to zero has led to prolonged periods of low 
spot  prices  as  well  as  reduced  running  hours  of  conventional  generation.  In  such  a 
situation, an essential condition for electricity markets sending the right price signals for 
investment  in  adequate  capacity  is  to  allow  prices  to  reflect  scarcity  during  demand 
peaks,  and  for  investors  to  have  confidence  in  this  translating  into  long-term  price 
signals.  

Allowing  wholesale  prices  to  rise when  demand  peaks  or  generation is  scarce  does  not 
necessarily  mean  that  customers  are  exposed  to  higher  or  more  volatile  prices.  Well-
functioning  longer-term  markets  will  allow  suppliers  and  producers  to  manage  price 
swings on spot markets – where generators effectively can sell insurance to suppliers and 

5 

 
 
 
 
 
 
 
consumers against the impact of price swings and also improve the long term investment 
signals.  Market  participants,  including  renewables  producers,  should  be  able  to  hedge 
against price volatilities and volume risks translating the uncertainties connected to price 
peaks into planned and secure revenue. This is why it is critical both to allow for price 
fluctuations in short-term markets and link them to long-term markets. 

Long-term  contracts  between  market  participants  can  help  mitigate  the  investment  risk 
for the capital-intensive investments required in the electricity sector, facilitating access 
to  capital  in  particular  for  low-carbon  technologies  at  reasonable  costs.  It  is  therefore 
important  to  promote  the  availability  of  suitable  long-term  products  and  establish 
whether there are any obstacles to competitive long-term contracting. When entering into 
long-term  contracts  on  power  exchanges,  parties  to  the  contracts  are  often  asked  to 
provide guarantees. As providing such guarantees might be costly, mechanisms to reduce 
the related costs, while still limiting risks associated with counterparty default, should be 
assessed.  

2.1.3.  Infrastructure for a functioning market 

A  well  interconnected  European  energy  grid  is  vital  for  Europe's  energy  security,  for 
more  competition  in  the  internal  market  resulting  in  more  competitive  prices  and  for 
providing the right signals to drive investments towards the decarbonisation energy and 
climate policy targets to which the European Union has committed7. 

Completing the infrastructure links still missing for a truly integrated internal market, and 
enabling the necessary investment for this to come forward, is therefore one of the key 
priorities in implementing the Energy Union strategy.  

The  projects  of  common  interest  (PCIs)8  are  the  principal  instrument  to  physically 
integrate the national electricity markets and to diversify their energy sources. Many of 
the  proposed  infrastructure  links  will  play  a  key  role  in  coping  with  the  variability  of 
renewables sources between countries like Norway and the United Kingdom, France and 
Spain,  or  Norway,  the  Netherlands  and  Germany.  The  European  Fund  for  Strategic 
Investment,  complementing  the  existing  funding  available  from  the  Connecting  Europe 
Facility, would also support energy projects, including energy infrastructure. In addition, 
the European Investment Advisory Hub will provide expertise and technical assistance to 
public  and  private  promoters  to  design  and  structure  financially  good  investment 
projects. 

2.2.  Adapt market design to renewables and support schemes to markets 

Delivering  on  the  Energy  Union's  ambition  of  making  the  European  Union  the  world 
leader  in  renewable  energy  will  involve  creating  an  environment  in  which  renewables 
can attract the required investments. Low-cost financing for capital intensive renewables 

7   COM(2015)82 final of 25.02.2015 - Communication from the Commission to the European Parliament 
and to the Council - Achieving the 10% electricity interconnection target - Making Europe's electricity 
grid fit for 2020. 

8   Regulation  (EU)  No  347/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 
guidelines  for  trans-European  energy  infrastructure  and  repealing  Decision  No  1364/2006/EC  and 
amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) No 715/2009 

6 

 
 
 
 
 
 
                                                 
depends  on  having  a  stable  investment  framework  that  reduces  regulatory  burden  and 
risk.  

2.2.1.  A market fit for renewables 

Investment decisions in renewables need to take into account the natural endowments of 
the geographical location, grid availability, public acceptance, consumption location and 
administrative  as  well  as  investment  conditions,  including  taxes  and  levies.  All  are 
relevant  factors  as  regards  production  costs.  A  functioning  market  with  appropriately 
defined  price  zones  would  thus  signal  where  and  when  electricity  should  be  generated 
from renewable sources.  

