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EU's internal energy market:
Tough decisions and
a daunting agenda
Discussion Paper
Summer 2013
The authors in the Discussion Paper contribute in their personal
capacities, and their views do not necessarily reflect those of the
institutions they represent or of Friends of Europe and its board of
trustees.
Reproduction in whole or in part is permitted, providing that
full credit is given to Friends of Europe, and provided that any
such reproduction, whether in whole or in part, is not sold unless
incorporated in other works.
Friends of Europe is grateful for the financial support it received from
GDF Suez for the production of this discussion paper.
Publisher: Geert Cami
Project Director: Nathalie Furrer
Project Manager: Julie Bolle
Greening Europe Programme Adviser: Mike Scott
Design & Layout: Heini Järvinen
Cover image: woodleywonderworks
Table of contents
Foreword
2
Introduction
4
Europe’s unresolved energy versus climate policy
dilemma
David Buchan, Senior Research Fellow at the Oxford Institute for
Energy Studies
7
The many steps EU governments must still take if
the internal energy market is to work
Jerzy Buzek MEP
The ‘perfect storm’ threatening EU energy
Jean-François Cirelli, Vice Chairman and President of GDF Suez
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21
The EU’s internal energy market must be completed
with a clear strategy targeting global competitiveness
Fernand Felzinger, President of the International Federation of
Industrial Energy Consumers (IFIEC) Europe
26
The three ages of Europe’s single electricity market
Jean-Michel Glachant, Director of the European University
Institute’s Florence School of Regulation
33
Two solutions for Europe’s energy “trilemma”
Mike Lawn and Jonas Rooze, both of Bloomberg New
Energy Finance
39
A sustainable energy system needs efficient markets
Auke Lont, Chief Executive Officer of Statnett
45
Integrating energy and climate policy to drive
low-carbon growth in Europe
Johannes Meier and Arne Mogren, both of the European
Climate Foundation
What EU governments must do to get the internal
energy market right
Hans ten Berge, Secretary General of EURELECTRIC
“The stuff we have, a strong wind will blow it to
pieces”: Two decades behind schedule, we need to
re-think the single energy market
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59
Jorge Vasconcelos, Founder of the Council of European Energy Regulators 65
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Friends of Europe | Greening Europe
Foreword
Europe needs a well-functioning internal energy market to address its energy
and climate challenges. An open and well-connected market helps to keep
energy prices in check despite the ongoing rise in commodity prices. It is also
the best guarantee for securing energy supplies across the EU member states
and ensures easy entry of renewable energy into the market. All this is crucial for
creating growth and jobs in Europe and to mitigate climate change.
The leaders of EU governments are committed to making a fully functioning
internal market a reality. The European Council in May underlined the importance
of completing the market by the end of next year.
The EU has come a long way since the market liberalisation process started:
Europe in 2013 is no longer a patchwork of different national energy systems,
each with its own national company controlling the entire sector. Increasingly
integrated markets through independently operated networks make it easier
today for new players to enter the market and start competing with existing
companies, both on the wholesale and the retail levels. Consumers profit from
better prices, improved services and overall more choice. As the market matures,
prices become fairer and more reliable and can serve as important investment
signals.
We can also be optimistic about the additional beneficial effects of several recent
pieces of legislation, such as the energy infrastructure package, the regulation
on wholesale energy market integrity and transparency or the network code on
fairer access to gas pipelines.
But completing the internal market is a complex task, and a lot still needs to be
done. The first thing to do is to apply the rules that are already there and that
the member states have committed to. This may sound easy, but a good many
infringement cases are still being pursued against a large number of member
states for non-transposition or non-compliance of the 2nd and 3rd internal energy
market legislative packages.
EU's internal energy market: Tough decisions and a daunting agenda | 2013
A second priority relates to the need for infrastructure investment. Infrastructure
is the backbone of the whole energy system, and with energy islands still present
in parts of Europe, and without sufficient cross-border interconnection capacity
a truly European market simply won’t be possible. Giving investors the right
signals is therefore a priority. Fortunately, transmission and distribution assets
have characteristics that make them attractive to investors. Strict EU rules on
unbundling are needed for the market to function, but they also limit investment
possibilities. We have to be pragmatic and keep in mind the overall goal of
the unbundling rules rather than applying a strict interpretation of legal texts
to the letter. The Commission has therefore recently issued guidance on how
to interpret the law without discouraging the most badly needed investments
that are financial rather than strategic, whilst still ensuring the independent
management of networks.
A final challenge is finding the right balance between consumers’ needs and
our trust in what the liberalised markets can offer. All the member states need
to ensure secure supply of energy at affordable prices for their citizens, and
competitive prices for business. But public interventions – by setting regulated
prices, say – are certainly not the best way to tackle these issues. They frustrate
competition and ultimately they increase costs rather than keeping them down.
Europe today faces difficult economic challenges, but that is no excuse for
abandoning our ambitious energy policy objectives. On the contrary, a wellfunctioning energy market is key to getting out along the road to economic
recovery.
Philip Lowe
Director General for Energy
European Commission
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INTRODUCTION
Europe’s attempts to create a single energy market now stretch back over
more than 20 years; it’s been so long it’s an idea that’s in danger of answering a
question no longer being asked.
The internal energy market (IEM) was born out of two aims, explains Jorge
Vasconcelos, founder of the Council of European Energy Regulators; the first,
to liberalise electricity and natural gas markets, so consumers benefit from more
competitive prices and the second being the wider one of completing the single
market as a whole with the goal of achieving an ever closer union.
The potential economic benefits are enormous. A fully integrated electricity
market could save the EU up to €35bn a year by as soon as 2015, compared
with 2012, says the European Commission.
But since the beginning of attempts to bring Europe’s energy markets together,
the aims have evolved – not least that of including the decarbonising of the
European economy – so that the three strands of European energy policy are
now to improve competitiveness, security of supply and sustainability.
It’s possible today to see an energy market where all of these aspects have been
enhanced – not in Europe but in the U.S., where shale gas has cut energy costs,
energy imports and greenhouse gas emissions as utilities switch from coal to
gas. European Commission President José Manuel Barroso pointed out not long
ago that between 2005 and 2012 the price of gas for EU industrial companies
jumped by 35%, while their U.S. counterparts are paying 66% less than in 2005.
And electricity prices in Europe have risen by 38%, against a 4% drop in the U.S.
Jean-Michel Glachant of the Florence School of Regulation suggests that,
however imperfect, we have the basics of an integrated energy market, a point that
the European Climate Foundation’s Johannes Meier and Arne Mogren reinforce.
Yet although energy prices in Europe continue to soar, efforts to integrate
markets in the EU seem to have gone backwards, points out Hans ten Berge,
Eurelectric’s Secretary General.
Jerzy Buzek, the former Polish prime minister who has also been president of the
European Parliament, says that European countries’ energy markets are poorly
interconnected, fragmented and highly concentrated, while the compatibility of
national grids remains low. “The market is neither open nor competitive, and it
strongly favours the energy industry, disadvantaging consumers”, he warns.
These problems are exacerbated by the biggest economic crisis in the EU’s
history, the collapse of carbon prices in its Emissions Trading Scheme (ETS) and
the increasingly national focus on energy policies of the member states.
The ETS has “more or less collapsed, with the traded price of carbon too low
to change the behaviour of energy generators or consumers – because it has
proved all too responsive to the market and to the recession-induced fall in
energy demand,” says David Buchan of the Oxford Institute for Energy Studies.
And while some of our contributors, such as Meier and Mogren, argue that
“we need a robust carbon price in order to drive the long-term, low-carbon
investments that will enable us to decouple growth from fossil fuel consumption
and decarbonise the power sector”, Fernand Felzinger of the International
Federation of Industrial Energy Consumers (IFIEC) Europe believes that
“artificially increasing the CO2 price would reduce our chances of promoting a
global decarbonising tool, would further sap the EU’s competitiveness and would
send distorted signals to investors”.
Perhaps most worrying of all is what Jean-François Cirelli, Vice-Chairman and
President of GDF Suez, calls “the renationalisation of energy policies” which
“poses a very real threat to energy investment in Europe”. This trend is reflected
in part by the failure in many member states to implement market liberalisation
measures and through the introduction of policies that take no account of the
wider European market. “There’s an increasing tendency among member states
to implement policies that are distinctly different to those of the rest of the
EU, whether it is renewable energy support schemes, capacity remuneration
mechanisms or energy taxes and regulations on end-user prices,” warns Cirelli.
Hans ten Berge agrees, pointing to the example of Germany, which has unilaterally
embarked on its Energiewende policy, “while the UK has proposed an electricity market
reform whose measures effectively disregard the implications for other markets”.
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This increased national focus at exactly the time when a pan-European approach
is so important is complicating the task of integrating more renewable energy into
the system. There is a growing acknowledgement that capacity remuneration
mechanisms are essential if we are to have the back-up capacity to keep the
lights on when the wind isn’t blowing or the sun shining.
Mike Lawn and Jonas Rooze of Bloomberg New Energy Finance write that
such measures need to be coordinated at a European level. “National capacity
payments, while guaranteeing security of supply in each jurisdiction, discourage
further interconnection and suggest that countries do not feel they can rely on
their trading partners in the event of a shortfall in power supply.”
Part of the problem, they say, is that national subsidies for renewables, combined
with the recession, have now so distorted the wholesale energy market that
countries are worried about their ability to ensure future security of supply. The EU
needs to push hard to develop cross-border trading of power from renewables
to ensure that renewable capacity operates as efficiently as possible.
However, Felzinger argues that capacity payments should be “a last resort” and
the focus should instead be on demand management.
For this to happen, Europe needs a much stronger transmission and distribution
system – €600bn of the €1 trillion of investment needed between 2010 and 2020
must go to this sector, Commission President Barroso has emphasised.
Decarbonisation in the power sector will reduce flexible, fossil power generation,
and replace it with intermittent power generation like wind power. To maintain
security of supply, a much stronger European transmission grid will be needed,
along with greater flexibility in generation, consumption and storage systems.
Market prices will have to be an important driver for this change, explains
Statnett’s Auke Lont.
This is true, but what an EU-wide IEM really needs are harmonised policies to
create a level playing field for the free flow of electricity supplies across the EU.
With the EU’s member states appearing to pull apart rather than closer together,
the IEM could prove a source of much greater co-operation. Because it can
provide jobs, reduce energy costs for everyone and make it easier to meet EU
climate targets it’s a prize worth striving for. ●
Europe’s unresolved energy
versus climate policy dilemma
The creation of a pan-European energy market is being
undermined by member states’ reluctance to align their national
renewable energy policies, or to rely on their neighbours for
back-up capacity, writes David Buchan of the Oxford Institute for
Energy Studies.
David Buchan
Senior Research Fellow at the Oxford Institute for
Energy Studies
However great the disarray over Europe’s energy policy, there is still consensus
on the goal of a pan-European energy market. The whole point of European
Union membership is to provide greater scale for every sector of the economy,
and energy is no exception.
In a single market of 28 countries, scale can promote wider competition and
through competition convergence on the most efficient price level; scale provides
security through diversity of energy sources, and scale can also provide a critical
mass of low-carbon investment along with the political influence in the world to
make a difference in international climate negotiations.
But there is no longer a consensus that this geographical unification of Europe’s
national energy markets can be achieved through liberalisation – if Europe wants
at the same time to achieve its climate goals of emission reduction and promotion
of low carbon energy. This is because current climate policy is being carried out
through increasing doses of random national intervention in the energy market,
exactly what liberalisation was supposed to remove.
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So what are the alternatives? Drop Europe’s climate goals, or coordinate at
EU level the various national interventionist measures? For the moment, the
European Commission is pursuing the second option. It is producing guidelines
this summer that member states are being asked to follow in the design of
their national subsidies for renewable energy and back-up capacity. These
national renewable and capacity schemes – which are both key elements and
consequences of climate policy – create a real risk of segmenting, or rather resegmenting, the European energy market.
In 2009, the EU put together an energy and climate package of legislation
that appeared to be coherent. A third package of internal energy market rules
completed the legislative job of unbundling electricity and gas transmission
companies from distorting supplier interests so that they could act as common
carriers of energy for all. It strengthened the powers and independence (from
interference by their governments) of national regulators, and put them under
the pan-European umbrella of the Agency for Cooperation of Energy Regulators
(ACER). It gave to this body, and to the upgraded European organisations of
transmission system operators (TSOs), the task of developing blueprints for
building future pan-European grids and of agreeing on market designs and
network codes to integrate trading across borders.
On top of this foundation of traditional internal market liberalising and integration
measures, a series of ambitious climate targets were overlaid. Some of these
– such as mandatory national renewable targets – were clearly non-market in
character. The Commission sought to prevent these targets from leading to a
national carve-up of the energy market by proposing these targets could be met
through a pan-European system of trading renewable power certificates. The
European Council and Parliament rejected this in favour of maintaining national
renewable subsidy schemes.
The flagship climate instrument of the 2009 package, however, was the reformed
Emissions Trading System (ETS). Although non-market in the sense of setting an
arbitrary maximum cap on Europe’s carbon emissions, the ETS allows emitters
to use the market mechanism of carbon allowance trading to comply with the
cap. And back in 2009, the ETS instrument looked to be big enough and marketfriendly enough to make EU climate policy appear compatible with a liberalised
EU energy policy.
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But now the ETS has more or less collapsed, with the traded price of carbon
too low to change the behaviour of energy generators or consumers because
it has proved all too responsive to the market and to the recession-induced
