Electricity (and Hydrogen) Market

Electricity (and hydrogen) market 2024: policy and regulatory developments

What a year! 2024 has been quite prolific judging by the amount of major policy and regulatory developments. Summer 2024 alone was marked by the adoption of the several major legal acts,

1. updated Electricity Regulation and Directive, and
2. the Hydrogen and Decarbonised Gases Package

The Electricity Regulation and Directive

Baby steps instead of a giant electricity market overhaul. The Electricity Regulation and Directive were updated following the Electricity Market Design Reform, which in turn was a result of the one-of-a-kind energy crisis we experienced in 2022-23. Despite for some calls for a major overhaul of the European electricity market design, the changes covered in the two documents were much less ambitious than what most feared/hoped for. In general, the burn of sky-high electricity prices is vividly felt in the updated text that places a strong focus on energy affordability & consumer protection, strengthening of RES expansion (incl. infrastructure) and of security of supply.

Just to highlight the main points:

• Strengthening of the EU PPA markets and the establishment of CfDs as the default method of RES support, thus promoting a better integration of RES into wholesale markets and signaling a shift from volume-at-all-cost to cost-efficient integration. This is also seen as a way to close the feedback loop between consumer costs of RES support and passing benefits back to them. Participation in CfD schemes remains voluntary.
• Another way to stabilise prices and enable more robust long-term price signals is seen in the strengthening of long-term forward markets, whose liquidity beyond Y+1 timeframe is still very limited in most Member States. A new assessment of EU’s forward markets should be conducted by the EC by January 17, 2026, and consider measures to streamline them, e.g. introduction of regional virtual hubs to boost liquidity.
• Flexibility was for the first time specifically addressed and recognized as one of the energy system’s future needs. The Regulation now requires ENTSO-E and EU DSO Entity to develop a methodology (akin to the European Resource Adequacy Assessments) and for Member States to conduct regular national flexibility assessments. These can, among others, result into new non-fossil flexibility support schemes. For more details on this point, see our Working Paper on the FNA Methodology the draft methodology proposed by system operators published in November 2024.
• This edition of the Energy Regulation also opened the regulatory floodgates for capacity mechanisms in Europe , which are no longer required to be temporary whereas the rules for getting them approved by the European Commission will be simplified. On the other hand, the participation rules became stricter: existing capacity is no longer eligible for participation after July 1, 2025 if its annual emissions exceed 350kg CO2/kW/year – essentially banning all coal from participation.
• Peak shaving products are promoted as a way to allow system operators reduce electricity demand during peak hours in terms of price crises – subject to their NRA’s approval. Its procurement must follow transparent, competitive bidding processes with non-discriminatory criteria, allowing participation through aggregation and ensuring minimal environmental impact. Activation of the product must occur within specified time frames without affecting cross-zonal capacity or involving fossil fuel generation. Consumption reductions are measured against a pre-approved baseline methodology.
• Consumer protection measures from high price variability manifested themselves predominantly in the updated Directive, namely in two ways: 1. Entitlement to “fixed-term, fixed-price supply contracts” - unless derogations apply; 2. Declaration of an electricity price crisis (Art. 66a): The Council, based on a Commission proposal, may declare a regional or EU-wide electricity price crisis if wholesale prices exceed 2.5 times the five-year average (at least €180/MWh) for six months and retail prices rise sharply by 70% for three months, with the crisis declaration valid for up to one year and extendable annually. In this period, Member States may introduce “targeted public interventions in price setting for the supply of electricity”. This last point creates both a lot of room for interpretation and for implementing wide-reaching measures for future market intervention.

The Hydrogen and Decarbonised Gases Market Package

The Hydrogen Package is the first set of legal acts creating a comprehensive framework for the nascent hydrogen sector. For some logical reasons, a lot of inspiration was taken from the regulatory framework for gas (addressed in the same documents). First and foremost, it creates new roles, those of hydrogen transmission and distribution network operators (HTNOs and HDNOs), as well as gives a mandate for a new international entity,ENNOH (European Network of Network Operators for Hydrogen). This new counterpart of ENTSO-E and ENTSO-G submitted its statutes to the EC end of 2024 and is expected to be officially founded in the first half of 2025. Together they will be tasked with integrated infrastructure planning for the 3 sectors and ENNOH will be responsible for preparing its hydrogen TYNDPs on a biannual basis.