At  the  same  time,  successfully  integrating  renewables'  electricity  generation  into  the 
system  requires  flexible  markets  encompassing  a  broader  range  of  players,  both  on  the 
supply  and  demand  side.  The  establishment  of  liquid  and  better  integrated  short-term 
markets will help increase flexibility and allow renewable energy producers to compete 
on  an  equal  footing  with  conventional  energy  producers.  Equally,  markets  to  manage 
volume risk should be encouraged. 

Likewise,  both  improving  interconnections  and  enabling  demand  response  will  further 
contribute  to  the  flexibility  required  to  integrate  renewable  energy  into  the  market. 
However,  consumers  are  currently  not  sufficiently 
their 
consumption  pattern  to  the  changing  supply  situation.  Furthermore,  regulatory  barriers 
and  discriminatory  rules  in  place  prevent  customers,  or  aggregators  acting  on  their 
behalf, from using demand response (including storage management) and taking part in 
electricity markets on an equal footing with generators. 

incentivised 

to  adapt 

Making markets more flexible will enable producers of electricity from renewable energy 
sources  to  be  fully  involved  in  the  market,  including  in  balancing  their  portfolio.  They 
should  also  be  enabled  to  contribute  to  increasing  the  flexibility  of  the  system 
themselves.  Existing  provisions  excluding  particular  means  of  power  generation  from 
normal market rules have to be reviewed.  

2.2.2.  Promoting renewables fit for the market  

Reforming  the  market  in  this  way  is,  together  with  a  strengthened  EU  ETS,  a 
fundamental  step  to  create  the  conditions  that  will  eventually  allow  investment  in  new 
renewable energy capacity to be driven by the market.  

In the meantime, the production of electricity from renewable energy sources should be 
supported,  if  necessary,  through  market-based  schemes  that  address  market  failures, 
ensure cost-effectiveness and avoid overcompensation and market distortion in line with 
the State aid guidelines9.  

Support  schemes  for  renewable  energy  are  almost  always  national  in  scope.  A  more 
coordinated regional approach to renewable energy – including support schemes – could 
deliver  considerable  gains,  among  others  by  promoting  cost-efficient  development  of 

9   Communication  from  the  Commission  —  Guidelines  on  State  aid  for  environmental  protection  and 

energy 2014-2020 OJ C 200, 28.6.2014, p. 1–55 

7 

 
 
 
 
 
                                                 
 
renewable generation in optimal geographic locations. This would enlarge the market for 
renewable  energies,  facilitate  their  integration  and  promote  their  most  efficient  use. 
While Member States are becoming increasingly open to enhanced regional cooperation, 
practical  difficulties  remain.  A  concrete  framework  for  cross-border  participation  in 
support schemes could address these practical difficulties. 

2.3.  Linking  wholesale  and  retail  markets  to  deliver  a  new  deal  for 

consumers 

The integration of the internal market should not stop on the wholesale level. To realise 
the full potential of the European internal energy market, the retail part of the electricity 
market has to offer consumers – households, businesses and industry – the possibility of 
active and beneficial participation in the European Union's energy transition. This has to 
be one of the goals of the new market design and requires a fundamental change in the 
role of the consumer on the electricity market.  

Many  obstacles  to  full  participation  of  consumers  in  the  energy  market  persist  today. 
Lack of appropriate information on costs and consumption or transparency in offers leads 
to a lack of sufficient competition on many retails markets. At the same time, markets for 
residential energy services remain insufficiently developed.  

Being  an  active  energy  consumer  should  not  be  complicated  or  time-consuming.  The 
technologies  now  exist  to  enable  consumers  to  become  full  participants  in  the  energy 
transition.  However,  regulatory  interventions  such  as  price  caps,  price  regulation, 
distortive taxation and other state interventions result in prices that do not provide signals 
and  value  for  consumers  to  participate  in  the  market.  Thus  the  potential  for  optimal 
demand  response  remains  untapped.  Accordingly,  neither  households,  businesses  nor 
industry are currently sufficiently incentivised to participate in electricity markets. 

