Electricity market reform and the gathering CfD storm
(EurActiv, 19 Sep 2023) The current marginal pricing system for electricity no longer works when moving from mostly fossil generation to mostly renewable generation and is likely to cause price crashes, writes Mike Parr. Unfortunately, the expected conversion to Contracts for Difference (CfDs) will only make things worse, he argues.
Mike Parr is director of PWR, a UK-based company providing market research and technical support in the field of renewables and energy efficiency.
The current trajectory for EU electricity market reform (EMR) is to retain the marginal pricing system by which wholesale electricity prices are defined whilst mandating a mixture of contract for difference (CFD) and power purchase agreements (PPAs) for all new renewable projects.
However, concerns have been raised on the medium and longer-term consequences of taking this route. Furthermore, member states such as France, unhappy with the slow progress of EMR, are threatening to go it alone on market reform.
Member states and CfDs
Some EU member states see CfDs as a source of revenue. Their assumption is that CfD prices will be mostly lower than wholesale electricity prices, allowing them to pocket the difference between the wholesale price and the CfD price paid to renewable projects.
The rating agency Standard and Poor (S&P) and the European Commission are somewhat sceptical that CfDs will deliver revenues to EU member states. In short, as renewables funded by CfDs grow, this, in turn, will cause an increase in wholesale price crashes.