fall in energy demand. As the ETS has declined in importance, the non-market
instruments of renewable targets and subsidies have grown in importance,
and have created worries about insufficient conventional power back-up that
EU policymakers simply hadn’t been able to foresee in 2009. And if EU climate
policymakers are in a mess, many of those making EU energy policy are in
revolt. Energy Commissioner Günther Oettinger now complains openly about
the subordination of energy policy to climate policy, in particular about policies
that have done little to reduce emissions and a lot to raise energy prices across
Europe.
Bearing in mind the key link between fossil fuels and greenhouse gases – energy
production accounts for around two-thirds of all greenhouse gases in terms of
CO2 equivalence – how did we get to this situation of near-divorce in Europe
between energy policy and climate policy?
“Many of those making EU energy policy are in revolt. Energy
Commissioner Günther Oettinger now complains openly about the
subordination of energy policy to climate policy, in particular about
policies that have done little to reduce emissions and a lot to raise
energy prices across Europe.”
One obvious reason is the recession. As well as effectively neutering the ETS
as an instrument for encouraging new low carbon energy, it has also helped
undermine the business case for investing in new relatively clean gas-powered
electricity generation. Virtually no new gas plants are being planned, and some
existing ones are being mothballed. The crisis in Europe’s financial sector has
led to most banks and many insurers pulling out of project finance in energy and
other infrastructure sectors to focus instead on re-building their capital ratios.
This has created a bigger financing gap than could ever be plugged by the €5bn
of EU budget money slated for energy infrastructure over the next seven years,
and by the European Investment Bank’s plan to use a modest amount of public
money for partnering private investors to try to revive project bonds.
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The economic downturn has, above all, made Europe’s governments and
public opinion neurotic about energy prices. These are being kept high by
such outside factors as Russia’s linkage of its gas price in Europe to a stillbuoyant global oil price, and by the upward push to liquefied natural gas prices
of strong Asian demand, along with the renewable energy subsidy costs borne
by Europe’s electricity consumers. The signs of this energy price neurosis are
everywhere. From Bulgaria, where energy price protests recently overturned
the government, to Spain which has retroactively (illegally, in terms of contract
law) reduced subsidies on existing renewable projects. In the UK, the public,
the media and the politicians are more focussed on the immediate issue of
“price gouging” by energy companies than the country’s looming shortfall in
electricity generation, while in Germany the powerful manufacturing sector
is complaining, with some exaggeration, that energy costs risk causing deindustrialisation, not just in Germany but throughout Europe. For all these
reasons, the focus of the European Council summit in May was on energy
policy and prices, and on replicating the U.S. shale gas revolution to bring gas
prices down. Europe’s energy price neurotics see shale gas as the EU’s getout-of-jail card.
“The building of more cross-border links, and negotiations on crossborder trading arrangements, are all in train, but are not moving as fast as
the deployment of renewables or capacity scheme planning.”
There is another reason why the ‘single marketeers’ who dominate EU energy
policymaking fret at climate policy. This reason is the disruptive effect of national
renewable energy programmes on EU policymakers’ attempts to integrate the
market – both in terms of the geographical unification of national energy sectors
and in terms of smoothly marrying conventional fossil fuels with renewables in the
commercial marketplace. The EU is on track to meet its overall target of achieving
an average of a 20% renewables share of total EU energy consumption by 2020.
But while some member states will struggle to meet national targets that require
a surge of new renewable energy deployment in the last few years running up to
2020, the biggest member state, Germany, is deploying renewable generation to
a spectacular – and destabilising – extent.
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Germany has doubled its renewable generation capacity – wind, solar, biomass
and small hydro – from less than 40 gigawatts (GW) in 2008 to more than 80 GW
today. At maximum potential, this is almost enough to meet peak German energy
demand of around 85GW. But most of this capacity (60 GW) is intermittent wind
and solar energy. For much of the time, this meets only around a quarter of
German demand, but occasionally it is enough to blow conventional generation
– gas, coal and what remains of nuclear – right out of the marketplace and
therefore out of the money.
There is therefore growing clamour by Germany’s providers of non-renewable
power for some form of capacity subsidy as payment for keeping plants ready as
standby generators. Some countries already have, or plan, capacity mechanisms,
although not all have the same motive as Germany. The UK has a far smaller
renewables sector than Germany, but plans to introduce a capacity market in
2014 because forced closure of dirty plant and years of dithering about new
plant have left it with an impending shortage of overall capacity, not just back-up.
But all capacity schemes in Europe tend to prefer national generators over foreign
ones, because most politicians would rather not rely on foreigners to keep their
country’s lights on. This combination of national renewable and capacity schemes
may deal the EU energy market a double blow – a blow to the energy sector’s
geographical unity because the schemes are national, and a blow to the normal
workings of a commercial marketplace because the schemes involve subsidies.
“Rather than the artificial completion of Europe’s energy market, it is more
important to aim for coherence of this market – in particular to reduce
the mismatch between fast-developing national renewable and capacity
schemes and slower-moving infrastructure construction.”
In this summer’s guidelines, the Commission is urging a Europeanisation, or at
least a regionalisation, of national renewable and capacity schemes. This would
involve neighbouring countries aligning the structure and level of their renewables
subsidies to reduce distortion of trade and investment in renewables, and so
allow neighbouring countries to participate in each other’s capacity schemes
where there’s sufficient interconnection between them. That’s the rub; the
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building of more cross-border links, and negotiations on cross-border trading
arrangements, are all in train, but are not moving as fast as the deployment of
renewables or capacity scheme planning.
The new EU infrastructure regulation, which streamlines national procedures for
permitting priority trans-frontier energy links will speed transmission construction,
especially of overhead electricity pylons that attract more public opposition than
buried gas pipelines. But the difference will not be dramatic. TSO organisations
in Europe are pumping out agreed network codes for electricity and gas as fast
as they can, but they struggle to meet the arbitrary deadlines set by politicians.
“We had been aiming to complete our work on network codes in 2015”, said a
TSO executive. “But when the European Council in February 2011 suddenly set
2014 as the deadline for completion of the internal energy market, we found that
in one day we had lost a year”.
“While some member states will struggle to meet national targets that
require a surge of new renewable energy deployment in the last few years
running up to 2020, the biggest member state, Germany, is deploying
renewable generation to a spectacular extent.”
Come next year, the European Council will find that it could no more command
completion of the internal energy market by that date than the Anglo-Saxon
King Canute could command the ocean tide to turn back. Yet next year will
see substantial achievement, in particular the coupling of day-ahead trading
for electricity in almost all the 28 national markets. The European Council will,
though, find its 2011 edict of an end to the isolation of all EU energy markets by
2015 unfulfilled; the three Baltic states will still be linked to the Russian electricity
and gas grid, partly because they cannot agree among themselves where and
how to build both a regional nuclear reactor and a regional terminal to receive
outside LNG supplies.
Rather than the artificial completion of Europe’s energy market, it is more
important to aim for coherence of this market – in particular to reduce the
mismatch between fast-developing national renewable and capacity schemes
and slower-moving infrastructure construction. One way to do this would be for
the European Commission to use its powers for policing state aids to say that
it will approve national capacity schemes only if the member state in question
devotes some money to improving interconnections with its neighbours.
Increased interconnection would increase the member state’s ability to draw on
its EU neighbours’ energy supply in case of emergency, and should also make
it easier for countries to compensate for supply/demand imbalances caused by
renewables. In doing this, the Commission would be taking a strong stand in
the area of security of supply, which is one of great political sensitivity to national
governments. Needless to say, the Commission now has to take a very strong
stand if it is to regain control over the forces of disintegration that it failed to
anticipate in 2009. ■
New realities in the global energy market
Source: European Commission
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The many steps EU governments
must still take if the internal
energy market is to work
A harmonised common energy market and coordinated investment
in infrastructure are vital if Europe is to return to growth and
remain competitive, writes former European Parliament President
Jerzy Buzek. For now, he cautions, the market is still fragmented
and opaque.
Jerzy Buzek MEP
Former President of the European Parliament (2009-2012)
and a former Prime Minister of Poland (1997-2001)
The prices of goods and services depend to a significant extent on the price of
energy. Excessive energy prices influence the overall competitive potential of an
economy, so 20 years after Bill Clinton's slogan "it’s the economy, stupid!" it is
plain that the real depth of his catchphrase is that it acknowledges a prospering
economy needs secure, stable and affordable energy. The U.S. seems to have
learned this lesson particularly well. Thanks to falling energy prices, American
industry is booming. The U.S. expects to achieve independence from oil and
gas imports by 2035. By as soon as 2015, the U.S. will be producing more gas
than Russia, and in 2017 it will be able to extract more energy resources than
Saudi Arabia.
In striking contrast, energy prices in the EU are among the highest in all OECD
countries and it is estimated that electricity costs in the European Union will
by 2035 be 50% higher than in the U.S. and three times higher than in China.
European industries pay four times more for gas than their American competitors.
The EU’s dependency on energy imports of 50% at present is projected to grow
by another 15 percentage points by 2030.
To be competitive, we should put all our efforts into reversing these trends.
To facilitate this, we need a harmonised common energy market that is open
and competitive, flexible, well-connected, well-regulated and transparent and
predictable. The EU’s internal energy market (IEM) should be seen as the most
important of all 12 of the fields in the Single Market Act II. It is after all, the single
market which along with innovation based on research and new technologies,
constitutes the most direct path towards a fully competitive Europe. And
increasing economic competitiveness is needed more than ever to get the EU
back on the path to the growth and to the creation of new jobs.
When I and Jacques Delors launched the European Energy Community (EEC)
initiative in May 2010, our purpose was to motivate EU member states to think
and act European on energy. The internal energy market is, with joint energy
purchases and joint funding of low-emission technologies, one of the three pillars
of the Community. Underlying the initiative was our belief that this sector should
be integrated and harmonised just like the other sectors covered by the 1992
single market programme.
The EU’s member states have confirmed their commitment to a single energy
market and at the European Council in February 2011 set a clear deadline for
creating it by 2014. There’s been some progress but there remains more to be
done than has so far been achieved.
Today's energy market in Europe is poorly interconnected. The compatibility
of national grids remains low, and that creates challenges like energy islands
and loop flows. The market is neither open nor competitive, and it strongly
favours the energy industry, disadvantaging consumers. The market is also
highly concentrated: single energy producers control over 50% of the markets
in as many as 11 member states and in six countries single producers are nearmonopolists, holding more than 80% of market share. This has a variety of
implications for all stakeholders, it affects the quality of services and results in
insufficient flexibility.
Energy prices are high, and in many cases on the increase, and this is a trend
that’s likely to persist. Prices differ heavily across Europe, so in the wholesale
trade gas in Tallinn can be 50% more expensive than in London, and electricity
can be almost 70% more expensive in Rome than in Tallinn. What’s more in these
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fragmented markets, energy prices are too often rigidly regulated by member
states. Before these energy markets can become fully competitive regulation
needs to benefit consumers and prevent energy poverty. At present, though, it all
too often imposes excessive limitations and doesn’t increase energy efficiency.
As well as being poorly interconnected and overpriced, the market isn’t
transparent enough, so consumers have too little understanding of their options.
They lack the tools to compare what is on offer from different suppliers, and they
find it hard to tell whether switching between providers gives them access to
cheaper and reliable energy supplies. In many member states switching simply
isn’t possible, and in others although such possibilities exist it often fails to result
in better prices or quality of service.
“Before these energy markets can become fully competitive regulation
needs to benefit consumers and prevent energy poverty. At present,
though, it all too often imposes excessive limitations and doesn’t
increase energy efficiency.”
Our goal must be to create an energy market that will be rebalanced to benefit
consumers, so they can better understand their rights and the market rules and
are therefore able to make decisions based on clear information. In short, where
both private and business consumers will be able to play the market game on
equal terms with the energy sector.
Individual consumers would benefit from a truly integrated market via the lower
prices resulting from increased competition. They would gain better control of their
energy costs and that could generate consumer savings of as much as €13bn
annually in the EU. The information available to consumers would be improved
and its availability increased. An EU-wide system of protecting consumer rights
could be put in place in which vulnerable consumers would be covered while the
IEM also made dispute resolution easier. For the business sector, a single market
in energy with half a billion consumers would mean new investment opportunities
and a strong incentive to maintain business activity in the EU and thus create
new jobs. Last but not least, it would offer opportunities for strengthening the
economy with high-end technological innovation.
Energy producers, for their part, stand to benefit from predictability, clear rules and
as equal and fair access to the single market. In a fully competitive environment,
they will be more strongly motivated to produce energy, and that in turn promises
a reduced dependence on non-EU sources as well as a stronger negotiation
position with external suppliers. All of that translates into greater energy security.
The growth we are striving for needs to be sustainable and environmentally
sensitive. By ensuring we have a more efficient means of producing, storing and
distributing energy, a competitive European market will, along with investments
in new technologies, make the sector more environmentally friendly. A welldesigned open and coherent energy market should also speed the way to a
low-emission economy.
In April of this year, I prepared a European Parliament report on the internal
energy market. Entitled "Making the Internal Energy Market Work", it pointed to
the actions that the EU’s institutions, member states and corporate sector must
undertake urgently to facilitate the single energy market. The main areas in the
report were:

