Towards efficient european hybrid electricity markets: the european commission’s acceptance of long-term contracts to ensure investment in low carbon generation

Authors

Sara Modolo, Jan Horst Keppler

Abstract

Term Contracts (LTC) assume an increasingly important role in European electricity markets as they advance towards comprehensive decarbonisation while ensuring the security of electricity and energy supplies. This follows the recognition that the energyonly markets (EOM) based on short-term marginal cost pricing, which were favoured by the European Commission (EC) and European member countries after the energy market liberalisation of the late 1990s, regularly fail to incentivize adequate levels of investment in low-carbon generation. Previously viewed with caution due to potential anti-competitive effects, long-term contracts are now recognized for their capacity to provide price and revenue stability, key factors in facilitating large-scale investment in capitalintensive low carbon technologies. This paper analyses the gradual evolution of the views on electricity market design at the level of the European Commission. Shifting from a predominantly competition-focused perspective to a broader view, recent regulatory provisions now explicitly include long-term contracts. Notably, mechanisms such as Contracts for Difference (CFD) and Power Purchase Agreements (PPA) have become central to supporting investment in renewable energy and nuclear energy, as they provide partial or complete hedges against price and quantity risks and thus ensure more predictable revenue streams. Recent EU regulations, including Directive EU/2024/1711 and Regulation EU/2024/1747, embed long-term contracts into the EU’s regulatory framework, reflecting a more nuanced stance that balances a concern for market competition with a need for long-term investment in clean energy. Tracing this regulatory evolution, the paper also sheds light on the likely future trajectory of EU energy market governance that is likely to preserve a central role for different forms of long-term contracts in the simultaneous pursuit of market efficiency, energy security, and climate commitments.