Contracts for difference (CfDs) proposed by the European Commission as part of the European power market reform should be designed in a way to avoid market distortions, Paris-based power exchange Epex Spot representatives have told Argus.
Epex Spot this week, in a joint statement with European energy exchange EEX, has urged the EU Council and EU Parliament to elaborate on the design principles for two-way CfDs, mentioned in the latest European market design proposal, and to include provisions preventing distortive effects on the electricity forward markets and excessive costs for consumers.
This comes after European energy commissioner Kadri Simson earlier this month specified that the commission would use existing state aid rules in order to protect the EU's single market and avoid "undue distortion" from CfDs.
But state-backed CfDs leave little or no incentive to still trade in the forward market, as they de-risk the investment, according to the exchange. "Exclusivity of state-backed CfDs would mean moving away from the paradigm of market-based integration of renewables, instead focusing on skimming of profits and limiting revenues of renewable developers," Epex Spot told Argus today. The exchange also deplored a possibility that price signals stemming from forward power markets could be diluted, depending on the volumes subject to CfDs, while those signals are critical to bring more renewables into the market. In addition, the need for concluding power purchase agreements (PPAs) could be significantly reduced, it added.
"The only CfDs that do not distort the futures market are futures and PPAs," Epex Spot said, reminding the importance of a clear definition of the scope of eligible generation, contract duration, auction design, reference price, level of the strike price and the price corridor.
Epex Spot's scepticism echoes concerns previously expressed by other market participants, including European association of transmission system operators Entso-E and European energy traders association Efet, about the reform and on the potentially adverse effects of CfDs.