Appropriate price signals are therefore crucial. This includes linking wholesale and retail 
markets more closely, notably by offering prices to end users which reflect variations in 
wholesale  prices.  Besides,  network  tariffs  must  be  designed  in  a  way  that  they  do  not 
discourage demand response while ensuring a fair contribution to network costs. 

Moreover, other regulatory barriers and discriminatory rules in place prevent customers, 
or  aggregators  acting  on  their  behalf,  from  taking  up  the  demand  response  option 
(including storage management) and taking part in electricity markets on an equal footing 
with  generators.  The  existence  of  regulated  prices  that  shield  the  final  consumer  from 
market  price  signals  is  the  most  obvious  among  them.  Besides,  market  rules  are  not 
always conducive to the participation of aggregators yet. It may be desirable to develop a 
common  approach  to  market  design  for  enabling  demand  response  to  compete  on  an 
equal footing with generators. 

8 

 
 
 
 
 
 
 
 
QUESTIONS  

1)  Would  prices  which  reflect  actual  scarcity  (in  terms  of  time  and  location)  be  an 
important ingredient to the future market design? Would this also include the need for 
prices to reflect scarcity of available transmission capacity? 

2)  Which  challenges  and  opportunities  could  arise  from  prices  which  reflect  actual 
scarcity?  How  can  the  challenges  be  addressed?  Could  these  prices  make  capacity 
mechanisms redundant? 

3)  Progress in aligning the fragmented balancing markets remains slow; should the EU 

try to accelerate the process, if need be through legal measures? 

4)  What can be done to provide for the smooth implementation of the agreed EU wide 

intraday platform? 

5)  Are  long-term  contracts  between  generators  and  consumers  required  to  provide 
investment certainty for new generation capacity? What barriers, if any, prevent such 
long-term hedging products from emerging? Is there any role for the public sector in 
enabling markets for long term contracts? 

6)  To  what  extent  do  you  think  that  the  divergence  of  taxes  and  charges10  levied  on 
electricity  in  different  Member  States  creates  distortions  in  terms  of  directing 
investments efficiently or hamper the free flow of energy? 

7)  What needs to be done to allow investment in renewables to be increasingly driven 

by market signals?  

8)  Which  obstacles,  if  any,  would  you  see  to  fully  integrating  renewable  energy 
generators into the market, including into the balancing and intraday markets, as well 
as regarding dispatch based on the merit order?  

9)  Should there be a more coordinated approach across Member States for renewables 
support  schemes?  What  are  the  main  barriers  to  regional  support  schemes  and  how 
could these barriers be removed (e.g. through legislation)?  

10) Where  do  you  see  the  main  obstacles  that  should  be  tackled  to  kick-start  demand- 
response  (e.g.  insufficient  flexible  prices,  (regulatory)  barriers  for  aggregators  / 
customers,  lack  of  access  to  smart  home  technologies,  no  obligation  to  offer  the 
possibility for end customers to participate in the balancing market through a demand 
response scheme, etc.)? 

3.  STEPPING UP REGIONAL COOPERATION IN AN INTEGRATED ELECTRICITY SYSTEM  

The  need  for  secure  and  cost-efficient  development  and  management  of  the  electricity 
system calls for increased coordination and cooperation between all actors in the internal 
energy  market.  In  some  cases,  this  will  involve  moving  from  national  to  regional  or 
European-wide approaches.  

10   These  may  be  part  of  general  taxation  (VAT,  excise  duties)  or  specific  levies  to  support  targeted 

energy and/or climate policies. 

9 

 
 
 
 
                                                 
3.1.  Regional coordination of national policymaking 

A  fully-functioning  internal  energy  market  requires  that  Member  States  coordinate  and 
cooperate  with  their  neighbours  when  developing  their  energy  policies.  Likewise,  it 
needs  to  be  assured  that  all  regional  initiatives  evolve  in  a  coherent  way  and  lead  to  a 
fully-integrated  energy  market.  When  fragmented  national  systems  exist,  regional 
cooperation  should  become  an  essential  part  of  effective  governance  for  the  Energy 
Union and a first step towards European Union-wide harmonisation where required.  

