The first few lines of the new European Commission proposals to clean up the energy market are enough to realize that this is a far-reaching policy initiative that will change the energy landscape in Europe forever.
While there have been grumblings from some EU parliament members, warning the Commission not to go too far in its energy reform bill, these are irresistible proposals that will mark a significant change in how renewable energy is traded in Europe – moving from slow and conservative to revolutionary and entrepreneurial overnight.
Yes the key amendment as foreseen by most commentators is the arrival of Contracts for Difference for all non-fossil fuel electricity generation, with the Member States obliged to channel excess revenues back to consumers.
This means that when fossil fuels drive up the price of electricity, because they are needed to meet the total electricity requirement in any one country, the excess profits are returned to the subsidizing body i.e. the member state government, and that money must be used to give relief to high electricity prices at the consumer level.
Member states which want to pick a fight with the Commission over aggressive moves against fossil fuels, will find they have nothing to complain about, renewables will stay cheap and be guaranteed profits, and not inflate the price of electricity, and this in turn only applies subtle pricing pressure to cutting out fossil fuels from the mix over time.
For those who are unclear a contract for difference guarantees a subsidy payment to a renewable company when the price of electricity is very low, but at the same time, it sets a clearing price so that when the price of wholesale electricity is above this price, the extra is returned to the subsidizing agency, usually the government. But the addition that they MUST use this money to cut the price of electricity, helps consumers battle against fossil fuel price surges for as long as they stay in the fuel mix. This is also true for hydro and nuclear as these are not fossil fuel based.
This move alone will force energy companies to shift towards renewables as these will be guaranteed not to rise in price – at the expense of fossil fuel sources.
But the trigger for entrepreneurial activity is the added idea that rules for sharing renewable energy are also being revamped. Consumers must be allowed to invest in wind or solar parks, and they can also sell excess rooftop solar electricity to neighbors, not just back to their supplier. This right to sell energy to anyone will trigger the emergence of thousands of VPP style clubs that trade spare electricity for profit, to the highest bidder. It will single handedly unleash a huge shift towards distributed resources which are NOT in the hands of energy companies – for instance to power nearby EV charging points, literally to neighbors, or offer relief to utilities when they are tempted to buy-in more gas powered generation for peaking power, and instead take it from home solar and batteries and stationary EV batteries.
This will single-handedly change the mindset of Europe towards home and grid batteries, which have an enormous pipeline, but where investment uncertainty has tended to slow progress. It will also lead to a larger percentage of rooftop space being used for solar, and larger home batteries being installed, because the formula for payback will be far easier. At present payback has to come from avoiding some grid expense and selling energy to the grid at very low government controlled feed-in tariffs. Now it will become an enterprise in its own right, and whole communities will start rooftop electricity swapping organizations, with the potential to entirely remove themselves from the utility’s grasp.
The Rethink Energy report, Solar industry growing rapidly with DER skew post-pandemic, has just been published this week, promising a huge upsurge in Distributed Energy Resource due to the chase for energy security, not just in Europe but globally. And this legislation will accelerate this new trend in Europe even faster. One suggestion we make in that report is for utilities themselves to step in and aggressively promote and fund rooftop development, or risk losing customers entirely.
The European Commission also added some new rules that promote the idea of member states introducing new support schemes especially for demand response and also storage. Previously the EU has been slow on policy changes around storage – utilities should immediately offer price incentives for consumer homes to agree to let their supplier choose WHEN they use electricity for thing such as washing machines and EV rechargers, lowering the peak usage and making less peaks which require fossil fuel generation, which will drive down average energy prices. And being encouraged to sign up battery storage to enable this and also for peaking power, will move generation away from gas.
Alongside this proposal, the Commission has also issued recommendations today to the Member States on the advancement of storage innovation, technologies, and capacities.
These changes plus an obligation to have longer term contracts where fossil fuels are concerned will shift the entire EU energy base away from the risk of another Russian war changing the cost landscape overnight.
The EU will also push industry to buy Power Purchase Agreements and will remove some legal obstacles which have slowed this in Europe. The PPA has been the friend of renewables throughout the last ten years, with enterprises happy to buy cheap renewables energy to use first and forecast and then take the remainder of industrial energy from the grid, rather than all of it. The same type of contracts should now also be applied to hydro and nuclear as well, where they are subsidized to reach low enough prices.
The slow shift to bringing wholesale trading deadlines closer to real-time, will also be encouraged.
All of these rules, in long legal documents, must be argued over in the European Parliament, but Rethink Energy believes this set of changes will sail through, and become EU law in short order.
One key detail will be whether or not existing renewables deals, which benefit from subsidies under older contracts, will be obliged to accept a new extended contract for difference.