Navigating the Transition to Renewables in Eastern Europe

An Exploration of Electricity Market Reform and Price Signals

On 14 March 2023, the European Commission (EC) published a proposal to reform and improve the European Union (EU) electricity market design. The proposal encompasses mainly three areas of action:

  1. Protecting and empowering consumers from energy price volatility through fixed and dynamic price contracts, multiple contracts option, improved transparency and information, the opportunity to share renewable energy without the need of energy communities’ establishment, stabilization of energy supply by encouraging suppliers to hedge their exposure against high prices by using forward contracts with generators that can lock future prices;

2. Strengthening the stability and predictability of the energy industry through the optimization of short-term electricity markets, market access to more stable long-term contracts such as PPAs and CfDs, but also through liquidity enhancement in forward markets by introducing regional virtual hubs;

3. Stimulating investments in renewable energy sources and flexibility solutions by providing stable prices to consumers and reliable revenues to RES producers through PPAs and CfDs, designing capacity markets to provide low-carbon flexibility, implementing new support schemes and products for non-fossil flexibility such as demand response and storage, making connection capacity availability more transparent, and bringing trading deadlines closer to real time.

The primary goals of the EC legislative proposals are to optimize the electricity market design for a decarbonized energy system and to enhance affordability for consumers. This will require coordinated actions amongst Member States both at national and regional levels.

This paper assesses the current situation of the renewable energy market in Central and Eastern Europe (CEE) along with the inherent technical and economic challenges posed by the rapid deployment of renewable capacities. The marginal pricing (merit-order) mechanism remains a well-established and transparent way of determining prices in the short-term electricity markets in CEE, encouraging competition and innovation in the energy sector. The decline in wholesale electricity prices coupled with periodic price volatility signify that generation lacks flexibility, the demand side is inexistent or is not adequately responsive to pricing, or there is insufficient energy storage for arbitrage. Recent negative price signals highlight the need to invest in solutions and technologies to enhance system flexibility in the region.

Obviously, an increasing renewable-based power system requires customers to play a more active role in electricity markets through various mechanisms like dynamic tariffs, aggregators and demand shifting. In order to accelerate the integration of renewable energy sources, customers can engage in demand response actions and benefit from grid stability and electricity cost reduction at the same time. The CEE region definitely lacks a comprehensive regulatory framework that incorporates demand-side management, through which electricity markets can better protect customers from price volatility, ensure fair pricing, and foster an environment where consumers can make informed decisions about their energy consumption.

Nonetheless, energy market revenues alone are insufficient to attract the level of renewable energy investment required in CEE, due to the electricity price and investment recovery uncertainty, jeopardizing all the energy sources, not just the renewable ones. Therefore, long-term arrangements backed both by governments and private stakeholders are still necessary to de-risk the investment in low-carbon power generation in the region, providing long-term visibility for investors and keep financing costs low. However, it is important that support mechanisms do not significantly disrupt the operation of wholesale markets, but rather enable renewable energy sources to respond to price signals and encourage their involvement in the wholesale markets, particularly in the balancing markets.

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