A comprehensive harmonisation of the regulatory framework is needed;
the member states must fully transpose the Third Energy Package, yet
it is most disturbing that not even the second package has been fully
adopted by all EU countries. It will be impossible to build the third floor
of a house when the second has not been finished, and to ensure the
regulatory framework’s stability harmonised network codes and rules
must first be introduced.
Infrastructure investment must be better coordinated so as to ensure a
fully EU-wide system of connectivity that is cost-effective. We are going to
need €210bn just for the construction of new transmission networks for
electricity and gas. This all includes €140bn for electricity infrastructure,
intelligent networks, storage and high-voltage transmission networks;
€70bn for reverse flow interconnectors, gas infrastructure: storage,
gas pipelines and LNG terminals and €2.5bn for CO2 transporting
infrastructure. The total investment needed amounts to around €1 trillion.
It is worth stressing that the introduction of smart technologies must not
be restricted to automatic meter-reading only but must be completed
with dynamic, online grid management.
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It has to be acknowledged that certain aspects of infrastructure development
may not be commercially viable but are needed to provide stable energy supply.
Cross-border interconnectors are a key prerequisite for the internal energy
market and are also an excellent example of the community-wide investment in
energy infrastructure that could and should be funded with community resources.
The cuts made to the Connecting Europe Facility during the negotiations of the
2014-2020 Multiannual Financial Framework seem very likely to constrain key
investments of this sort. It is difficult to demand more Europe with less money.
To support future infrastructure investment, we ought to rethink our own
protectionist measures. EU member states must refrain from regulating their own
retail energy prices because all aspects of energy trading should be stable and
predictable. The gradual phasing out of subsidies to renewables means that after
2020 they will be at a substantially lower level than today. But at the same time,
carbon pricing will depend on the design of climate policy and its interconnection
World trends affect Europe
with the Emissions Trading Scheme. Its stability requires that these should be free
of disruptive interventions like the recently attempted backloading of emission
allowances.
With the EU's economy stagnating, there is currently no demand for an increased
supply of energy. That’s a normal market reaction and slow growth, no growth
has made us more energy efficient. But in the scenario of returning to steady
growth in a few years from now, demand for energy will again increase. Then, in
line with basic market principles, those who have invested in new infrastructure
and developed their production, storage and distribution capabilities, will have a
clear advantage. The investment banking sector should play an important role
here and help carry the risk of these future investments. That such investments
will soon pay off is in little doubt – after any crisis, growing demand and rising
prices mean the rates of return increase substantially.
Electricity prices: the U.S. is increasing its advantage largely
thanks to shale gas
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Europe’s internal energy market is not an end-goal. It is a tool that will serve the
long-term objectives of an efficient and reliable energy system and the costeffective transition to a low-emission economy. It also has a chance to become
our greatest asset in the global competitiveness race. We cannot ensure the
prosperity of Europe’s citizens without affordable energy prices.
“Europe’s internal energy market is not an end-goal. It is a tool that will
serve the long-term objectives of an efficient and reliable energy system
and the cost-effective transition to a low-emission economy.”
We know what must be done, and we also know there’s no time to lose. An
integrated energy market will never become reality unless today’s spectrum of
different national approaches to energy generation, storage and distribution,
is replaced by an overall European approach. We need a genuine European
Energy Community – a locomotive to move our energy project forward along
the tracks to a shared destination. Winston Churchill once said that attitude is a
small thing that makes a big difference. EU member states are on the horns of
a dilemma – they have to decide whether to demonstrate close cooperation for
the sake of their citizens, or to further delay taking these crucial steps and so
endanger European competitiveness. Big difference or indifference – it is up to
we Europeans to decide. ■
The ‘perfect storm’
threatening EU energy
The European Commission’s market-fixated approach to EU
energy policy has been overtaken by revolutionary changes. JeanFrançois Cirelli of the GDF Suez energy giant sets out a five-point
plan for tackling Europe’s greatest competition challenge.
Jean-François Cirelli
Vice Chairman and President of GDF Suez
Few industrial sectors in Europe have been transformed as profoundly as energy. Four
important developments have redefined the fundamentals of the sector: the shale
gas revolution in the U.S., the fall-out from the Fukushima nuclear accident, Europe’s
persistent economic crisis and the growing share of renewables in power generation.
Despite these radical changes, the decision-makers who define EU energy
policy are still committed to the same market-based vision of the energy sector
they’ve had for the past 20 years. But now, due in part to these transformations,
the limitations of this approach are increasingly apparent. The co-existence of
over-capacity in the power market with what appears to be a re-nationalisation
of energy policies poses a very real threat to energy investment in Europe. It’s
worth stressing that the problem is not market liberalisation as such, because we
very much share the objectives and appreciate the importance of this approach.
It’s the uneven implementation of these measures that is preventing the muchneeded level playing field across member states. The benefits that we can expect
from market liberalisation are so great that we Europeans have a duty to take
action now. The current approach doesn’t have to be abandoned, but it must
be reformed so that the confidence of operators can be re-established. That’s
crucial if the EU’s internal energy market is to be a success.
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The European Commission’s leitmotiv for the energy sector has for two decades been
“the market”. This has created two flagships of energy policy – the internal energy
market with its liberalisation packages, and the emissions trading system (ETS).
“The decision-makers who define EU energy policy are still committed to the
same market-based vision of the energy sector they’ve had for the past 20
years. But now, the limitations of this approach are increasingly apparent.”
The centre-pieces of market liberalisation have been the first, second and third
energy packages, adopted respectively in 1998, 2003 and 2009 with the aim
of ensuring affordable, competitive, secure and sustainable energy supplies
to private and industrial consumers. The Commission’s goal now is to finalise
the internal energy market by 2014, notably, by enforcing the unbundling of
networks away from the competitive parts of the electricity and gas business in
Europe. The aim is for markets to be opened up. It has, naturally enough, been
a challenging process for vertically integrated companies like GDF Suez, but we
are now fully compliant and eager to participate fully and benefit from it.
The Commission’s complement to the energy packages has been enforcement
of a carbon price in the form of the ETS market mechanism. This was supposed
to create an incentive for the reduction of emissions in Europe, and to provide
signals for low-carbon investments through establishing a price for carbon,
making that the most attractive way to reduce greenhouse gas emissions.
Although we share the Commission’s goals, and believe in the potential of its
policy instruments, it is with some regret that we would nevertheless underline the
fact that neither the market liberalisations nor the ETS have yet borne fruit. The
defining point about energy is that long-term investments are essential to its future.
That requires long-term certainty and predictability, neither of which is provided
by the Commission’s current market vision. The situation facing operators today
has become critical, because overcapacity and the re-nationalisation of energy
policies are combining to make the current market model unworkable.
Europe’s energy system now suffers from overcapacity in overall terms, although
not at times of peak generation. This to some extent results from the economic
downturn and a substantial drop in demand. It’s a significant challenge that has
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been aggravated by subsidised renewables coming onto the market in an uncoordinated manner that takes no account of their impact on the energy market
or on the EU grid. There has also been a collapse in the carbon price, with the
ETS no longer providing any incentive for investment in low-carbon technologies.
Attempts to re-establish credibility for CO2 market quotas have failed, and that’s
reflected in the extremely low price of emissions credits.
Operators of thermal power plants, and natural gas ones in particular are facing a
short-term crisis that may yet have disastrous long-term consequences going well
beyond the energy sector. These plants’ economic viability is being undermined by
their growing role as back-up providers rather than base-load power sources. In
practical terms, this means reduced hours of operation at the same time as higher
operating and maintenance costs. Gas power stations are being pushed to the
side by renewables and also by coal thanks to the extremely low ETS price of CO2.
The upshot is that both existing and planned gas power stations are more and
more uneconomical, and so are no longer viable investment options for utilities.
“Although we share the Commission’s goals, and believe in the
potential of its policy instruments, it is with some regret that we would
nevertheless underline the fact that neither the market liberalisations nor
the ETS have yet borne fruit.”
If this trend persists there will be closures, and no prospect of replacements
being built. The EU would pay a high price for the absence of gas power plants,
because coal, as the energy source that would largely replace gas, is not only
far more polluting, but also far less flexible. Gas is therefore the most appropriate
energy source in its own right, as well as the best back-up for often intermittent
renewables. Europe’s increased energy needs once economic recovery takes
root, as well as its commitment to reducing CO2 emissions, means that only gas,
coupled with renewables, can ensure both needs are met.
In the meantime, the re-nationalisation of energy policies across the EU is running
in stark contradiction to the aim of completing the single energy market. These
liberalisations are not being implemented in several member states, despite the
deadlines, and that’s creating serious uncertainties because national rules often
vary significantly from country to country. We in the power generation business
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can only ask for full implementation of EU legislation so as to avoid a “multispeed” Europe. These divergences need to be addressed urgently, which means
that attacking market distortions should be among the Commission’s priorities.
The re-nationalisations in the energy sector go well beyond the liberalisation issue.
There’s an increasing tendency among member states to implement policies
that are distinctly different to those of the rest of the EU, whether they concern
renewable energy support schemes, capacity remuneration mechanisms or
energy taxes and regulations on end-user prices. The EU’s third energy package
continues to allow for the regulation of end-user prices in several member states
as an alternative letting the market determine prices. And the prices set by
national authorities all too often fail to cover costs and the return on investments.
All this explains why EU-level action is so urgently needed. If 2014 is to be
remembered for completion of the internal energy market rather than for the
continued loss of confidence amongst operators, five key changes must be made.
First we need an improved framework for investment that offers long-term
predictability and visibility. The rules of the game to which investors sign up,
cannot be changed half-way through for political reasons. It is intolerable that
retroactive decisions be put in place or existing regulations not be completely
implemented. And when regulated, the price of energy for the end-user must be
at a level that covers costs and fairly remunerates the capital invested.
Second, a coordinated European approach to capacity remuneration mechanisms
(CRM) across Europe is essential if we are to have enough capacity to back-up
renewables. A pan-European CRM would provide much-needed harmonisation
of today’s patchwork of national CRMs, and would also speed up the integration
of national energy markets. By providing appropriate remuneration for new and
existing power generation, a well-designed European CRM would ensure security
of electricity supplies without hindering the drive towards a single energy market.
Third, the coordination of renewable energy support schemes at the European
level has become very necessary indeed. Excessively generous financial support
schemes are at the root of policymakers’ concerns as well as those of the general
public that could undermine the EU’s energy policy. And fourth, the ETS must
be restructured to deliver a price signal that attracts low-carbon investments. A
CO2 emissions reduction target for 2030, in line with the European Commission’s
objective of 80% decarbonisation by 2050, would be appropriate. This new
target should be transposed to all sectors subject to the ETS as soon as is legally
possible, and a contribution to this effort also needs to be made by those sectors
not yet subject to the ETS. The ground for this medium-term measure could be
prepared by a short-term reduction in the present allowances surplus, namely
the set-aside of a minimum of 1 200Mt CO2.
Fifth and last, research and development on future technologies like energy storage,
smart metres, smart grids, shale gas and new renewables need to be EU priorities.
Increased funding for the new Horizon 2020 programme looks promising, even
though the cuts of €10bn by the European Council in its agreement on the EU’s
next Multiannual Financial Framework 2014-2020 are clearly regrettable.
The challenges facing Europe’s energy sector in general, and particularly gas,
must not be under-estimated. Business-as-usual quite simply won’t be possible,
so we need a revitalised EU approach that is balanced more in favour of investors
by being based on long-term stability and visibility, a higher price for CO2 in the
ETS, the implementation of CRMs and a more favourable energy market design.
In short, we need a revamped EU energy policy that actually works. ■
Completing the internal energy market
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The EU’s internal energy
market must be completed with
a clear strategy targeting
global competitiveness
Companies in the EU face significantly higher energy prices than
their competitors and the situation is getting worse, writes Fernand
Felzinger, who argues that increasing the carbon price would be a
disaster for Europe’s energy-intensive industries at a time when it
needs to re-industrialise.
Fernand Felzinger
President of the International Federation of Industrial
Energy Consumers (IFIEC) Europe
The EU’s energy policy is based on the three pillars of competitiveness, security of
supply and sustainability. Of these, international competitiveness is obviously the
one that has been left behind and needs urgently to be restored.
The European Commission’s “Industrial Policy Communication Update” of
October last year warned that European industry is facing significantly higher
energy prices than its global competitors, and that “the difference has increased
drastically over the last decade”, for both gas and electricity. This, along with
the overall deterioration of the EU economy, has put Europe’s energy-intensive
industries in an extremely difficult situation. Since the beginning of the economic
crisis in Europe, over 3m industrial jobs have been lost while, in competing areas
like the U.S. with shale gas and China with coal, energy is clearly being used as
a “production factor”.
When looking at the EU’s internal energy market, it’s impossible to ignore the
interaction between climate and energy policies as both strongly impact the energy
market. The problem is that the assumptions on which these policies were based
are no longer valid. This has important consequences when it comes to aligning
both policies, and when debating the outlook for new targets.
The underlying assumptions of climate and energy policies need therefore to be
revised as they are threatened by the drastic change in the fossil fuel price trend.
In 2007 and 2008, the future seemed easy to predict: oil had peaked close to
$150 a barrel and the only question seemed how long it would take to reach
$200. On that basis, Europe’s climate and energy policies were coherent. By
decarbonising its economy and developing renewable energy sources that over
time would benefit from a declining cost curve, the EU would strengthen its longterm competitiveness, improve its security of supply and favour the emergence of
“green industry” leaders. On top of that, the EU’s emissions trading system (ETS)
would pave the way for an enlarged Kyoto protocol and a global market-based
carbon price.
We now know that few things are as predicted only a few years ago:

The shale gas and oil revolution in North America has led to a price
decrease for both gas and power, with coal following suit.
Conventional and unconventional gas reserves are more widespread than
had been thought, and are now being re-evaluated at several hundred
years of consumption.
Gas prices around the world are not expected to increase except in areas
where consumers get squeezed by a lack of gas-to-gas competition.
The consequence is that it will take longer than had been anticipated to
bring the total cost of recent renewable energy source (RES) technologies
down to a globally competitive level. And the subsidies granted for 15-20
years will not be wiped off by rising market prices led by fossil fuels. They
are a debt to be reimbursed over many years.
The intermittent nature of wind and solar power generation means that
ensuring power system stability requires significant investments in grid
extensions and back-up capacities.
The overly rapid scaling-up of immature technologies also adds significant
costs to the system.
As seen in last year’s Doha conference for climate change, the number
of countries committed to reducing their greenhouse gas emissions
in a binding manner has decreased, while coal-fired power plants are
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flourishing in China, where they provide energy-intensive industries with
cheap power. By 2015, China will produce more than 50% of the world’s
overall aluminium production, with its dedicated coal-based power
consumption there greater than that of the whole Italian market.
Add to these elements the fact that Europe is grappling with its severe financial
crisis and it becomes obvious that decarbonising the EU economy has to be driven
in a cost-effective way.
What new objectives do we need for an efficient climate policy? The one thing that’s
sure is that the EU will meet its 2020 reduction target of greenhouse gas emissions
for the sectors covered by the ETS. A low CO2 price for its phase three confirms that
a market-based system indeed delivers results at the lowest possible cost.
But does that change the global picture? Not on present trends as the EU will by
2030 represent only an estimated 6% of global emissions. The real challenge is
therefore to arrive at a global agreement. The aim of a market-based system like
the ETS was to develop an efficient global tool that’s other than just as tax; the
temptation is often to use taxes for purposes they weren’t designed for.
As a tool the ETS is still useful, and linking it with Australia’s comparable system is
an initiative which we at the International Federation of Industrial Energy Consumers
(IFIEC) welcome. It is a first step towards globalising the scheme, and by comparing
the two systems it offers an opportunity to correct the structural flaws of the EU
system, namely, the ex-ante allocation of allowances which can incentivise carbon
leakage. It is only once we have a global agreement and a global carbon price, that
the goal of reducing greenhouse gas emissions will become a reality.
But we must avoid shooting ourselves in the foot. The paradox is that those who
now advocate political intervention to artificially increase the carbon price, and thus
electricity prices in Europe, also risk distorting a purely market-based signal for the
sake of “giving the right price signal.”
But the right price signal for what?
If it’s to make gas more attractive than coal for power generation, then we would need
a carbon price that’s above 40€/t. And if the EU achieves that, what signal would it
give to gas suppliers who refuse to offer competitive prices to Europe? Should we
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therefore ban the use of coal or lignite? That wouldn’t take into consideration the
2050 roadmap which showed that with carbon capture and storage (CCS) there
will be room for all energy sources in the European mix. Keeping gas in the picture
doesn’t require an artificially high carbon price as it will always be an important part
of Europe’s energy mix, maybe not for baseload power generation but for heating at
least. And transport might be another opportunity for the development of gas usage.
Or maybe the price signal should be to reduce the level of subsidies that span the
difference between feed-in tariffs and market prices, and that are required by some
RES investments? But this misses the point. In order to develop a sustainable
Europe-based renewables industry, we need truly competitive technologies which,
once mature enough, can be exported because they would be a valid alternative
to carbon-based power. The real objective of RES development is not to impose a
volume target in an abstract framework which might lead to unnecessary costs for
the community, but to fix competitiveness targets which will bring us faster to grid
parity. Although it may require a greater innovation and R&D effort, this is the sort
of challenge which the EU is accustomed to.
“Artificially increasing the CO2 price would reduce our chances of promoting
a global decarbonising tool, would further sap the EU’s competitiveness and
would send distorted signals to investors.”
Artificially increasing the CO2 price would reduce our chances of promoting
a global decarbonising tool, would further sap the EU’s competitiveness and
would send distorted signals to investors. What is instead needed for both social
and environmental purposes is a re-industrialisation of Europe. As shown by a
number of studies, the EU may be reducing its direct carbon emissions but is
increasing its indirect carbon emissions by consuming goods manufactured in
countries with a more carbon-based energy mix. The challenge is to fight more
actively against this carbon leakage.
The most threatened industries are, of course, the energy intensive ones. This is
why it is so important – for both jobs and the environment – to stimulate growth
in energy-intensive industries confronted with international competition. After all,
basic industries are key contributors to greening the economy. But to invest in
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Europe, industry needs access to globally competitive energy costs with long-term
visibility and a stable regulatory environment.
Urgent structural measures are needed to safeguard the competitiveness of EU
industry. These include reducing the gas price gap between Europe and the rest of
the world because natural gas prices are at present three to four times higher than
in North America, leading already to an alarming shift of investment from Europe
to the U.S., creating a situation that is unsustainable. For gas intensive industries,
the cost differences are tens of millions of euros a year, compared to competitors
buying gas in the U.S.
“The rapid implementation of the EU’s internal energy market is not only
necessary for internal competition but because it enables the overall costs of
adapting the EU energy system to the new generation mix to be reduced.”
The critical situation faced by gas intensive industries means we need a whole set
of actions. Those that could yield short-term results include:

The rapid implementation of the third energy package. Its 2014 target
should on no account be postponed, and implementation should take
place in all EU member states.
There should be a decoupling of natural gas prices from oil prices, with
gas prices defined by supply and demand, not by oil.
Further actions leading to mid- to long-term effects are:

The promotion of investments in infrastructures like LNG terminals and
pipelines which would enable further diversification of supply sources,
and would increase competition.
The encouragement of clean exploration and production of shale
gas. Europe, according to the American Energy Information Agency,
has almost as much technically recoverable shale gas as the United
States. But exploration and development of shale gas are stuck at
a very early stage because of political and regulatory uncertainties.
Policymakers need to set an enabling framework that takes into
account environmental concerns that can be minimised by using
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technologies such as “green fracking”. The challenges of extracting
shale gas in Europe are different to those in the U.S., but the EU
nevertheless has the potential to form a medium-term “strategic
bridge” towards long-term greener energy.
Another measure to safeguard the competitiveness of EU industry concerns
electricity. For industrial consumers, electricity costs are twice as expensive in
Europe as in North America and parts of Asia, and this situation will worsen with
the cumulative cost impact of energy and climate policies.
The rapid implementation of the EU’s internal energy market (IEM) is not only
necessary for internal competition but because it enables the overall costs of
adapting the EU energy system to the new generation mix to be reduced. But
by itself this cannot resolve the lack of competitiveness. In the context of rising
costs, hardship regimes and exemptions from inappropriate cost allocations
become an absolute necessity for those power-intensive industries in Europe that
are most vulnerable to international competition. These measures must address
the whole cost structure, from the power generated (easing restrictions on longterm contracts), to grid costs (the need for a cost-reflective approach taking
into account baseload consumption profiles) and government’s contributions to
multiple national support schemes.
“With European governments recognising industrial growth as the key to
resolving the economic crisis as well as lowering global carbon emissions,
adequate measures are needed to back the reindustrialisation of Europe.”
The major question is whether these specific measures can provide enough
visibility to spark investment? To be really efficient, a globally competitive market
requires a globally competitive energy mix. The issue with scaling up immature
RES technologies too quickly is that the total financial support keeps on increasing
while burdening consumers with huge costs; in Germany alone these already
stand at €20bn a year. The EU energy system now needs reforms that focus
on the elimination of market distorting elements such as the over-subsidising of
renewable energy and the lack of balancing responsibility for intermittent energy
generation by solar and wind power.
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Capacity mechanisms should be considered only as a last resort, and only after
promoting cheaper demand-side solutions. Provided the conditions are designed
adequately, energy-intensive industries can, on a voluntary basis, provide important
and cost-efficient flexibility.
Energy and industrial policies must be linked. With European governments
recognising industrial growth as the key to resolving the economic crisis as well
as lowering global carbon emissions, adequate measures are needed to back
the reindustrialisation of Europe. Energy is one of the main levers for this, and
it’s essential that discussion of European priorities should focus on high energy
prices. Completing the internal energy market is one of the elements, but it is
not enough. Structural political initiatives that target global competitiveness are
urgently needed. ■
Energy-intensive industries are most exposed
The three ages of Europe’s
single electricity market
It is still far from perfect and has been painfully slow in taking shape,
but an EU-wide power market has now emerged. Jean-Michel
Glachant of the Florence School of Regulation nevertheless warns
that renewable energy and a “smarter” grid remain challenges to
its further development.
Jean-Michel Glachant
Director of the European University Institute’s Florence
School of Regulation where he holds the Loyola de
Palacio Chair
It took us a while to build an EU internal market for electricity. According to the
Single European Act strategy of Commission President Jacques Delors, it should
have been implemented back in 1992… but that turned out to be only the first
stirrings of a 25-year process. There are many “good reasons” why Europe has
been so slow, and they are set out in the first part of this paper, entitled “Not easy
to do … 1990-2015”. But there’s no denying that today we are entering the last
mile of this slow process, even if anti-market arrangements still prevail in many
countries. The paper’s second part – “All done by 2015?” – asks whether this
whole construction is robust enough, while the third part “Done forever? From
2015 to 2030” will suggest that the EU’s internal electricity market may yet be
seriously challenged by two waves of disruptive innovations – renewables and the
“smartening” of the energy system.
Not easy to do… 1990 – 2015
Taking a quarter-century to build Europe’s internal market in electricity may seem
an incredibly long journey as well as an example of the EU’s inability to accomplish
serious industry reforms. But we should remember that no other “federal-style”
government of a major country has achieved an internal market for electricity.
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The U.S., Canada, Brazil, Russia, India or China have none of them succeeded in
opening up a continent-wide electricity market.
Let’s turn first to all the good reasons for the EU’s slowness. The project aimed
to open up national monopolies’ territories to foreigners, and that of course
was widely seen as a radical project that inevitably triggered opposition. The
second reason was that there was no wave of technological innovation – unlike
in the case of telecoms – to challenge the incumbent energy giants. Third,
electricity is a difficult product to trade as it requires hundreds of technical, legal
and economical rules and standards to be agreed before it becomes tradable.
Electricity is, after all, no more than a coordinated flow of electrons jumping
from one atom to the other inside the millions of metallic wires of a gigantic
interconnected network. This very demanding market arrangement meant that
electricity was for decades considered to be a typical “anti-market” product that
was best suited to monopolies and even cartels.
“Electricity is a difficult product to trade as it requires hundreds of technical,
legal and economical rules and standards to be agreed before it becomes
tradable. Electricity is, after all, no more than a coordinated flow of electrons
jumping from one atom to the other inside the millions of metallic wires of a
gigantic interconnected network.”
In truth, it has been the communications revolution that has opened the way to
new market arrangements in the electricity industry, and made them feasible. New
communications technologies have given us the tools to register every move of
electricity generators and consumers alike – and so permitting one generator and
one consumer to trade bilaterally inside a market. The fourth reason is that the
various national arrangements between industry players and public authorities
cannot readily be merged into a common scheme of interoperable markets.
Several successive packages have been needed to get all EU countries to
implement compatible market arrangements. Germany, for instance, did
almost nothing to promote compatibility because it chose not to have any
regulatory authority but only a cartel of industry representatives. A plague of
national barriers fragmented the EU for decades, which is why we needed
four packages – the Commission’s three energy ones plus the infrastructure
package – to make it work at continental level. The rapid expansion of gasfired power plants in the EU has nonetheless added a common industry
factor between many countries and helped them to converge on compatible
arrangements. Since the EU’s gas market reforms are far less advanced than
those in electricity, we ended up with settling for a bit of help from the “gas
dash” instead of a complete revolution. And by the end of this first period, the
speed at which the industry consolidated into EU mega-giants was much faster
than the speed at which national market arrangements converged towards a
common EU market platform.
All done by 2015?
If we ask ourselves whether the arrangements being implemented according to the
third energy package and the infrastructure package add up to an “EU market”,
the answer is yes. In the first place, we Europeans already have a set of national
“day ahead” wholesale markets that are mostly connected by “implicit access” to
physical interconnections: Any bid accepted in an exchange is simultaneously taken
into account by the other exchanges and by the transmission network operators
that manage the interconnections. Whenever there is significant congestion of the
EU network the European market splits into smaller regional or national markets
until the congestion is ended.
Second, we have more and more intraday and “real time” arrangements by which
offers of capacity and energy services cross the borders of the electrical zones
managed by the TSOs. Third, the network is itself becoming more and more
“Europeanised”. New grid operation codes are being conceived at EU level, and
a common planning of the EU grid is taking place under the “Ten Year Network
Development Plan”. A set of “Projects of Common Interest” are also due to adapt
our infrastructures better to the internal market’s needs.
Having said all this, it’s nevertheless true that anti-market arrangements still survive
in many European countries. At the retail level, one can still see government price
controls in France and many other countries. Sometimes these regulated retail
prices are not even aligned on wholesale prices, and result in billions of euros in
“tariff deficits”, as is notably the case in Spain. At the wholesale level, byzantine
market arrangements can add up to a “re-regulated access regime”, not only in
France and Spain but in the UK too in light of its planned new nuclear power
stations. These national distortions have significant effects, but they cannot entirely
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block the internal market’s functioning. However imperfect the EU’s internal market
may be, there can be no doubt that we are moving towards it.
Done for ever? From 2015 to 2030
But it is far from guaranteed that this internal market for energy will work forever.
The many national compromises that have been realigned and harmonised in
successive EU compromises dealt with the past, and therefore were aimed at
opening up an EU market as conceived in the 1990s. What we now face in the EU
is the new energy policy designed in the Spring of 2007 at the European Council
in Berlin – the 20-20-20 strategy to be in place by 2020. Add to that the wave
of “smart” innovations and there’s a risk we’ll still end up with an internal market
headache.
The reasons for saying so are, first, that renewables are being pushed in the
electricity sector from outside the market. Both wind and photovoltaic energy
(PV) run at the speed of their feed-in tariffs. With virtually no barriers to them from
entering the electrical system, renewables enjoy considerable advantages: they are
always guaranteed access to existing consumption, whereas thermal generation
only has access to the remaining demand. In some EU countries, renewables also
have the right to connect to the grid, and the grid owner has a duty to invest
accordingly. Step by step, a significant proportion of Europe’s thermal power
plants are selling less and less energy while providing more and more “flexible
capacity” for the electrical system. Some countries like the UK and France are
looking at bridging that power generation revenue gap by re-organising their
national market’s capacity arrangements. Obviously enough, this might well break
up the EU’s internal market as some thermal generators would still be paid only for
the energy they can sell, while others would get both those energy revenues and
also a national capacity payment.
Second, even if there were to be no capacity splitting of the market, the present
wholesale market might well undergo profound changes under the pressure
of the growing share occupied by renewables. When large amounts of energy
generated by renewables enter the wholesale market, that greatly depresses the
market price. The variable cash cost of generating electricity with renewables is
low, and a competitive energy market will use the variable cost of marginal power
generation to price the market as a whole. That price can then easily drop close
to zero if the market is flooded by renewable energy. It can even fall below zero
37
into negative prices: when the generators pay the buyers! Because thermal plants
face difficulties when reducing their output – they have to contend with huge
output start-up costs and other dynamics – they may prefer to pay for the right
to keep their plants running. But in depressed conditions of this sort, how could
the wholesale Day Ahead market that is the backbone of the EU internal market
maintain its central position in the chain of electricity market arrangements that
stretches from futures to real time?
“As we can already see that the distribution grids are going to be the core of
the EU internal market, the question we should ask is how will they operate
and how will they be regulated and monitored?”
Third, an important share of renewable energy isn’t fed in to the transmission grid
but at distribution grid level. To get an idea of the importance of this, we should
understand that historically the transmission system operators managed electrical
flows in a way that more or less replicated the trades in the wholesale market. In
the electrical system of the future, these flows will increasingly be operated on
distribution grids. With the expansion of smart technologies, this challenge may
perhaps be overcome. As we can already see that the distribution grids are going
to be the core of the EU internal market, the question we should ask is how will
they operate and how will they be regulated and monitored? The problem will be
to avoid a situation in which several thousand distribution operators throughout
Europe fragment the internal market by spontaneously diverging through myriad
different policies. Another step that could push us into this fragmentation scenario
is that the smartening of the electrical system will also push millions of consumption
units through the smart metres and other devices. Many of these consumers will
also be producers, thanks mainly to the PV panels that are famously turning them
into “prosumers” – and they may therefore have an impact on both the offer and
demand sides of these changing energy markets. Nobody yet knows how the
corresponding new services, whether communication-related or energy-related,
and new markets that are immediately responsive to demand will evolve – will each
EU country be different, and each distribution operator?
Building Europe’s very large internal market for electricity has been a slow process
of some 25 years, but it has been achieved, and only in the EU but nowhere
else. We Europeans conceived our internal market arrangements “our way”, even
38
though many other ways were originally envisageable. Europe could for example,
have opened up the wholesale market without opening the retail market. Or it
could have made opening the wholesale market mandatory with a centralised
exchange system operating a single price algorithm, just as England did for more
than 10 years.
In the end, though, we Europeans did it in a way that works, contradicting the
thousands who predicted failure, disruption and chaos.
I would conclude, though, by repeating that what we now call the EU internal market
is just a compromise between all the other national-level compromises; it’s not a
perfect mechanism capable of serving us all whatever the prevailing conditions.
It may suffer greatly in the coming years from the effects of a massive increase in
renewable energies or from a de-centralisation of the production – consumption
loop. The future, now that the European Commission is trying to stimulate debate
on the EU’s 2030 horizon, is far from clear. ■
Prices affect competitiveness
Two solutions for Europe’s
energy “trilemma”
National capacity payments are a slap in the face for energy market
liberalisation, and will hinder further interconnections. Allowing
suppliers from any member state access to capacity markets would
help reduce market distortions, say Mike Lawn and Jonas Rooze.
Mike Lawn
Head of Power and Gas Services at Bloomberg New
Energy Finance
Jonas Rooze
Policy Analyst at Bloomberg New Energy Finance
The European Commission has long championed the shift of the EU’s energy
market from one dominated by vertically integrated national monopolies to one
where the market is separated into different competitive layers, making member
state boundaries irrelevant. But national measures in support of renewable energy
sources, along with the deep and prolonged recession, has so distorted the
wholesale energy market that EU countries are increasingly worried about their
own security of supply. This is leading to the creation of still more national policies
that run counter to the dream of a Europe-wide free market in energy. The EU and
its national governments both need to act to prevent fears over security of supply
from leading to an expensive overbuilding of thermal power generating capacity.
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40
There has been much talk of an energy “trilemma” involving choices between trying
to reduce carbon emissions at the same time as ensuring security of energy supply
and keeping control of energy costs. But this trilemma looks more like a game of
“whack-a-mole”, with the policy hammer coming down on one issue only to see
unintended consequences pushing out of the ground elsewhere.
“The policy drive to tackle decarbonisation – symbolically through EU-wide
carbon pricing – has in reality had to contend with a patchwork of effective
but highly market-distorting national subsidies for renewable energy.”
The policy drive to tackle decarbonisation – symbolically through EU-wide carbon
pricing – has in reality had to contend with a patchwork of effective but highly
market-distorting national subsidies for renewable energy. This has led to huge
amounts of capital investment in the renewables sector, as shown in our clean
energy investment figures below. For traditional generators, this means that thermal
Figure 1: European new clean energy investment ($bn)
Source: Bloomberg New Energy Finance.
Note: Total values include estimates for undisclosed deals and adjustment for re-invested equity but exclude corporate
and government R&D.
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generation has been pushed up the supply curve, earning lower margins on fewer
running hours. Although renewable power is delivered into the energy market at
zero (and often negative) marginal cost, the consumer receives it at the cost of the
subsidy – a price that is well above the prevailing power prices and that, through
its impact on retail prices, causes a backlash against the whole support system.
The latest “mole” to emerge concerns the serious security-of-supply issues that
thermal power closures and mothballing will raise within the next few years. These
closures are in part driven by policy – notably the European Commission’s Large
Combustion Plant (LCP) Directive reducing oil and coal capacity, and Germany’s
energiewende, or energy transition policy for shutting down nuclear plants. Then
there’s the marginal issue costs that is pushing the owners of gas-fired generators
across Europe to mothball or even close loss-making units.
In the past, these closures would have marked the bottom of the cycle and
resulted in increasing margins and running hours for the remaining plants, thus
Figure 2: Western European capacity payment schemes – state of play
Source: Bloomberg New Energy Finance, Eurelectric
Note: Countries displaying two colours are transitioning to or have proposed capacity markets. Germany is formalising its
currently ad-hoc reserve scheme, while considering developing a full-blown capacity market.
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encouraging investment in new capacity and ensuring that power cuts remain
low enough to keep consumers, and therefore politicians, comfortable. This time
around, though, investors fear that the continued high generation of renewables will
permanently distort market price signals, making thermal generation unprofitable
in the foreseeable future, and leading to capacity shortfalls when low renewable
generation coincides with high demand.
The tool being proposed for addressing these fears is capacity mechanisms. These
allow generators to be paid for the reliability they provide to consumers, so in other
words, generators would be paid extra just for being there. But this proposed fix
could lead to the unwanted consequence of a risk that we would be paying for
more capacity in Europe than is economically viable, leading to distortions in the
single energy market and a further increase in consumer’s bills.
Rewarding reliable power plants in the face of the rising penetration of renewables
is common to much of Europe, but these are solutions that are being proposed
at national level. It’s a slap in the face for energy market liberalisation and the
integration of the European power market. Any moves toward national capacity
payments, may guarantee security of supply in each jurisdiction, but discourages
further interconnection and suggests that countries don’t feel they can rely on
their EU partners in the event of a fall in power supply: a very different approach
from the one that has seen Europe integrate natural gas networks that depend
heavily on one another for supply during cold periods. This proved highly effective
during the winter of 2012/13 when the UK came close to running out of gas and
was bailed out by supplies through its European connections.
Under the current proposals, each EU country will have to pay a high price for
sufficient domestic capacity when low renewable energy generation coincides
with high demand. And even though integrated transmission networks reduce
the frequency of high demand/low renewable energy generation periods by
allowing the cross-border transfer of renewable and thermal generation, the value
of these interconnections will fall. The rush to national solutions for capacity, with
little or no inclusion of international generators, will hinder future development of
interconnection capacity.
Different mechanism designs and disparate capacity prices will lead to diverse
energy prices, further distorting the Europe-wide energy market and leading to
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results that are diametrically opposed to the market opening that the third energy
package promised.
The various national renewable energy support schemes that now exist across
the EU have been a boon for the development of the renewables industry,
allowing countries to experiment with the best scheme for their particular needs.
Unfortunately they have also led to distortions in energy production across the
region. A good example is the vast wind energy build-out in northern Germany
which has caused severe problems for the transmission networks of neighbouring
countries, sometimes delivering negative pricing. But it has also enabled southern
Germany to benefit from cheap power that otherwise could not be delivered there
due to transmission constraints.
“The various national renewable energy support schemes have been a
boon for the development of the renewables industry, allowing countries to
experiment with the best scheme for their particular needs. Unfortunately
they have also led to distortions in energy production across the region.”
Although technically the door has been left open for European countries to meet
their binding renewables targets by trading generated energy, there has to date
been no attempt to set up actual trading schemes despite emerging renewable
surpluses in countries such as Spain, and emerging deficits in others like the
Netherlands. Yet there are early signs of change, notably between the UK – where
“Nimbies” don’t want to see any more wind farms in their backyards spoiling
England’s green and pleasant land – and Ireland, which seems happy to take
British cash for Irish windmills. This change gives hope to finding the first part of a
two-part solution.
The EU should now push hard to develop cross-border trading of renewable power,
with the condition that it must be physically deliverable and not just an on-paper
transfer. This proviso would prevent the adverse effects of excessive renewables
building leading to power generation that has nowhere to go – something that would
inevitably follow if renewables trading were a purely paper exercise. Without the
physical delivery constraint, the southern half of the continent would very likely be
so flooded with solar photovoltaic power that its infrastructure and demand would
both be unable to absorb, aggravating recurrent capacity issues in these countries.
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This brings us to the second part of the solution: capacity mechanisms as a
response to the distorting impact of subsidies for renewables. Capacity payments
could be made more efficient if the EU were to stand behind the demand for equal
treatment of suppliers across the Union. Anyone who can deliver reliable capacity
to a country must be allowed to participate in that country’s mechanism, no matter
where the capacity is – again with the proviso that it is physically deliverable to that
member state at times of need.
“The EU should now push hard to develop cross-border trading of
renewable power, with the condition that it must be physically deliverable
and not just an on-paper transfer.”
This would encourage national capacity mechanisms to become compatible with
one another, allowing countries with excess capacity to make money supporting
their neighbours, and minimising the new build needed to maintain reliable supplies.
But, perhaps most important of all, it would provide clear market signals for the
construction of interconnections that would allow mutual support in times of need
and facilitate the transmission of low-carbon power.
Implementing the physical trading across borders of both renewable power and
reliable capacity faces complicated, but not insurmountable, regulatory challenges.
The European Network of Transmission System Operators for Electricity (ENTSO-E)
and the Agency for the Cooperation of Energy Regulators (ACER) could together
be asked to take on the task of watching closely for any "gaming" that may emerge.
Without a strong and immediate stance on these issues by the EU and national
governments, it’s likely that the concerns of national policymakers and regulators
will quickly push Europe into a situation in which national schemes for renewable
support and reliable capacity distort the European electricity market even more.
This will lead to unnecessary costs to consumers, who will be forced to pay for
renewable capacity that should be more cost-effectively managed elsewhere, and
for thermal capacity that quite simply would not be needed if Europe’s energy
market were more integrated. ■
A sustainable energy system
needs efficient markets
Decarbonisation in the power sector will reduce flexible, fossil
power generation, and replace it with intermittent power
generation like wind power. To maintain security of supply, a
much stronger European transmission grid will be needed, along
with greater flexibility in generation, consumption and storage
systems. Market prices will have to be an important driver for this
change, explains Statnett’s Auke Lont.
Auke Lont
Chief Executive Officer of Statnett
The decarbonisation of Europe’s power generation by 2050, along with
the reduction of emissions in the rest of the energy sector, is important,
commendable but also challenging. Decarbonisation will demand very large
investments in emission-free electricity generation and transmission, in energy
efficiency and increasingly in energy storage. We need new and improved
technology in most segments of the energy system as well as smart, consistent
and predictable regulation to create the right framework for the EU’s internal
energy market to operate efficiently.
Electricity market prices are essential to coordinating operational and
investment decisions for generation, transmission and consumption right
across Europe. For electricity, where generation and consumption have to
be tightly in balance, the marginal cost of supply varies substantially over
time and between different regions. This reflects differences in generation
costs between technologies, start-up costs for power plants and variations in
consumption. To minimise the total energy costs, power prices should reflect
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46
the marginal cost of supply as well as capacity constraints on generation and
transmission.
When consumption is low and renewable power production is high we may
increasingly see excesses of power so that marginal generation costs fall
close to zero. At the other extreme, at times of high consumption and low
renewables generation, the most expensive thermal power plants must be
started up. And in the future we will need greater storage capabilities and
increased consumer flexibility if we are to maintain security of supply in
these situations.
The challenge of balancing supply and demand will increase as intermittent
power generation grows and the share of fossil powered electricity generation
decreases. There are broadly two challenges: the first is using the available
power surplus efficiently when intermittent power generation is high and
consumption is low. The second is maintaining security of supply when
intermittent generation is low and demand is high. The most important of these
challenges is to secure enough power supply when intermittent generation is
low. The cost of forced rationing of power is huge in any modern society, and
that cost will probably be even higher in the future as more economic activity
and private consumption will rely on electricity.
Until 2030 or so, increases in gas-fired generation capacity may play an
important role as a source of flexible power generation. But it is important to
develop other solutions as well, in particular for the long-term.
The problems of power surpluses and then shortages can have very different
consequences, although the same solutions can often be used to address
both challenges.
A stronger European transmission grid is widely recognised as a core solution
balancing supply and demand.