the  new  South-West  Europe 

Regional  cooperation  between  Member  States  will  also  be  key  to  achieving  the  agreed 
European  Union-level  targets  more  cost-effectively  (e.g.  making  better  use  of 
cooperation mechanisms to meet the renewables target), furthering the integration of the 
internal  energy  market  and  strengthening  energy  security.  Examples  of  political 
cooperation in energy matters such as within the Pentalateral Forum, in the North Seas 
Countries' Offshore Grid initiative (NSCOGI), the Baltic Energy Market Interconnection 
Plan  (BEMIP):  http://ec.europa.eu/energy/en/topics/infrastructure/baltic-energy-market-
Interconnectivity  Group: 
interconnection-plan, 
https://ec.europa.eu/energy/en/news/high-level-group-energy-infrastructure-south-west-
europe-created  or  the  Central  and  South  Eastern  Europe  Gas  Connectivity  Group: 
https://ec.europa.eu/energy/en/topics/infrastructure/central-and-south-eastern-europe-gas-
connectivity,  in  the  field  of  gas  are  steps  in  the  right  direction.  Regional  cooperation 
should  not  be  limited  to  EU  Member  States  or  stop  at  EU  borders.  The  application  of 
third  package  legislation  by  neighbouring  countries  such  as  the  Energy  Community 
Contracting Parties will ensure that benefits of the internal market span beyond the EU. 
Regional fora should also assess and address the intrinsic risks related to overdependence 
on third countries that choose not to apply EU internal market legislation. Strengthening 
regional cooperation offers unique opportunities to deliver faster and more cost-efficient 
progress towards an integrated market. 

3.2. 

Improving interconnections  

Given the clear benefits of better interconnection, the Commission, as part of the Energy 
Union  package,  presented  a  detailed  strategy  how  to  bridge  the  gap  to  the  10% 
interconnection target11 and intends to come forward in 2016 with a communication on 
how to fulfil the further reaching objective of an interconnection level of 15% as called 
for by the European Council. 

Interconnection capacity between several countries is still fairly low and insufficient for 
the expected power flows. The projects of common interest introduced by the Regulation 
on  guidelines  for  trans-European  energy  infrastructure12  are  fundamental  to  physically 
integrating  the  national  electricity  markets  and  to  diversify  their  energy  sources.  For 
example, the Baltic States do not form part of the continental European synchronous area 
yet. It is also agreed policy that regional cooperation to enhance interconnectivity needs 
to be enhanced in particular in the Baltic region, the Iberian Peninsula, the Northern seas 

11   COM(2015)82 final of 25.02.2015 - Communication from the Commission to the European Parliament 
and to the Council. Achieving the 10% electricity interconnection target - Making Europe's electricity 
grid fit for 2020. 

12   Regulation  (EU)  No  347/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 
guidelines  for  trans-European  energy  infrastructure  and  repealing  Decision  No  1364/2006/EC  and 
amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) No 715/2009. 

10 

 
 
 
 
                                                 
and Central and South Eastern Europe. Further links towards neighbouring regions such 
as the southern Mediterranean and Western Balkans should also be considered. 

Managing  the  system  and  identifying  where  new  interconnections  are  needed  requires 
that transmission system operators can rely on the price formation on spot and wholesale 
markets.  Currently,  income  from  congestion  charges  –  revenues  stemming  from 
transporting  electricity  from  low-price  areas  to  areas  where  prices  are higher  –  is often 
substantial  but  rarely  used  for  building  or  reinforcing  interconnections.  This  should 
change  and  these  funds  could  be  put  to  effective  use  in  building  Europe's  electricity 
system.  

3.3.  Cooperation between System Operators  

In such an integrated electricity grid, operational planning and decision-making has to be 
coherent at every point in time. Regional cooperation and regional decision-making are 
particularly  crucial  for  secure  system  operation.  The  establishment  of  regional 
operational centres will help effectively plan and manage cross-border electricity flows in 
the  transmission  systems  also  in  real  time.  Existing  Regional  Security  Cooperation 
Initiatives  (RSCIs)  are  important  first  steps  into  the  direction  of  further  regional 
coordination  and  integration  of  system  operation  –  they  should  be  gradually  equipped 
with  decision-making  powers  and  could  pave  the  way  ultimately  for  pan-European 
coordination of system operation. 

