In recent weeks, the European Parliament took a significant step by passing a reform proposal for the EU electricity marketThis decision can be seen as a reaction to the ongoing surge in electricity prices that has become prevalent in recent yearsMember states of the European Union, along with EU institutions, are optimistic that this reform will help control the volatility in electricity pricing, ensuring stability for both households and industrial consumersNonetheless, it is important to note that while the European Parliament has given its approval, the reform still requires scrutiny from individual EU member states, which may introduce challenges in the implementation process.

Since the beginning of 2022, a drastic reduction in natural gas supplies from Russia to Europe has precipitated soaring electricity prices across the continent, negatively impacting both personal livelihoods and industrial stability

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In an attempt to address this pressing issue, the EU’s decision-making bodies have begun examining ways to reform the electricity marketOn one hand, the EU is intent on ensuring a stable supply of electricity – in other words, providing secure, reliable, and efficient energy to consumersOn the other hand, there is an urgent need to diversify energy sources, to encourage continued investment in clean energy, and to adapt the electricity market to meet the long-term demands of Europe’s energy transition.

On October 17, 2023, the Council of the EU reached a consensus on the draft amendments and started negotiations with the European ParliamentThe amendments propose a deliberate shift away from the electricity market's reliance on fossil fuels, aiming to "untether" electricity prices from those of fossil fuel sourcesTo facilitate this, several measures have been introduced: first, fostering competition by encouraging new electricity generation companies to enter the market, thereby enriching the supply options and driving down prices

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Second, promoting a market-based trading mechanism for renewable energy, including initiatives like "green certificates" and trading platforms to balance the production and consumption of renewable energyTo ensure sustainable returns from renewable energy projects, the reform also recommends that newly constructed wind, solar, geothermal, hydro, and nuclear energy projects adopt two-way contracts for differenceThird, enhancing cross-border electricity interconnections is essential, which can be achieved through the development of transnational transmission lines within Europe to improve stability in electricity supplyLastly, the proposed reform aims to strengthen price regulation within the EU energy market to protect consumers’ interests.

Despite the intention behind the EU’s electricity market reform to resolve the intertwining issues of natural gas and electricity prices, the final proposal endorsed by the Council of the EU may appear somewhat conservative

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Rather than an explicit requirement to sever the link between electricity and natural gas prices, it instead opts for a combination of purchasing agreements, forward contracts, and two-way contracts for difference as stabilization tools in the electricity market.

The brewing electricity market reform has seen key contributions from France and Germany, often referred to as the EU’s primary enginesFrance, possessing 56 nuclear reactors, has been spearheading discussions aimed at dismantling the existing monopolistic structures in power supply and introducing new competitive mechanismsThe French President, Emmanuel Macron, advocates for the unique role of nuclear power in future European electricity supply, proposing its inclusion in two-way contracts for difference to revitalize France's nuclear energy supply system, an essential aspect of the country's quest for energy independence and reindustrialization

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Conversely, Germany expressed significant concerns over this strategy, fearing that it would allow France to "monopolize policy benefits" and jeopardize Germany's status as a "European industrial champion." However, with the European Parliament's approval of the electricity market reform, it is clear that Germany has ultimately reconciled its differences on this matterBoth French and German officials have publicly stated that introducing competition from nuclear energy will alleviate the burden of electricity costs on European citizens and, in the long term, bolster Europe's overall competitiveness.

Even though the European Parliament has passed the electricity market reform proposal, several significant challenges still lingerFirstly, achieving consensus among member states on the reforms will be no easy taskThe diversity within the EU — characterized by different energy policies, energy structures, and levels of economic development — complicates the prospect of fully integrating and harmonizing the electricity market across the region

Balancing national energy security with unified and competitive electricity markets is one of the pressing dilemmas facing the proposed reformsSecondly, improving cross-border electricity connectivity is not a swift endeavorWhile the internal market within the EU is relatively matured, interconnection within the electricity sector is impinged by factors such as technological limitations, monopolistic practices, varied economic conditions, and differing national policiesOvercoming these barriers to facilitate optimal allocation of electricity resources within the EU will require further compromise among member states.

Lastly, the intricate relationship between energy security and market supply-demand dynamics will likely prove challengingThe fundamental aim of reforming the EU electricity market was to reduce reliance on fossil fuels; however, achieving decarbonization entails costs and necessitates substantial investments in new infrastructure, such as energy storage systems and electricity transport lines