What are other cornerstones of the Hydrogen Package?

The Regulation mandates both vertical and horizontal unbundling of HTNOs, akin to gas and electricity, with leaner rules applicable to HDNOs. Among other things, this is also meant to avoid cross-subsidization between sectors and clear cost allocation. January 1, 2033 is a key date from many perspectives:

• By then, all hydrogen networks should be organized as entry-exit systems (i.e. point-to-point nominations no longer allowed)
• From 2033 HTNOs and HDNOs will be responsible for balancing their networks – with balancing rules being market-based.
• HNOs will also have to comply with so-called regulated third-party access (TPA), that is, based on regulated access tariffs (negotiated TPA possible before).

In order to avoid an excessive burden of the costs of new hydrogen infrastructure on the first movers, the Regulation foresees an intertemporal cost allocation mechanism. MSs are also allowed to use the State Guarantee to cover part of the HNOs’ risk. One – and so far the only – example for the implementation of this approach is observed in Germany that inaugurated its ambitious Kernnetz (Core network) project last year. (More on Kernnetz in my previous post).

Similar to electricity and gas, it is the EU’s ambition to facilitate European integration of future hydrogen networks and markets. With that in mind,NRAs of directly connected Member States may agree to “merge adjacent entry-exit systems with a view to enable a full or partial regional integration where tariffs can be abolished at the interconnection points between the concerning entry-exit systems” and approve a common tariff for the whole N-X area. This is, however, only an option and biggest questions remain exactly from the point of view of future cross-border integration.

What else?

In May 2024, the second edition of REMIT (Regulation of Wholesale Energy Market Integrity and Transparency)went into force. In broad terms, REMIT covers measures enabling market surveillance and preventing market manipulation or abuse. Notably, the reform significantly expands REMIT’s scope. For instance, among technologies, the requirements now also apply to energy storage. Among markets, REMIT now also applies to financial instruments and balancing markets while the surveillance of algo trading has been intensified.

The reform further enhances ACER’s investigative and enforcement capabilities. It now has cross-border investigatory powers, complementing national regulators, while enforcement remains primarily at the Member State level. ACER can impose fines for non-compliance in specific cases and is tasked with approving and withdrawing authorisations for Inside Information Platforms (IIPs) and Registered Reporting Mechanisms (RRMs). Additionally, ACER will develop a centralized platform for accessing and managing EU wholesale energy market data. 

The draft Network Code on Demand Response (NC DR) was submitted by ENTSO-E and EU DSO Entity for review in March 2024 while ACER is expected to submit its revised version to the Commission by March 2025.

In broad terms, NC DR provides guidelines and requirements specifically directed at facilitating market access and the contribution of distributed resources to power system stability and security at all network levels. Importantly, despite its name, it covers not only load but also distributed generation and storage facilities.

In terms of services, the NC DR primarily focuses on TSO and DSO congestion management, TSO and DSO voltage control and on balancing (EU DSO Entity and ENTSO-E, 2024). Interestingly, however, the provisions pertinent to balancing were suggested to be moves to the Electricity Balancing Guideline for the sake of consistency. The NC DR also considers the trading in the wholesale energy markets – albeit these are out of direct focus of the Code - while explicitly excluding capacity markets.

Key provisions include measures to improve TSO and DSO coordination for congestion management and voltage control.The Code supports local market solutions for congestion issues, encouraging market-based approaches to ensure efficiency and avoid distortions.Flexible connection agreements and optimized prequalification processes are addressed to help reduce barriers for system service providers. It also fosters digitalization and cybersecurity, streamlining procedures for participation in local and wholesale markets, with measures like “tables of equivalences” harmonizing prequalification requirements.

As to other measures to facilitate participation of distributed resources, the Code also includes multiple provisions aimed at streamlining approaches to aggregation of distributed assets and tackles associated responsibilities, such as balancing responsibility, and compensation mechanisms among independent aggregators and other parties. The role of metered data administrators can be assigned to different entities simultaneously. Interoperability and standardization are emphasized, particularly for switching controllable units between service providers, to facilitate provisions of flexibility services across the EU.

Deep-dive further into the topic of flexibility:

• New to the topic? Check out the Primer on Energy System Flexibility
• For people working in the regulatory environment, we recommend our Working Paper on Flexibility Needs Assessment