The  European  Network  of  Transmission  System  Operators  for  Electricity  (ENTSO-E) 
currently plays an important role in coordinating Transmission System Operators (TSOs) 
and  developing  network  codes.  The  need  for 
increased  coordination  between 
transmission  system  operators  may,  in  addition  to  the  establishment  of  regional 
operational centres, require a stronger ENTSO-E. This would also necessitate changes to 
the governance structure of ENTSO-E and its contribution to the effective governance for 
the Energy Union. 

Against the background of the increased integration of European transmission systems, it 
may  also  be  necessary  to  revisit  the  revenue  framework  for  transmission  system 
operators (tariffs, congestion rents and inter-transmission system operator compensation) 
to ensure it provides the right incentives for all transmission system operators.   

Grid expansion and optimal grid management is also needed at the distribution level as 
distribution  grids  are  instrumental  for  integrating  decentralised,  locally  produced 
renewable  energies.  New  procedures  will  have  to  be  introduced  to  incentivise 
Distribution System Operators (DSOs) to use local flexibility and respond to those new 
challenges  in  a  cost  effective  manner.  In  this  context  the  role  of  DSOs  needs 
reconsidering. DSOs should be neutral market facilitators to enable the development of 
market-based  services  to  consumers  by  third  parties.  This  is  especially  true  in  cases 
where DSOs are bestowed with the responsibility of smart metering and data handling. 
Questions related to ownership of data and security of data against cyber-attacks must be 
resolved in a satisfactory manner independently whether this task is allocated to DSOs or 
other service providers.  

It  might  also  be  necessary  to  reflect  if  distribution  system  operators  are  sufficiently 
involved  in  European  regulatory  bodies  and  in  the  effective  governance  of  the  Energy 
Union.  Furthermore,  network  tariffs  must  be  designed  in  a  way  to  incentivise  efficient 
grid  utilisation  and  ensure  a  fair  contribution  to  network  costs,  while  they  should  not 
discourage demand response.  

11 

 
 
Enhancing the intelligence of the electricity grid, from the highest voltage levels down to 
the individual households can help in dealing with variable and decentralised electricity 
production  in  a  more  cost-effective  manner  and  reduce  or  postpone  the  need  for  new 
lines,  interconnectors  or  capacity  mechanisms.  Closer  cooperation  between  DSOs  and 
TSOs  on  issues  around  network  planning  and  operations  is  therefore  paramount  and 
should be pursued further. 

3.4.  Adapting the regulatory framework to integrated markets 

Integrated  electricity  grid  operation  and  trading  rules  require  an  aligned  regulatory 
oversight. An enhanced role for the Agency for the Cooperation for Energy Regulators 
(ACER) to oversee the effective functioning of the integrated markets and cross border 
infrastructure is the natural consequence of market integration.  

ACER  currently  acts  primarily  through  recommendations  and  opinions  and  has  very 
limited  decision-making  rights.  In  line  with  the  increased  cooperation  of  system 
operators, the powers and independence of ACER may need to be reinforced so that it is 
able to carry out regulatory functions at European level where needed. ACER could then 
arbitrate in regional and EU level disputes.  

The reinforcement of the powers of ACER could include giving the agency the power to 
adopt directly applicable and binding decisions on EU-level initiatives and cross-border 
issues  and  the  introduction  of  enforcement  powers  to  ensure  compliance  with  such 
decisions.   

The  review  of  the  roles  of  ENTSO-E  and  ACER  provides  an  opportunity  to  assess  the 
process  for  developing  detailed  regulatory  rules  on  the  operation  of  the  market  and 
networks  (network  codes  and  guidelines).  These  are  developed  with  the  strong 
involvement of both ENTSO-E and ACER.  

Strengthening  the  regulatory  framework  may  also  require  integrating  entities  which 
currently are not subject to regulatory oversight, such as power exchanges which play a 
crucial  role  in  coupled  European  electricity  markets  and  perform  also  functions  which 
have  characteristics  of  a  natural  monopoly.  Likewise  the  increasing  link  between  retail 
and wholesale markets will have to be reflected in the regulatory framework. 

