The European Union’s 20-year-old electricity market is heading for a revamp.
The market suffered its worst year on record in 2022 after gas prices spiralled out of control and pushed electricity bills to unsustainable levels, bringing enormous financial distress to European households and companies.
The upheaval was blamed on Russia’s invasion of Ukraine and the Kremlin’s manipulation of energy supplies, which created widespread volatility and rampant speculation.
Although prices have since then gone down, the crisis is still latent and plenty of question marks remain on the EU’s ability to cope with the next winter.
To avoid a repeat of the 2022 chaos, the European Commission has proposed a reform of the EU electricity market and asked legislators to treat the file as a top priority.
The reform, however, is not the fundamental overhaul that some countries, like France and Spain, have demanded and instead focuses on targeted changes to the current rules.
One of the main elements in the draft plan is the so-called contract for difference (CfD), a type of long-term contract that is seen as underdeveloped across the bloc.
By comparison, in the United Kingdom, CfDs have been allocated since 2014.
Unlike a commercial deal, a contract for difference is signed between an electricity producer and a state authority for a period of up to 15 years. The signatories negotiate a range – or corridor – within which electricity prices can freely fluctuate.
But here’s where things get more interesting: if market prices fall below the corridor, the state is required to compensate the producer, effectively paying out the commercial losses.
If, on the other hand, market prices exceed the corridor, the state is entitled to capture the surplus revenues earned by the producer and use the extra cash to support households and companies.
This is why the European Commission refers to these contracts for difference as “two-way” because they work both when prices go up and when prices go down.
Source: yahoo
