In a significant development, the European Union has reached a consensus on two pivotal legislative initiatives, signaling a comprehensive reform in the electricity market and the adoption of a standardized supply chain law. Negotiations between representatives from EU member states and the European Parliament culminated in an agreement on Thursday morning.
The proposed electricity market restructuring aims to enhance consumer protection in Europe, shielding them from potential surges in electricity prices. Beyond price stability, the reforms are designed to incentivize the expansion of renewable energy sources. Formal confirmation of the compromise is pending approval from both the EU Parliament and individual member states.
The push for reform gained momentum in response to last year's exorbitant electricity prices, primarily driven by soaring gas prices amid the Russian war of aggression on Ukraine. Notably, disruptions in around half of France's nuclear power plants also contributed to the crisis.
The agreement is grounded in a legislative proposal put forth by the EU Commission in the spring. The proposal advocates for empowering individuals with the right to opt for fixed-price or dynamic-price contracts. A pivotal aspect of the reform, as per member states' preferences, involves establishing new long-term contracts known as "contracts for difference" between governments and electricity producers. These contracts assure electricity producers a minimum price for their output, fostering investments in renewable energies and nuclear power. In cases where the market price falls below the agreed-upon threshold, the state intervenes to cover the shortfall, while any surplus contributes to state revenues. The overarching goal is to stimulate domestic production of clean electricity.
Fundamentally, the EU electricity market will persist in functioning based on the merit order principle, determining the order of power plant deployment on the electricity exchange. The principle prioritizes the use of cost-effective power plants, such as wind turbines, with the ultimate price hinging on the last, often more expensive, power plant activated--typically gas power plants.
In tandem with the electricity market reform, the EU is set to implement a supply chain law holding large companies accountable for benefiting from child or forced labor outside the EU. Companies are obligated to present plans ensuring alignment with the goals of the Paris Climate Agreement. Instances of human rights violations within these companies' supply chains can be litigated before the European Court of Human Rights.
Anna Cavazzini, Chairwoman of the Internal Market Committee in the EU Parliament, hailed the development as a positive step for human rights. However, she expressed a desire for even more stringent regulations pertaining to climate and environmental protection. Cavazzini underscored that the EU supply chain law surpasses its German counterpart, covering a broader spectrum of companies.
While Germany already has a supply chain law in effect since the beginning of the year, it now needs adjustment to align with the newly adopted EU regulations. The existing German law applies to companies with over 3,000 employees, whereas the EU directive lowers the threshold to companies with more than 250 employees. Additionally, the German law only considers direct suppliers, while the EU-wide directive encompasses the entire supply chain.
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