BRUSSELS - The European Union proposed reforms to Europe's electricity markets on Tuesday to shift to more long-term, fixed-price contracts to make consumers' bills less tied to volatile fossil fuel prices.

The European Commission pledged last year to reassess the power market rules after Russia cut gas supplies to Europe, leading to record-high energy prices and supply concerns.

EU countries and the European Parliament will now negotiate and approve the reforms. Here's what they include.

 

STABLE POWER PRICES

The aim is to leave consumers less exposed to short-term swings in fossil fuel prices and ensure increased low-cost renewable electricity generation translates into lower bills.

The Commission said countries should do that by using more long-term contracts that lock in fixed prices.

All public support for new investments in wind, solar, geothermal, hydropower and nuclear electricity, for example, must be provided via two-way contracts for difference (CfD).

CfDs offer generators a fixed "strike price" for their electricity, regardless of the price in short-term energy markets. If high market prices mean the generator receives extra revenue, the Commission said those proceeds would be shared among consumers.

The reforms would require countries to support power purchase agreements - another type of long-term contract where a consumer directly buys electricity from a generator - with state guarantees.

The proposal would also form virtual hubs that pool trading on forward electricity contracts in a large region - potentially multiple countries. The hope is that if forward markets are more liquid, suppliers will use them to hedge their long-term price exposure.

CUSHIONING CONSUMERS

The proposal would strengthen protections for consumers. For the first time, all EU countries would be obliged to protect vulnerable consumers from being cut off by electricity suppliers if they cannot pay their bills.

Billpayers would also gain the right to request a fixed-price contract from any large electricity supplier, to help them to avoid tariffs tied to volatile energy markets. Currently, EU consumers only have the legal right to request a variable price contract.

If energy prices spike to extreme levels, governments would also be able to temporarily fix the price of a share of consumers' and small businesses' electricity consumption, to tame their bills.

The Commission gave three options that would count as a price crisis allowing this intervention, including a more than 70% jump in consumers' electricity prices that are expected to persist for at least six months.

 

GREENER POWER MIX

Europe is attempting to integrate a growing share of renewable energy into its electricity system and shift away from fossil fuels.

The draft rules would allow power network operators to pay market participants to use less electricity or use stored power during periods of peak demand to help balance the grid. The aim is to gradually replace the role that gas power plants currently play in balancing power supply.

 

DEEPER REFORM

EU countries have disagreed on how much reform is needed.

Spain and Greece had previously called for deeper reform to how power prices are set - although such calls have cooled in recent months and a recent proposal by Madrid was aligned with the Commission's focus on boosting CfDs.

Currently, power prices in Europe are set by the running cost of the final power plant needed to meet overall demand. Often, that is a gas plant, so gas price spikes can send electricity prices soaring.

Germany, Denmark, Latvia and others had wanted to keep the price-setting system and make more limited tweaks.

They say Europe's existing power market has fostered years of lower power prices and helped avoid energy shortages - and that drastic change could scare off investors, putting at risk the hundreds of billions of euros in renewable energy investments Europe needs to meet its climate goals.

(Reporting by Kate Abnett; editing by Jane Merriman, Jason Neely and Josie Kao)