The European Union’s approach to the energy transition is undergoing a structural shift. This post examines the evolving landscape of EU energy policy, the role of Power Purchase Agreements (PPAs), the 2024 Electricity Market Design (EMD) Reform, and the persistent challenge of financing a secure, decarbonised future.
Redefining Energy Security and the Trilemma
Energy security was once understood narrowly: maintain supply and protect consumers against price volatility. The concept has since expanded to encompass resilience against variable renewable deployment, large-scale storage integration, and geopolitical shocks. Today, security is a function of both availability and affordability, and serves as a core determinant of geopolitical stability and economic growth.
To navigate these competing priorities, the World Energy Council’s Energy Trilemma provides a useful heuristic. The framework posits that a credible energy policy must balance three competing dimensions: energy security, energy equity (which encompasses both affordability and equitable access), and environmental sustainability. These goals rarely align, and policy choices typically involve trade-offs. Pursuing decarbonisation without attention to security can leave a system exposed to import shocks; pursuing security without attention to equity can produce a transition that voters and energy-intensive industries will not sustain.
Three Eras of EU Energy Policy
EU energy law can be read through three historical phases. During the Liberal Era, which preceded 2008, market liberalisation drove policy and the state acted largely as an observer; efficient markets, the logic went, would deliver security as a by-product. The Decarbonisation Era, running from 2008 to 2022, shifted the focus toward climate action. The state assumed the role of enabler and subsidiser, with security treated as a useful side effect of green initiatives. The Post-2022 Crisis Era, triggered by Russia’s war against Ukraine and the resulting gas shock, treats energy security as the absolute primary driver. The state now intervenes actively as a strategist, pursuing what the REPowerEU plan calls “open strategic autonomy”. The current logic is: The energy transition and energy security are mutually reinforcing, not competing objectives.
The Two-Way Feedback Loop and the Cost of Capital
Current policy operates as a two-way feedback loop. Security investments (grids and system flexibility) must accelerate decarbonisation. Decarbonisation investments (renewables and storage) must reinforce security of supply. The crux is the rapid and efficient deployment of renewables, which reduces import dependence and boosts security. Yet this transition demands massive capital expenditure (CAPEX) and substantial firm or baseload capacity from storage, nuclear power, and liquefied natural gas (LNG).
This feedback loop relies entirely on access to finance, which depends in turn on income stability. In project finance, the principal barrier is the Weighted Average Cost of Capital (WACC), which rises sharply in high-interest-rate environments. Lowering WACC requires predictable cash flows. This is precisely what the 2024 EMD Reform sets out to deliver.
The 2024 EMD Reform: A Financial Fix
The 2024 Reform (comprising Directive (EU) 2024/1711 and Regulation (EU) 2024/1747) is best understood as a financial reform rather than a traditional energy systems reform. Its objective is to separate electricity prices from fossil fuel prices, particularly gas, by combining contractual flexibility with robust public safeguards.
To lower WACC, the reform creates predictable cash flows that reduce the risk premium demanded by lenders. It does so through three principal channels. First, regional forward markets, established through Regional Virtual Hubs. Second, Contracts for Difference (CfDs), which stabilise prices via state-backed guarantees: the reform requires two-way CfDs with built-in safeguards, transferring price-stabilisation risk to the state in exchange for symmetric protection. Third, supported PPAs, which hedge market risk through private contracts and offer partial or full price hedging through risk-sharing between buyers and sellers.
The overarching goal is to promote PPAs, facilitate access through public guarantee schemes, and reduce exposure to credit risks. The reform also explicitly targets grid investments to coordinate variable generation and electrified demand within and across borders.
Under the 2024 Reform, PPAs can be guaranteed, but implementation parameters are strict. Market orientation must not be severed. PPA guarantee facilities are publicly backed tools designed to price credit and volume risks, allowing private capital to flow where needed; they are not subsidies. Access is conditional on “additionality”: eligibility is limited to new capacity, new-builds, or repowering projects in constrained zones to ensure tangible grid impact.
To prevent market distortion, the reform deploys moral safeguards and loss-sharing mechanisms. Risk-sharing is structured so that the state does not bear the entire downside. A clawback mechanism recovers revenue above a strike price, and recovered funds support electricity consumers.
Consumer protection has become a major policy pillar. Under the reformed framework, a regional or Union-wide electricity crisis declaration is now possible, opening the door to regulated prices and below-cost supplier compensation in defined circumstances.
Remaining Regulatory Gaps
The reform is a meaningful step forward, but critical gaps remain.
Small and medium-sized enterprises (SMEs) and energy-intensive industries are largely left behind. PPA bankability typically requires investment-grade offtakers, which excludes many otherwise suitable consumers. Current schemes are still too complex and expensive for them to access. The EFET Corporate PPA template, endorsed by the European Federation of Energy Traders (EFET), has helped standardise contracts and reduce transaction costs, but it cannot resolve the underlying creditworthiness problem.
At the macroeconomic level, an aggressive push toward guaranteed public schemes risks crowding out forward hedging. If the spot market shrinks, private liquidity falls, ultimately undermining hedging itself.
Governance of domestic guarantee platforms remains fragmented, producing a patchwork of national rules rather than a unified market. Fragmentation makes cross-border Virtual PPAs (vPPAs) difficult to execute, and limits the very cross-border price convergence the internal energy market is meant to deliver. Coordination between PPAs and CfDs is incomplete, generating potential operational friction. And the physical constraint of the grid itself continues to limit what vPPAs can practically deliver.
A recent step addresses some of these gaps. On April 22, 2026, the European Commission published a Recommendation on removing barriers to the development of PPAs and other energy purchase agreements. It targets access for small buyers, guarantee design, accounting rules, and the treatment of guarantees of origin. Whether national authorities follow through will determine how the reform’s promise extends to the consumers and producers currently left at the margins.
As the EU shifts toward long-term, publicly supported contracts, the challenge will be to balance these new mechanisms with the traditional Target Model of unbundling, marginal pricing, and merit-order dispatch.
(Photo: Sophia Sideri)