A stronger grid contributes by averaging local variations in intermittent
generation. At a given time, one European region may have little wind and
another a lot. And while one region may be dominated by wind power,
another region may be dominated by solar or hydro power.

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A stronger grid also promotes a more efficient use of existing flexibility
because available flexibility in one region can help in another. More
interconnections, along with power prices that reflect the real value
of flexibility, can also create opportunities and incentives to develop
flexibilities in regions that have specific advantages such as pumped
storage.
A stronger transmission system reduces the risk of shortages and eases
excess generation problems by allowing exports to regions where prices are
higher. Different types of energy storage can help tackle both the excess and
the shortage challenges, because storage facilities can buy power to fill up their
reservoirs when prices are low and then deliver to the market when prices are
high. Price variations govern the short term operation of storage facilities and
determine the profitability of new storage capacity.
“The cost of forced rationing of power is huge in any modern society, and
that cost will probably be even higher in the years ahead as even more
economic activity and private consumption will rely on electricity.”
Combined heat and power production (CHP) and the heating market offer an
interesting opportunity for flexibility, notably in countries with a well-developed
district heating system and in industries that consume large amounts of heat.
By using the heat from power generation, CHP plants achieve high total energy
efficiency, and coal in CHP will increasingly be replaced by gas and biomass to
reduce CO2-emissions.
Producing electricity in CHP plants is often governed by demands for heat
alone, which results in an inflexible supply of power. Yet CHP plants may
become more flexible, and they may help solve both the excess and shortage
problems. With storage of heat, more power may be generated in hours with
high power prices, and the extra heat may be stored for later use. At times when
power prices are low, power generation may be reduced or even stopped, and
the demand for heat may be covered by stored heat. And by installing separate
cooling systems, a CHP plant will be able to operate as a traditional thermal
power plant, generating electricity whenever the power price is high enough.
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The investment in separate cooling will only be profitable if power prices are
very high in some periods.
When power prices are very low, a CHP plant can also stop generating power
and heat from fuel, and instead produce heat from electricity. In district heating
and in smaller heating systems without CHP, biomass or gas may be replaced
by electricity from the grid when power prices are low. Heat storage would
increase this flexibility. Heat pumps have low marginal cost when producing
heat from electricity, and therefore can operate whenever there is a need for
heat other than when power prices are very high. Then demand for heat may
be covered by stored heat or by an alternative fuel like gas.
“This means that very high prices at times of limited supply may be
necessary to trigger investment in flexibility and its efficient use.”
In some countries, like Germany, the heating sector is larger than the power
sector, so the potential for flexibility in the power sector is considerable and
is also in the nature of low-hanging fruit. But development of this flexibility
also requires market prices that fully reflect power excesses and shortages.
In the longer term, a stronger integration of electricity, gas and heating may
be crucial to exploit the advantages of these energy carriers, in particular,
their flexibility.
Having the flexibility to reduce demand when power prices are high contributes
to the security of supply. Smart metering and smart control of consumption are
essential to exploit this potential for flexibility, especially where small consumers
are concerned. But smart metering is not enough. With just a few exceptions,
reductions in power consumption involve significant costs in terms of lost
production or lost consumer welfare. This means that very high prices at times
of limited supply may be necessary to trigger investment in flexibility and its
efficient use.
Along with a stronger and smarter grid, market prices will have an important
role to play in balancing the electricity market. From a market perspective,
prices should be allowed to skyrocket when there are shortages while also
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reflecting the full cost of CO2 emissions. But there are other important
considerations that may lead the EU and governments to create regulations
that reduce the strength of the price signals. In other words, subsidies for
renewable energies may be justified by the need to speed-up technological
developments or reduce the risk of carbon leakage. A similar justification
can be advanced for energy efficiency targets. Subsidies for renewables and
energy efficiency targets mean that a given emission target can be reached
with a lower carbon price than through a climate policy based purely on
carbon pricing. A side effect of this is that the power price, particularly in
peak hours when less efficient fossil generation is needed, will not reflect the
full cost of emissions.
Governments have questioned the ability of the current energy market to
deliver the required security of supply in the future. Among the proposed
solutions are capacity payments to promote investment and delay
disinvestment. This concern for security of supply is understandable, and it is
important to establish regulatory regimes that give investors the confidence
to invest. But it is also important that regulations promote innovative,
efficient and sustainable solutions and take advantage of all possible options
regarding consumption, transmission, storage and generation. If they’re
poorly designed, capacity payment systems can favour fossil generation and
inefficient national solutions, and they may also lead to peak prices that are
too low, because they do not reflect the real cost of capacity and the real cost
of CO2 emissions. This may significantly reduce market-based incentives to
develop capacity and flexibility.
“It is also important that regulations promote innovative, efficient and
sustainable solutions and take advantage of all possible options regarding
consumption, transmission, storage and generation.”
Against this background, how can regulation aimed at 2030 and beyond
exploit the EU internal market’s economic advantages while still allowing for the
renewable support schemes and interventions needed for security of supply?
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Guidelines for such a design should include the following:

Market design, transmission investment incentives, support schemes
for renewables and carbon pricing should be evaluated as a single
package because the development of the energy system will be
affected by regulation as a whole.

A stronger and smarter European grid is essential because increased
interconnection is key to more stable and efficient markets. Smart
systems to exploit consumer flexibility must be established.

With greater market integration, the economic advantages of
harmonising national support schemes and other regulations increase.

High and fairly predictable carbon prices are essential if Europe is
to stay on track for the 2050 target. A high carbon cost creates a
broad incentive to innovate and invest in energy efficiency, low carbon
generation, and in flexibility too.

To grow, renewable power needs to grow up. Subsidies should not
replace market prices, but rather be in addition to them, thereby
promoting renewable power generation where and when power
prices are high. There should be no subsidy when power prices are
negative and no priority for renewables in the grid because that is
taken care of with support schemes and carbon pricing. Renewable
energy should pay for its system costs like any other method of power
generation. These changes in regulation promote efficient investments
and operation.

There may be a need to turn support schemes more in the direction
of flexibility and maintaining security of supply rather than focusing on
kWh. The current regulation only sees pumped storage as a use of
energy, not as a tool to promote a sustainable energy system.

If introduced, schemes of capacity payments must be carefully
designed. Schemes should not be limited to conventional national
power generation, but rather should promote technology-neutral and
cost efficient, sustainable and innovative solutions for consumption,
storage and generation. The procurement of capacity should not
unjustifiably discriminate against suppliers from other countries, and
where possible schemes should be harmonised.

