1.What is the Communication on energy markets about and how is it linked to REPowerEU?
The European Union has been facing the consequences of a global energy market supply squeeze since last summer, and the Commission has taken a wide range of measures to help Member States tackle the high energy prices that have hit EU households and businesses. Today's Communication on short-term market interventions and electricity market design builds on an existing framework. In particular, it extends the short-term crisis response interventions contained in the ‘Energy Prices Toolbox' communication of last October, as well as in the Communications of 8 March on REPowerEU and 23 March on Security of supply and affordable energy prices.
The Communication contains additional or extended measures that could be implemented by Member States in the short term in the gas and electricity sectors to mitigate the impact of soaring energy prices. The Commission also presents potential areas for longer-term reform to make the European electricity market more resilient to future price shocks and fit to deliver the European Green Deal objectives, drawing on market analysis and on the assessment of the functioning of the EU electricity market design recently completed by the Agency for the Cooperation of European Energy Regulators (ACER). The Communication also outlines possible responses to address a major or full gas supply disruption from Russia.
2.How is the Energy Prices Communication linked to REPowerEU?
Russia's invasion of Ukraine has been a stark reminder of the implications that Europe's dependence on fossil fuel imports from third countries can have on the EU energy markets and security of supply. EU leaders agreed in Versailles on 10-11 March to phase out 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. The European Council also 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.” Alongside today's Communication on possible interventions in the energy markets, the Commission is also presenting the REPowerEU Plan to phase out Russian fossil fuels in the EU energy market.
3.Why do we need short-term intervention measures?
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 significantly over the same period, due to gas-fired power plants often driving the price in EU power markets. The market expects energy prices to remain high for the rest of 2022 and to a lesser extent until 2024-2025.
In spite of measures that have mitigated the impact of sustained high energy prices, both at EU and national level, the situation on the global gas market means that citizens and companies have been exposed to higher prices and economic strain for several months. Russia's illegal and unjustified war in Ukraine has added to pre-existing challenges and has increased market uncertainty, which can translate into further volatility.
With this in mind, in March, EU leaders tasked the Commission to propose measures that could be deployed immediately to address the problem of excessive electricity prices. The wide range of energy stakeholders consulted over the past weeks have confirmed the need for such intervention. They have also expressed support for measures that shield end users, while avoiding unintended consequences on the security of energy supply, decarbonisation plans and the integrity of the European energy market.
4.What are the measures proposed in the gas sector?
The Communication outlines several options for intervention in the gas market, to tackle the imbalance between gas supply and demand at the global level which lies at the origin of the surge of wholesale energy prices. In the EU, gas still plays an important role in power generation. Moreover, Russia, the EU's largest gas supplier, has increased supply uncertainty by waging an illegal war against Ukraine, a key transit country for gas, and seeking to unilaterally change the terms of payment for gas contracts.
To tackle the root causes of the current price pressure in the global gas markets, the EU Energy Platform will help mitigate price spikes by securing supplies at competitive prices thanks to aggregated demand and coordinated outreach to supplying countries. The Communication also presents a number of options to mitigate the impact of high gas prices on consumers. These include a possible extension of retail price regulation, ‘circuit breakers' in trading for extreme volatility situations, and emergency liquidity support measures.
In the case of a large-scale or full disruption of Russian gas deliveries, which would create significant supply strain, the Commission has looked at options to strengthen existing solidarity mechanisms between the Member States, including well coordinated cross-border rationing and curtailment of demand. An administrative EU price for gas during the period of a declared EU emergency could also be envisaged. One possibility in case of a full disruption would be to limit price formation during this disruption scenario by capping the price on European gas exchanges for the duration of the emergency.
5.What are the measures proposed in the electricity sector?
The existing EU electricity market design offers tools that shield end consumers from market volatility, such as a framework for prosumers, local energy communities with self-generation, and demand response. However, the Commission considers that in the immediate term additional measures could be envisaged in the wholesale electricity market to protect the most vulnerable EU households and businesses, taking into account national and local contexts. These measures include redirecting exceptionally high infra-marginal returns (so-called windfall profits) of certain baseload electricity generators to support those in need. Moreover, the scope of regulated retail prices could be extended to cover also SMEs. This extension would have to be limited in terms of the quantities covered so as not to trigger an increase of consumption.
Some Member States are considering to temporarily lower electricity prices, by introducing a reference price of gas used for electricity generation. Any such measures need to be designed in a way compatible with EU Treaties, in particular with no restriction of cross border exports and with State aid rules being respected. Finally, in these exceptional circumstances, congestion revenues could be used to finance emergency measures for consumers.
6.How can the EU electricity market be optimised to be more resilient against price volatility while contributing to meet the European Green Deal objectives?
For decades, the EU electricity market has been delivering on the objectives of increased security, flexibility and affordability of power supply, while contributing to the decarbonisation of the energy system through a systemic uptake of renewable energy sources. It is based on a solid legislative framework and its proper implementation and execution remain the primary points of reference in assessing how the market functions. Nonetheless, 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. The issues relate to securing consumer protection, enhancing demand response and flexibility mechanisms, investing in low carbon capacities and innovative infrastructure solutions, locational pricing, and transparent market surveillance.
7.What are the next steps for the implementation of these measures?
The Commission invites the European Council to endorse the short-term measures to address high prices proposed in the Communication. It also invites Member States to accelerate preparedness measures for a possible further disruption to the supply of Russian gas. It also 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.
Building on this preliminary work, the Commission will launch an impact assessment process and engage with Member States and a wide range of stakeholders and national regulatory authorities to adjust the electricity market design and, where necessary, its legislative framework.
For more information
Press release - Electricity Market Design
 The market price of electricity is determined on the basis of the marginal generation unit.