12 

 
 
 
 
 
 
 
 
QUESTIONS 

11) While  electricity  markets  are  coupled  within  the  EU  and  linked  to  its  neighbours, 
system  operation  is  still  carried  out  by  national  Transmission  System  Operators 
(TSOs).  Regional  Security  Coordination  Initiatives  ("RSCIs")  such  as  CORESO  or 
TSC have a purely advisory role today. Should the RSCIs be gradually strengthened 
also  including  decision  making  responsibilities  when  necessary?  Is  the  current 
national  responsibility  for  system  security  an  obstacle  to  cross-border  cooperation? 
Would a regional responsibility for system security be better suited to the realities of 
the integrated market? 

12) Fragmented national regulatory oversight seems to be inefficient for harmonised parts 
of  the  electricity  system  (e.g.  market  coupling).  Would  you  see  benefits  in 
strengthening ACER's role?  

13) Would  you  see  benefits  in  strengthening  the  role  of  the  ENTSOs?  How  could  this 

best be achieved? What regulatory oversight is needed? 

14) What  should  be  the  future  role  and  governance  rules  for  distribution  system 
operators?  How  should  access  to  metering  data  be  adapted  (data  handling  and 
ensuring  data  privacy  etc.)  in  light  of  market  and  technological  developments?  Are 
additional  provisions  on  management  of  and  access  by  the  relevant  parties  (end-
customers,  distribution  system  operators,  transmission  system  operators,  suppliers, 
third party service providers and regulators) to the metering data required?  

15) Shall there be a European approach to distribution tariffs? If yes, what aspects should 
be covered; for example tariff structure and/or, tariff components (fixed, capacity vs. 
energy, timely or locational differentiation) and treatment of self-generation? 

16) As  power  exchanges  are  an  integral  part  of  market  coupling  –  should  governance 

rules for power exchanges be considered?   

4.  A EUROPEAN DIMENSION TO SECURITY OF SUPPLY 

Closer integration of markets across national borders and the development of short- and 
long-term  markets  with  effective  price  formation  –  notably  reflecting  the  need  for  new 
capacity – should deliver the right investment signals to allow new generation sources to 
come onto the market and, where overcapacity exists, signals for decommissioning. 

The Commission notes that in many Member States the market functioning and security 
of supply could be significantly improved for example by introducing market coupling, 
improving  cross-border  flows,  strengthening  intra-day  trading  and  the  demand  side  as 
well  as  removing  price  caps  to  wholesale  markets.  All  of  this  would  improve  price 
formation  and  enable  peak  prices  that  should  translate  into  better  investment  signals 
whilst overall facilitating increased renewables penetration. 

Nonetheless, today a number of Member States anticipate inadequate generation capacity 
in  future  years.  To  tackle  this,  they  have  introduced  or  plan  to  introduce  capacity 
mechanisms which involve making separate payments for available capacity rather than 
paying for electricity delivered. 

13 

 
 
 
While  capacity  mechanisms  might  be  warranted  under  certain  circumstances,  they may 
be  costly  and  distort  the  market.  Furthermore,  they  may  contradict  the  objective  of 
phasing  out  environmentally  harmful  subsidies  including  for  fossil  fuels13.  Capacity 
mechanisms  should  only  address  real  market  failure  and  not  support  uneconomic  or 
unsustainable generation14. 

The  Commission  recently  launched  a  sector  inquiry  into  capacity  mechanisms15  –  the 
first  under  the  European  Union  state  aid  rules.  This  will  examine  in  particular  whether 
they distort competition or trade in the internal electricity market. 

4.1. 

Alignment of methods to determine system adequacy 

In the Communication Delivering the internal electricity market and making the most of 
public  intervention16  the  Commission  addressed  the  need  for  public  authorities  to 
regularly  undertake  an  objective,  facts-based  assessment  of  the  generation  adequacy 
situation; while the electricity security of supply Directive17 requires public authorities to 
regularly assess the adequate level of generation in their Member State.  