It may be very difficult to develop general support schemes that
address the broad range of potential flexibility and capacity, particularly
yet unknown solutions or contributions from small consumers or
generators. Given this difficulty, regulations should make sure peak
prices are high enough to encourage the necessary flexibility. ■
Our energy mix will evolve
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52
Integrating energy and
climate policy to drive lowcarbon growth in Europe
Europe’s efforts to control emissions are failing, yet the necessary
technologies are already here – decarbonising the power system
and then using it to run more of our economy is the key, say
Johannes Meier and Arne Mogren.
Johannes Meier
Chief Executive Officer of the European Climate
Foundation
Arne Mogren
Director of the European Climate Foundation's Power
Programme and Member of the Energy Roadmap 2050
ad hoc Advisory Group
It made grim headline news when newspapers reported this spring that the
average CO2 reading in the atmosphere over a 24-hour period passed 400 parts
per million at Mauna Loa in Hawaii, where observations have been recorded
since 1958.
The best available evidence suggests that the amount of CO2 in the air hasn’t
been so high for at least three million years. The reading from Mauna Loa is a
sobering reminder that our efforts to bring human-produced emissions under
control are failing so far. The period since the Industrial Revolution, the burning of
fossil fuels has caused a 40% increase in atmospheric CO2.
Decarbonisation is among the greatest challenges of our time. What’s needed is clear:
we must reduce emissions substantially. But the question remains: how are we going
to do this before it’s too late? Specifically, how can we factor the decarbonisation
goal into Europe’s ongoing efforts to create an effective internal energy market for
gas and electricity? This article summarises current developments and lays out three
“must-haves” for structuring the internal energy market in the run-up to 2030.
Europe has committed to bring greenhouse gas (GHG) emissions down by 80-95%
by 2050, consistent with the internationally agreed target to limit global warming to
below 2°C. A number of studies by the European Commission, EURELECTRIC, the
European Climate Foundation and others point in the same direction: far-reaching
decarbonisation in the run-up to 2050 is feasible building on known technologies.
Higher shares of renewable energy, substantial energy efficiency improvements and
better and smarter energy infrastructure are no-regrets options for transforming the
European energy system. The role of gas with Carbon Capture and Storage (CCS) and
nuclear power not only depends on acceptance by the general public but also on the
extent to which these alternatives make economic sense.
Electrification and decarbonisation of the power system are at the very heart of
a decarbonisation strategy for our economies. That implies a major build-out of
renewables in most parts of Europe.
Decarbonisation will obviously not happen overnight. To drive the process, we need
a step-wise approach, with clear targets and milestones. The EU already has a
framework for steering energy and climate policies up to 2020, so the logical next
step is to create a framework for 2030 that will give investors the confidence they
need for funding over the long haul.
With or without decarbonisation, significant investments are needed to modernise
Europe’s energy system, and these investments will have an impact on energy prices
up to 2030. A decarbonised energy system doesn’t of itself lead to higher costs, but
the cost mix will be different because capital expenditure will be up while operational
expenditure will be down. Against this background, we face the big challenge of
building confidence among investors that the decoupling of growth from traditional
ways of using fossil fuels can and will happen. Well-functioning trade mechanisms,
transparency and transaction efficiency are crucial to building investor confidence.
In short, competitive markets must be at the core of the decarbonisation process.
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But markets won’t achieve decarbonisation on their own. We need clarity on the
overall architecture, aligning the energy and climate agendas. Power systems in
Europe are already becoming more integrated thanks to a process that started
a long time ago. Its main drivers are economies of scale because the sharing of
resources and trading can lower the total system cost substantially.
“With or without decarbonisation, significant investments are needed to
modernise Europe’s energy system, and these investments will have an
impact on energy prices up to 2030.”
Electricity is becoming integrated with gas and heat. In the long run, we will also see
the electrification of transport. With decarbonisation as a major driver, electricity is
a tool for efficiency gains, and higher volumes of variable power supply mean that
different forms of demand response can add value. The ongoing internationalisation of
Large untapped potential for energy efficiency across the world
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the economy at large and its effect on users, especially energy-intensive companies,
is also binding power markets closer together.
So market integration is already happening, but the effects are uneven and the EU’s
capacity to handle the challenges of the decades ahead at European level is weak.
The key will be setting a clear pathway for the no-regrets options while also leaving
room for new technologies and market developments.
When the Single Market was established 20 years ago, electricity and gas were still
viewed as national interests. All-inclusive monopolies and cartels dominated, while
various forms of direct intervention – such as state ownership, subsidised capital and
detailed price regulation – were governments’ main instruments for influencing these
sectors, along with extensive cross-subsidies. The real market value of electricity
was unknown – to the utilities, to the users and to the public. Outwardly, society
appeared to have a firm grip on the utilities, but in reality the power sector to a large
extent governed itself.
Significant investments will be required to renew or refurbish our energy system
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But, market innovation was on the way, beginning in the UK and in Norway.
The approach taken to opening up the Nordic region was twofold – a shift
from controlling details to using more general instruments such as taxes
accompanied by the opening up of rigid market structures to competition and
innovation. From the start, transparent market-based price creation was at the
core of this shift. Unbundling, along with some additional measures, meant
that control of physical flows in the system no longer led to dominance over
economic transactions.
Without this opening up of the power sector, it is hard to imagine the progress
so far on increasing renewables and reducing emissions would ever had taken
place. There’s still a long way to go, but the basic principles are in place, and
the decarbonisation agenda makes them more essential than ever. Without
correct price signals, it is very hard for resources to be used efficiently.
We are still at only the initial stages of building more sustainable energy systems.
There are critical challenges associated with large-scale deployment, such as
fully integrating renewables into the EU’s electricity system in a way that deals
with intermittency and improving co-operation among member states in meeting
targets.
What’s needed, then, to make the EU’s internal energy market the centrepiece
of a successful European decarbonisation drive? We should focus on three
“must-haves”. First, European governments need to focus on integrating the
internal energy market and other policy instruments into a powerful 2030
package. The complexity of the dependencies, inconsistencies and higherorder and side effects of the interventions and initiatives at different levels of
governance is such that we see a lack of orientation and direction across
actors. Support schemes like Feed-in Tariffs deliver, but they are costly and
can have unforeseen consequences on market integration and on wholesale
markets. The internal energy market and the deployment of renewables
should be seen as correlated rather than in isolation. We need to move
faster on integration to ensure that we have a European-wide market in place
beyond 2020.
Second, we need a robust carbon price to drive the long-term, low-carbon
investments that will enable us to decouple growth from fossil fuel consumption,
and also to decarbonise the power sector. Emissions need to come with real costs.
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The internal energy market and the Emissions Trading System (ETS) are, in a way,
two sides of the same coin. The current carbon price doesn’t provide the signals
to investors needed to trigger massive low-carbon investments. A structural reform
of the ETS so that investors can expect a robust and “de-politicised” carbon price
would be a major step forward. Just using the carbon price as a backstop won’t
drive change; the price needs to be sufficient, and complemented by policies
targeting the parts of the abatement mix that the ETS doesn’t reach.
Third, we need a more forceful way of achieving physical integration of national
markets. Plans and dialogues have been strengthened, but shared efforts to build
infrastructure are still insufficient. We must view infrastructure as an enabler of
decarbonisation and more efficient use of existing resources-generation as well as
demand response. We also must do more to integrate our power, gas and heat
systems. Grids and grid connections must be seen with a long-term perspective.
A powerful 2030 package combining market integration, a robust carbon price and
strengthened infrastructure are prerequisites for European decarbonisation. All three
ingredients are essential if we are to avoid the costs that will follow from a lost decade.
“We need a European “industrial policy” that tests new market solutions
through step-by-step exposure to market risks. So far, this has happened
mainly at national level, but now the time has come to consider new solutions
from a European perspective.”
Once again, markets alone will not drive decarbonisation. We need to set targets
– starting with decarbonisation – and transform those targets into market-relevant
instruments. It’s worth repeating the insight from the Roadmap 2050 analyses
that a 2030 GHG reduction target of less than 40% would over the longer term
increase the costs of decarbonising the economy.
Complementary measures will be needed to scale up efficiency investments and
to drive down costs for renewable technologies. One lesson learned from the
2020 package is the importance of avoiding a compromise motivated by political
calculations. Complementary measures should be viewed systemically, not on a
stand-alone basis, and there has to be a clear hierarchy and a comprehensive
view of what should be achieved by when and how that can happen.
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The internal energy market is a valuable resource for driving innovation and
change in the EU, but we need to think much bigger than that, in terms of 2030.
We believe that the internal energy market agenda should therefore be seen as
an integrated element in the architecture of a new growth model for Europe, a
growth model based on a low-carbon economy.
“Plans and dialogues have been strengthened, but shared efforts to build
infrastructure are still insufficient. We must view infrastructure as an enabler
of decarbonisation and more efficient use of existing resources-generation as
well as demand response.”
To help achieve this vision, we need a European “industrial policy” that tests new
market solutions through step-by-step exposure to market risks. So far, this has
happened mainly at national level, but now the time has come to consider new
solutions from a European perspective. If those issues aren’t handled effectively,
there’s a risk that the combination of integrated systems, open markets and
national policies will trigger growing tensions and perhaps protectionist moves
by some member states.
Without widespread support, and demand from member states for common
solutions, it will be hard to pursue a low-carbon growth model. The economic
crisis has fundamentally changed priorities for the time being. It may be tempting
to use all resources to solve the immediate problems and provide local solutions,
but is such a “balkanisation” of energy and climate issues really an attractive
alternative for anyone? The fact is that European markets already depend on
each other, and decarbonisation increases that dependency.
We need an ambitious idea for Europe, so a vision of low-carbon economic growth
is exactly that. The internal energy market aligned with a robust carbon price and
complementary measures to drive energy efficiency and renewable solutions, can
and should play a crucial role in achieving the synergies needed for competitiveness,
security of supply and sustainability. Hanging onto existing structures in businessas-usual scenarios isn’t a sufficient basis for a viable European future. A more
positively forward-looking view of European energy is a growing imperative. ■
What EU governments must
do to get the internal energy
market right
Uncoordinated national energy initiatives are harming the prospects
for EU-level market integration. Europe’s politicians must pay more
than lip service to a European energy market and take coordinated
action, warns Hans ten Berge.
Hans ten Berge
Secretary General of EURELECTRIC
The EU’s leaders have already committed to transforming Europe into an energyefficient, low carbon economy by 2050, they aim to have reduced Europe's
greenhouse gas emissions by 80-95% compared to 1990 levels, and by as soon
as 2020 they are targeted to have fallen by 20%.
An integrated EU-wide electricity market could lower the cost of decarbonisation
because integrated, properly functioning markets and market-based instruments
are more cost-efficient than any regulatory measures or political interventions.
But the benefits of market integration go further than that: larger markets reduce
prices by allowing more competition and greater economies of scale. They also
offer more choice between different suppliers or contract types and are a better
guarantee of security of supply. Rather than being seen as a secondary priority,
market integration should be speeded up.
This doesn’t mean simply building more lines across national borders. Yes, an
EU-wide electricity market requires a reinforced network – lines that can transport
electricity from large offshore wind parks in the North Sea, for instance, to major
consumption centres further south. But an EU-wide internal electricity market
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calls for more. It requires harmonised – or at least coordinated – EU-wide policies
and policy instruments. Only they can create a level playing field for the free flow
of electricity throughout the EU.
The list of potential coordination candidates is long: from support schemes
for renewable energy and permit granting procedures for transmission lines
to electricity trading rules and concerted efforts to reduce CO2 emissions.
Unfortunately, national approaches still dominate in many of these areas. A truly
common EU energy policy seems further away than even a few years ago, when
the European Council of February 2011 agreed to complete the internal energy
market by 2014.
“An integrated EU-wide electricity market could lower the cost of
decarbonisation because integrated, properly functioning markets and
market-based instruments are more cost-efficient than any regulatory
measures or political interventions.”
Since then, member states seem to have taken two steps back for every
single step forward. Germany has unilaterally started down its ‘Energiewende’
path, while the UK has proposed an electricity market reform whose measures
effectively disregard the implications for other European markets. In short,
national initiatives rather than European coordination seem to be the name of
the game.
Instead of opening up borders to ensure security of supply, Europe’s governments
are trying to achieve national energy self-sufficiency. Instead of letting market
forces determine the correct price, governments are intervening in the market
to set wholesale and/or retail prices. Instead of allowing the internal market to
develop, governments are introducing discretionary – and sometimes retroactive
– taxes with the stroke of a pen. The result is that the market is suffering and
its role is diminishing. Market participants increasingly look to governments
before they act, and their behaviour is increasingly driven by regulatory measures
or interventions rather than market forces. This reluctance to move from
uncoordinated national interventionist policies to market-based and common
European ones persists in many areas. The expansion of renewables, for
instance, is being driven by national subsidies rather than a single European
scheme. This leads to a veritable war of subsidies between member states,
which race to offer the most attractive schemes, regardless of location or actual
technology needs. The results are often bizarre: Germany has more installed
solar power than sunny Spain.
Grid expansion in Europe is similarly suboptimal: without an attempt to plan the
grid from a European perspective, it seems likely that the strong national focus
of regulators and transmission system operators will fail to address the essential
infrastructure links needed at a regional or pan-European level. The result is
uncoordinated and nationally focused grid expansions that prevent electricity
from flowing where it is most needed. The missing interconnector between Spain
and France is a case in point: though it’s vital to connect the Iberian peninsula
with the rest of Europe, this project has been delayed for at least 20 years.
Market regulation is being driven by national decisions, with the effect of
maintaining closed national markets and subverting plans for greater crossborder competition. The regulation of, say, renewables, capacity payments or
price caps, is resolutely national. The same applies to actions for addressing
security of supply. Rather than striving to speak with one voice, national solutions
to generation adequacy concerns remain dominant, whether focused on capacity
remuneration mechanisms, storage or other alternatives.
Looking beyond fairly narrow energy issues, even climate policy is coming
under threat, despite being the only area in which there actually is an EU-wide
market-based policy tool in the shape of the cap-and-trade EU Emissions
Trading Scheme. Yet even this is being undermined by national decisions on
carbon floors and carbon taxes, as well as by unclear interaction with targets on
renewables and energy efficiency.
Why is all this so problematic and why should policymakers and citizens care?
The answer is simple: because it is costly. Because purely national policy
instruments are almost inevitably sub-optimal for Europe as a whole. European
consumers are paying the price in higher electricity prices, and also through less
choice or inferior quality of supply.
The EU’s internal energy market is now genuinely at a turning point. Either the
EU changes course and pushes member states to align their national policies
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and targets with European ones or we will witness an erosion of the progress
achieved so far, putting at serious risk the European Council’s 2014 target.
More than ever, a real push for market integration is now needed. The actions
needed fall into four categories: market integration ‘proper’, along the lines of the
EU’s Third Energy Package; renewables integration; generation adequacy; and
grid investments.
First, and arguably most important of all, member states must correctly and
rapidly implement existing EU energy market legislation. A step in this direction
is for governments to remove such market distortions as regulated prices and
price caps. More than half the member states still have regulated prices that
completely obscure any price signal that the market could give, not least for
investments.
The EU should also put pressure on member governments to move forward
and implement the agreed ‘target models’ for day-ahead market coupling,
intraday, balancing and forward markets. Key to this would be progress
in north-west Europe, specifically in Denmark, Finland, Norway, Sweden,
Britain, Belgium, France, Germany, Luxemburg and the Netherlands.
Integration between these 10 countries is crucial to creating a full European
energy market, and day-ahead and intraday market needs to be established
among them by the end of 2013 if there’s to be any hope of an EU-wide
market by 2014.
Second, the growing share of electricity from renewable sources needs to
be integrated into the market. Renewable energy producers should meet the
same requirements as other generators, notably on scheduling, nomination and
balancing. This would not only help stabilise the electricity system but also would
create a level playing field and a more cost-effective use of resources.
National support schemes for renewables should be aligned, putting an end to
costly subsidy wars. As a first step, governments should start using the crossborder cooperation mechanisms foreseen in the EU’s 2009 Renewables Directive.
The Commission should then steer the progressive convergence of national
support schemes towards a single European model. And after 2020, support
schemes for mature renewable technologies should be phased out. Instead,
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support should aim at promoting research, development and deployment of
renewable technologies that are not yet market-ready.
Third, policymakers must address the investment gap that results from the fasttrack implementation of renewables and increasing concerns about generation
adequacy. In a growing number of European countries, the need for renewables
has reduced the operating hours of conventional sources like coal and gas.
This has made them increasingly unprofitable to run, calling into question future
investment even though they are still crucial to the overall system. Conventional
plants remain necessary to cope with the intermittency and unpredictability of
renewables like wind and solar.
The result is that policymakers are struggling to find solutions that allow
conventional plants to continue operating to safeguard electricity supplies.
Unfortunately, member states rather than the EU have so far taken the lead
in devising responses to this, most notably by setting up national capacity
remuneration mechanisms, which are schemes that reward conventional
generation for being available in times of need. The proliferation of these
schemes across Europe without any coordination is worrying because if they are
not market-based and technology-neutral they could distort and undermine the
market. A regional approach is needed that would be compatible with the internal
energy market. In the meantime, the European Commission is working to bring
greater coherence to these on-going national initiatives, and EU governments
would do well to support this regional aim.
“Implementing EU energy market legislation needs urgent action, as does
the integration of renewables into the market along with a coordinated
approach to concerns over power generation adequacy.”
Fourth and last, grid investments are inevitable if the internal electricity market
is to function properly. Lengthy permit-granting procedures in most EU member
states are among the major barriers to network development, including the
interconnections that are key to a working internal energy market. The acceleration
of interconnections should be a priority, and cutting red tape would also give an
incentive for private investors to undertake infrastructure development not only
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in high-voltage, cross-border transmission grids but also in local, low-voltage
distribution networks that are going to be increasingly important with the rise of
renewables and the further development of demand response.
The EU must foster greater coherence between European and national energy
policies, and promote the market’s central role in achieving EU energy policy
objectives. Implementing EU energy market legislation needs urgent action, as
does the integration of renewables into the market along with a coordinated
approach to concerns over power generation adequacy. Grid investments that
will help the internal energy market take off must be fostered too. Together all
these actions are needed if Europe is to reap the benefits of a truly integrated
electricity market.
The time for declarations is over; now it’s time to act. Governments must stop
paying lip service in Brussels to the idea of integrated energy markets while rolling
back any integration efforts at home. The current re-nationalisation of energy
policies is costly, wasteful and inefficient – and ultimately it is the consumers who
have to pick up the tab. In these times of tight public and private budgets, can
elected politicians really afford to let consumers pay more than they must? ■
Boosting energy efficiency
“The stuff we have, a strong
wind will blow it to pieces”:
Two decades behind schedule,
we need to re-think the single
energy market
The EU has made progress in integrating its markets, but there is
still a long way to go, argues Jorge Vasconcelos. Europe needs
a reinvented energy market and technological developments can
help that to happen.
Jorge Vasconcelos
Founder of the Council of European Energy Regulators and
Member of the Energy Roadmap 2050 ad hoc Advisory Group
Shakespeare said it all in his little-known play “Pericles, Prince of Tyre”:
“But shall I search the market?
What else, man? The stuff we have a strong wind will blow it to pieces, they are
so pitifully sodden.
Thou sayest true; they’re too unwholesome, o’ conscience.”
All markets are social constructions of some sort, whether they are the slave
markets of the past mentioned by Shakespeare or electricity markets of today.
And like buildings, some markets are ancient, resilient, efficient and admired,
while others are short-lived, fragile, defective and scorned. But unlike diamonds,
markets are not forever: they exist to serve the social needs of their time.
Markets are an ingenious human achievement; they are neither a reproduction
of natural processes nor the logical outcome of abstract reasoning. As Nobel
laureate Ronald Coase pointed out, “the creation of new markets is frequently
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complicated and sometimes even thwarted by ideological enmity, political
resistance, fear of uncertainty, or mere ignorance.” His definition applies neatly to
the EU’s internal energy market (IEM).
The IEM project set out to simultaneously meet two goals:

To liberalise Europe’s electricity and natural gas markets, and so allow
energy consumers to benefit from competitive prices through the
play of market forces. It was an ambition being embraced by many
governments around the world in the late 1980s and early 1990s.

To contribute to the “ever closer union” proclaimed in the Treaty of
Rome in 1957 and re-stated by the Single European Act of 1986 when
December 31, 1992 was set as the deadline for the EU’s single market.
Twenty years later, the single European energy market is still not a reality. Political
resistance, fears of uncertainty, ignorance and entrenched economic interests
all bear a share of the responsibility. Yet even though it wouldn’t be accurate to
describe the present situation as a single market, much has in fact been achieved
over the past two decades, so it would be equally inaccurate to describe the
result as an irremediable failure. From a legal standpoint, the EU has built the
largest integrated electricity and natural gas markets in the world, serving the
largest world economy, even if they are not yet fully integrated physically or in
terms of price. EU member states’ national electricity and natural gas markets
are fully liberalised, at both wholesale and retail level and some of these national
markets have successfully built strong links with neighbouring markets, thus
widening the choices available to consumers and enlarging suppliers’ customer
basis.
But Europe now faces two simultaneous challenges. The first is to complete the
IEM and achieve truly integrated European electricity and natural gas markets.
This is both an economic necessity and a political imperative. The second is to
reinvent the whole concept of the energy market to take account of recent and
coming technological developments, together with the environmental goals set
out by EU leaders in March 2007 (establishing an “integrated climate and energy
policy”) and October 2009 (“to reduce emissions by 80-95% by 2050 compared
to 1990 levels”).
To complete the IEM, policymakers, industry and regulators need to deliver on
a number of crucial actions. That means the strict and timely implementation
of existing legislation, the abolition of all current market distortions and the
prevention of new ones being introduced. Twenty years of legislation and
extensive jurisprudence means it would be useful to bring all these elements
into a coherent and simplified legal framework for energy. This task should not
distract the European Commission from its essential role as watchdog and
enforcer of EU law.
Appropriate regulation needs to be introduced at EU level. The Agency for the
Cooperation of Energy Regulators (ACER) that was established in 2009 needs
to be upgraded to make it a truly effective IEM regulatory agency, because
having EU markets without EU regulators poses a major problem. If that isn’t
done, market fragmentation will be a continuing threat and unilateral policies and
regulatory decisions will jeopardise energy market efficiency and energy system
reliability. This is an institutional change that will require strong political will and
innovative legal solutions. Energy regulation at EU level is now as urgent as that
of the EU’s financial markets.
Energy infrastructures must be expanded and upgraded, particularly where
cross-border inter-connections are concerned, so as to enable the full integration
of national markets. This is not so much a financial problem as a political,
administrative and regulatory one.
Tight operational coordination at EU level needs to be introduced, with the
clear assignment of responsibilities to the appropriate EU electricity and natural
gas bodies and to the respective national system operators. Without proper
operational coordination, existing and new transmission assets will remain
under-utilised, with an increased risk of black-outs and gas supply disruptions.
Energy infrastructures must be modernised through the systematic introduction
of modern information and communication technologies (ICT). This will improve
the planning and operation of energy systems, whatever their configuration.
It will also improve the functioning of Europe’s energy markets, both directly
because more and more reliable information will be available to market agents,
and indirectly through the more efficient use of physical infrastructure the better
to enable energy trade. ICT also has a decisive effect on enabling demand
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participation in energy markets, the development of energy efficiency services
and a large-scale deployment of electric vehicles. The “green economy” may well
make a substantial contribution to growth and job creation in Europe.
Besides these points, there are a number of other features that represent a threat
to electricity market efficiency and integration. Instead of becoming larger, more
liquid and more robust, Europe’s electricity markets seem to be shrinking, losing
liquidity and becoming more volatile and therefore fragile. By decreasing energy
demand, the economic crisis is reducing market liquidity, and though it’s to be
hoped this is temporary, there are other structural factors that can be expected
to have a long-lasting impact on market liquidity.
“Energy infrastructures must be modernised through the systematic
introduction of modern information and communication technologies. This
will improve the planning and operation of energy systems, whatever their
configuration.”
The first of these is energy efficiency and conservation. Reducing energy demand
by 20% as compared to the business-as-usual scenario is one of the EU’s 2020
energy and climate policy goals. Less demand means less market volume. A
second factor is the increased amount of subsidised electricity, mainly from
renewable energy sources and co-generation. Because it is directly subsidised,
this does not compete with conventional generation in “conventional” markets.
This type of “off-market”, “must-run” generation is expected to increase
substantially up until 2020 and onwards.
Third, some large industrial consumers and electricity producers such as
those based on nuclear power generation are promoting long-term contracts,
and so further reducing conventional market liquidity. And fourth, increased
protectionism may lead to a slow-down in the construction and use of crossborder interconnections.
With a 20-year missed deadline, “completing the IEM” can no longer have the
same meaning as was initially foreseen. Energy markets were then expected to
deliver competitive prices and provide customer choice. And the general belief
was that efficient markets would also enhance security of supply and provide
suitable environmental protection. But since then, public policies have changed
and now energy markets are not only expected to deliver competitive prices but
also make a decisive contribution to creating a low-carbon economy.
The impact of these policy changes is not to be ignored. In early 2011, the
European Council stated that “reducing greenhouse gas emissions by 80-95%
by 2050 compared to 1990 as agreed in October 2009 will require a revolution in
energy systems, which must start now.”
Looking back at the difficulties encountered during the creation of electricity
markets, and considering their current weaknesses and imperfections, some
observers believe that Europe’s electricity markets will not be able to withstand
the growing pressures of these changing public policy requirements. They
warn that they will eventually collapse, leading to a “re-monopolisation” of the
electricity industry. Others think that the present public policy goals are too
ambitious and too expensive, and therefore cannot be achieved. They believe
that policymakers will soon realise how such policies collide with hard market
realities, and that governments and the EU will consequently have to recognise
the need to soften these policies. It will be policies and not markets that will
eventually collapse, according to those observers who stick to the “classical”
energy market model.
So is a choice between market failure or policy failure the only one we are left
with? Is there a way to escape this dilemma by reconciling efficient markets with
ambitious policies?
In my view, both market sceptics and political cynics are wrong, because they
underestimate the disruptive role of technology. It is very difficult – perhaps even
impossible – to reconcile, at least in a cost-effective way, some policy goals with
current electricity markets. But the introduction of new technologies will change
the physical functioning of electricity systems, and as a result the functioning
of electricity markets. The application of new technologies to energy systems,
in particular ICT, will affect the way energy systems are planned and operated,
and the way energy markets work. ICT has the potential to make energy and
climate policies effective and electricity markets efficient. ICT may contribute
simultaneously to improving market efficiency, facilitating the implementation of
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public policies and adopting market-based mechanisms to implement renewable
and energy efficiency policies.
Technology is not a magic solution to all market inefficiency problems or to
policy implementation difficulties. What technology does allow for is the design
and implementation of market-based mechanisms and incentives that enable a
growing number of public policy goals to be met within the regulatory framework
of liberalised electricity markets. Policy and regulatory innovation is needed to
support technological innovation, thus keeping markets alive and functioning
well, and to ensure that policies are implemented cost-effectively.
Identifying and optimising the benefits of ICT for energy systems and markets is
the big challenge being faced by the energy industry and its regulators. Those
who would deny the need for a revolution in energy systems sometimes pretend
that ICT will have little or no impact upon energy markets, and so they advocate
managing or regulating the energy industry on a basis of business-as-usual.
They overlook, though, the dramatic impact of ICT upon our private lives, social
relations and economic behaviour. These hopelessly antediluvian patriarchs
seem to envisage the energy industry as a Noah’s Ark escaping the internet’s
flooding. Others are so excited about ICT’s apparently infinite possibilities
that they overlook the physical laws, economic restrictions and cultural inertia
governing energy systems. They dream of the birth of a brave new “internet of
energy” world.
What is urgently needed now is a realistic design for the transition process from
today’s low-ICT, high-carbon energy systems to a high-ICT, low-carbon system
of tomorrow.
“The stuff we have, a strong wind will blow it to pieces.” Strong wind and sunshine
can literally blow conventional electricity markets to pieces if high penetration
rates of wind and solar generation are attained without proper adaptation of “the
stuff we have”. After 20 years, this “stuff” is pitifully sodden, too unwholesome
and needs to be replaced anyhow. To find the appropriate replacement one will
“search the market” for market-based solutions. But searching the market will
nonetheless be interpreted as actively looking for “new stuff”, not as “old market
soul-searching”. ■
Friends of Europe – Les Amis de l’Europe
4, Rue de la Science, B-1000 Brussels, Belgium
Bibliothèque Solvay, 137 rue Belliard, B-1040 Brussels, Belgium
Tel.: +32 (0) 2 893 98 23 – Fax: +32 2 893 98 29
Email: [email protected]
Website: www.friendsofeurope.org
With the support of the Europe for Citizens
programme of the European Union
This project has been funded with the support of the European Commission.
The Commission cannot be held responsible for any use which may be made of the information contained therein.