Spain proposes reform of Europe's electricity market

The Spanish government said on Tuesday that it has a solution for how to fix Europe’s volatile electricity market and will send its proposal to Brussels for consideration before the European Commission (EC) comes up its own reform in March.

The government believes that the market system, being designed in 1998, is not equipped to cope with current volatility nor does it reflect the real average cost of power generation and the low cost of renewables. It said it came up with a new mechanism that can be adapted to the needs of each country.

Its solution is to separate the most expensive item in Europe’s power mix -- natural gas -- from clean electricity producers, such as renewables, hydro and nuclear energy, and promote forward contracts.

The short-term intraday and day-ahead markets would continue to operate as they do now and be complemented by the long-term market. Another option in the proposed reform includes segregating power generators by technology. Renewables, nuclear and hydro would be on one side, paid based on forward contracts for producing electricity. Combined-cycle gas plants, energy storage and demand-side management would form the capacity market and be paid for firm capacity and availability, according to the Spanish proposal.

In this scenario, contracts for difference (CfDs) for renewables would incorporate a fixed price for the lifetime of the power plant, while prices for nuclear and hydropower generation would be regulated under their CfDs. The upside of this design is that power generators would not be able to earn windfall profits, while the capacity market would facilitate investments in energy storage, the government said.

While waiting for the market reform, the Spanish government said that it will ask the EC for approval to extend the cap on the price of gas for power production it introduced alongside Portugal in May last year.

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