The determination of generation adequacy is currently carried out very differently in EU 
Member  States.  In  November  2013,  the  Electricity  Coordination  Group  called  for  a 
harmonised European methodology for assessing generation adequacy and ENTSO-E ran 
a public consultation on its methodology for generation adequacy assessment in 2014. In 
parallel,  the  Pentalateral  Forum  is  committed  to  developing  a  regional  level  adequacy 
assessment.  

A more standardised assessment in the EU would have to properly take into account the 
contribution  of  interconnections,  generation  across  borders,  variable  renewables 
production, demand  response  and  storage  possibilities  as  well as  the  relevant  European 
policy  contexts,  such  as  the  expected  evolution  of  the  carbon  market  and  energy 
efficiency policies ("system adequacy assessment"). The decision whether there is a need 
for a capacity mechanism should be based on such a standardised assessment. 

4.2. 

Reliability standards 

System  reliability  in  interconnected  markets  is  interdependent.  Even  if  Member  States 
may  have  legitimate  reason  to  establish  different  system  adequacy  standards  to  take 

13   See  Point  220  of  the  Communication  from  the  Commission  —  Guidelines  on  State  aid  for 

environmental protection and energy 2014-2020 

14   C(2013)7243 - Communication from the Commission to the European Parliament and to the Council 
Delivering the internal electricity market and making the most of public intervention and SWD(2013) 
438  final–  Staff  Working  Document  -  Generation  Adequacy  in  the  internal  electricity  market  - 
guidance on public interventions  

15   http://europa.eu/rapid/press-release_IP-15-4891_en.htm 

-

http://ec.europa.eu/competition/sectors/energy/state_aid_to_secure_electricity_supply_en.html 

16  C(2013)7243 

17   Directive 2005/89/EC of the European Parliament and of the Council of 18 January 2006 concerning 
measures  to  safeguard  security  of  electricity  supply  and infrastructure  investment,  OJ  33,  4.2.2006, 
p.22-27 

14 

 
 
 
                                                 
account  of  national  circumstances,  the  impact  on  the  internal  market  needs  to  be  taken 
into account. If Member States fail to act to ensure system adequacy this would increase 
supply  security  risks  for  the  wider  system.  This  particular  risk  is  even  greater  where 
Member  States  have  implemented  below-cost  regulated  prices  which  in  the  long  run 
mean insufficient revenues to cover necessary investments. Alternatively, there may be a 
tendency  to  err  on  the  side  of  caution  and  "over-insure"  against  the  risk  of  a  supply 
disruption.  This  could  result  in  high  costs  and  undermine  the  ability  of  the  internal 
market to guide investments18. 

If all Member States set clear system adequacy standards this would give greater clarity 
to  all  stakeholders.  Working  together  with  Member  States,  the  Commission  could 
establish  a  range  of  acceptable  standards  for  expected  involuntary  disconnections  of 
consumers  which  take  account  of  the  costs  to  the  economy  and  society  of  unforeseen 
supply interruptions.  

4.3.  A framework to opening capacity mechanisms across borders 

European security of supply monitoring and clear system adequacy standards should be 
the  basis  to  identify  whether  a  capacity  mechanism  is  needed.  Existing  Commission 
action, in particular State aid guidelines19, require all Member States to respect a number 
of important principles when opting for capacity mechanisms. Notably such mechanisms 
should not discriminate between technologies (including demand response or storage) or 
between  new  and  existing  capacity  providers,  but  should  pay  only  for  availability  (per 
MW) and allow for cross-border participation. In the absence of common arrangements, 
organising effective cross-border participation can be challenging. 

A way forward  could be  to  develop EU-level rules  on cross-border participation where 
capacity  mechanisms  are  implemented.  This  would  involve  setting  clear  roles  and 
responsibilities  for  the  parties  (in  particular  for  generators,  demand  response  providers 
and  consumers  and  transmission  system  operators)  and  a  framework  to  calculate  and 
allocate cross-border capacity in such mechanisms.  

However, if capacity mechanisms are very different in design, capacity providers across 
borders  might  face  a  number  of  different  requirements  when  participating  in  different 
schemes.  This  increases  transaction  costs  and  might  reduce  overall  efficiency.  It  might 
therefore be sensible to lay out a reference model for a capacity mechanism (or a limited 
number  of  mechanisms)  for  use  on  a  regional  basis,  thus  facilitating  cross-border 
participation and minimising distortions to the market.  

