EU Plans Boost for Fixed-Price Electricity Contracts - Draft

The European Union is set to propose rules to support the expansion of contracts that pay generators a fixed price for their electricity, in a bid to shield consumers from volatile price swings in energy markets, a draft proposal showed.

The European Commission pledged last year to reform the EU's electricity market rules, after record-high gas prices - caused by cuts to Russian gas flows - sent power prices soaring for European companies and citizens.

A draft of the Commission's proposal to "improve" the EU power market design, seen by Reuters on Tuesday, stopped short of the deep market reform that some EU countries have called for - suggesting instead limited changes to encourage more fixed-price contracts alongside existing short-term energy markets.

For example, if EU countries want to support new investments in wind, solar, geothermal, hydropower and nuclear electricity, this should take the form of a two-way contract for difference (CfD) or an equivalent contract, the draft said.

Two-way CfDs are a type of contract that offer generators a fixed "strike price" for their electricity, regardless of the price in short-term energy markets.

The aim is to provide a stable revenue stream to project investors, and help make consumers' energy bills less volatile. Restricting the support to renewable and low-carbon electricity aims to also speed up Europe's shift away from fossil fuel-based electricity.

In a CfD, if the market price for electricity is below the CfD strike price, then the government pays the generator the difference in price. If the market price is above the CfD strike price, then the extra revenue the generator receives should be handed out to final electricity consumers, the draft EU document said.

It said countries should also make sure that power purchase agreements (PPA) are available - another type of long-term contract to directly buy electricity from a generator.

Countries must ensure that instruments including guarantee schemes are in place to reduce the financial risks of entering into PPAs, the draft said. These guarantees should not support contracts to buy electricity from fossil fuel-based generators, it said.

(, March 7, 2023)

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