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Electricity Market Design Reform
After Russia’s invasion of Ukraine caused severe volatility and spikes in the EU’s energy prices in 2022, it became clear that the European electricity market, as has been drawn up in the previous decades, must be redesigned. In March 2023, the Commission presented its proposal on the redesign, which was adopted in May of 2024. As part of the package, the revision of the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) was also adopted in March 2024. T
The updated EMD concerned a large scope of regulatory elements, aiming to decouple the electricity market from volatile fossil fuel prices to make electricity more affordable to consumers, increase security of supply and enhance the roll-out of Renewable Energy Sources. It puts the consumer at the centre of the clean energy transition, enabling active participation, with a strong framework for consumer protection. The rules allow more flexibility to accommodate the increasing share of renewable energy in the grid and contribute to the creation of green jobs and growth. Finally, the reform lays out the conditions under which an energy crisis can be declared by the Council.
The new EMD has introduced two-way contract of difference or equivalent schemes, which will apply to new power-generating facilities based on wind/PV/geothermal, hydropower without reservoir and nuclear energy. These schemes can come into force after three years, while the revenues generated will be redistributed towards final consumers.
Complementarily, the EMD has introduced provisions to support the implementation of PPAs: On this, the ACER is tasked to give an assessment on the PPA market and the creation of standardised PPAs contracts to streamline PPAs creation, as well as a demand aggregation for PPAs to make them more accessible to energy demand and SMEs.
Flexibility now has become an instrumental element of the EMD, designed to incentivize investments in non-fossil flexible resources, like energy storage and demand response, to help integrate more renewable energy into the grid. These schemes provide payments for the capacity of these resources, helping to address flexibility needs and achieve national objectives for increasing non-fossil flexibility.
Finally, security of supply is another very important aspect tackled by this piece of legislation, and the Commission has published a new report on the current process for approving capacity mechanisms in the EU (COM/2025/65). Indeed, the EMD highlights how capacity mechanisms must be deployed and streamlined to incentivise the roll-out of capacity resources (e.g. generators, demand response, storage units) to ensure security of electricity supply.
Additionally, it includes mandatory regulated last-resort tariffs to tackle energy poverty in Europe that expands also to SMEs.
What’s in it for hydrogen?
The reformed EMD lays the groundwork for the decarbonisation, financial stability, and support of the massive roll-out of RES which consequently enables the availability of abundant clean energy sources to produce clean hydrogen. An increase in RES also leads to an increase in flexibility needs to balance the periods of over and under generation of Variable Renewable Energy Sources – and hydrogen can provide these flexibility needs through two avenues: operational flexibility by adapting to load needs (by ramping up and down) and storage-based flexibility (by storing surplus renewable energy and dispatching it when the energy system needs it: low RES generation and low adequacy needs).
In this regard, the EMD will establish national objectives for flexibility based on the needs across different timeframes (short term, monthly and seasonal). For that, ENTSO-E has drafted the Flexibility Needs Assessment Methodology. Potentially, this will be followed by a Union Strategy on flexibility carried out by the Commission. Based on these National Objectives, Member States will include new non-fossil flexibility schemes to support energy storage technologies and demand response tools, which will provide investment signals and financial support to Hydrogen to power facilities – if applied correctly.
Additionally, the new EMD also aims to streamline capacity mechanisms and include certain environmental criteria – while hydrogen can participate in these markets, still more provisions to incentivise non-fossil technologies for capacity are still to be studied as most remuneration schemes are directed towards fossil fuel technologies. Hydrogen can be a key technology in participating in capacity mechanisms, given that it is the most technologically ready and economically efficient option to provide clean dispatchable technology in the long term. Therefore, capacity mechanisms should be a way to finance hydrogen as an additional resource.
Indeed, the new EMD sets the EU on a path to a more integrated energy system, where the interplay between renewable sources and hydrogen will be key to ensure sustainable, reliant, and affordable energy for European industry and its citizens. The inclusion of flexibility targets and the promotion of non-fossil flexibility support schemes in the new market design can help the decarbonisation and security of supply of the energy system. Indeed, hydrogen’s ability to provide essential flexibility, long-duration storage at scale and security of supply services in the power sector are pivotal in the transition to a system dominated by renewable energy.
Links to legislation and further reading
Report and proposals on streamlining procedures for capacity mechanisms