The  results  of  the  Commission’s  recently  launched  sector  inquiry20  will  provide  useful 
material to establish future rules in this area. A draft report on the sector inquiry will be 
published for public consultation at the end of the year.  

18   Comparing  the  adequacy  standards  applicable  in  neighbouring  systems,  the  Electricity  Coordination 
Group found a lack of clarity regarding responsibility for setting these standards for system adequacy 
and security of supply with many Member States having no formal standard. 

19   Communication  from  the  Commission  —  Guidelines  on  State  aid  for  environmental  protection  and 

energy 2014-2020 OJ C 200, 28.6.2014, p. 1–55 

20   http://europa.eu/rapid/press-release_IP-15-4891_en.htm. 

15 

 
 
 
 
 
 
 
                                                 
Questions 

17) Is there a need for a harmonised methodology to assess power system adequacy? 

18) What  would  be  the  appropriate  geographic  scope  of  a  harmonised  adequacy 
methodology  and  assessment  (e.g.  EU-wide,  regional  or  national  as  well  as 
neighbouring countries)? 

19) Would an alignment of the currently different system adequacy standards across the 

EU be useful to build an efficient single market? 

20) Would  there  be  a  benefit  in  a  common  European  framework  for  cross-border 
participation in capacity mechanisms? If yes, what should be the elements of such a 
framework?  Would  there  be  benefit  in  providing  reference  models  for  capacity 
mechanisms? If so, what should they look like? 

21) Should  the  decision  to  introduce  capacity  mechanisms  be  based  on  a  harmonised 

methodology to assess power system adequacy? 

5.  NEXT STEPS 

This  consultative  Communication  on  electricity  market  design  will  launch  the  public 
consultation on the elements of the new market design for the preparation of any future 
legislative and non-legislative proposals. The aim of this consultative Communication is 
to  give  the  opportunity  to  all  stakeholders  to  provide  feedback  on  the  vision  presented 
and the identified steps required to deliver that vision. It will be complemented by more 
detailed  and  comprehensive  questions  regarding  certain  aspects,  notably  regarding 
security of electricity supply. 

At the same time, the Communication on Delivering a New Deal for Energy Consumers 
adopted alongside this consultative communication on market design presents a detailed 
vision  of  how  the  new  role  of  the  energy  consumer  might  look  like  and  outlines  the 
necessary steps. Consumer empowerment – households, businesses and industry – smart 
homes  and networks  and  data  management  and  security are the three  pillars  to  achieve 
such  a  vision.  The  actions  outlined  in  the  communication  on  consumers  build  on 
extensive  consultations  with  citizens,  consumers  and  stakeholders,  including  a  public 
consultation conducted in the first half of 2014 and discussions in Commission-led expert 
groups21.  

The possible legislative follow-up to the Communications presented today could include 
amendments  to  the  following  pieces  of  legislation,  depending  on  the  outcome  of  the 
future work: 

  Electricity Directive, 
  Electricity Regulation, 
  ACER Regulation, 
 
  Electricity Security of Supply Directive, 

Infrastructure Regulation, 

21   ENER  Smart  Grids  Task  Force,  Vulnerable  Consumers  Working  Group  under  the  Citizens'  Energy 

Forum. 

16 

 
 
 
                                                 
  Energy Efficiency Directive, 
  Renewables Directive. 

Furthermore, the work will impact the shape of a number of network codes, in particular 
the codes on Balancing and Emergency and Restoration. The future proposals and their 
impact  assessments  will  take  into  account  the  economic  implications  and  the  inputs 
received through the consultation process. 

All  the  questions  in  this  Communication,  as  well  as  the  separate  questionnaire  on 
electricity security of supply are available on the Commission website. Responses should 
only be provided in accordance with the instructions there22 and by 8 October 2015 at the 
latest.  The  Commission  intends  to  publish  a  findings  document  summarising  the  main 
outcomes  of  this  consultation.  It  will  preserve  the  confidentiality  of  the  responses  it 
receives,  provided  confidentiality  claims  have  been  made  and  these  are  based  on 
reasonable grounds.  

22  

https://ec.europa.eu/energy/en/consultations 

17