community energy
Eurelectric, the association defending the interests of the European electricity industry, presents itself as a defender of the European consumer and the internal energy market. And yet many of its recommendations serve neither, argues Manon Dufour, head of the Brussels office of independent organisation E3G.
Eurelectric officially supports key Energy Union goals such as competitive markets and ambitious climate policies, but its policy recommendations tell a different story. In particular, its response to the Clean Energy for All Europeans package (the “Winter Package”), which was proposed by the European Commission late last year and is now being debated by the European Parliament and the European Council, goes against the grain of competition and decarbonisation.
The vision that emerges from reading Eurelectric’s various policy documents is one in which consumers are charged for reducing their electricity demand, dying coal plants are bailed out by taxpayers and innovative community projects are rushed into a complex and inefficient market.
Europe’s electricity sector is a fast-changing business. Passive consumers of yesterday’s electricity market (from individual households to local governments and large businesses) are becoming active participants in the new energy economy. It’s to accommodate and nourish this fundamental shift that the European Commission has proposed an upgrade to electricity market rules as part of the “clean energy package”, on which Eurelectric has recently commented – see for example here and here.
The following three recommendations illustrate Eurelectric’s selective commitment to market principles.
1. A tax on demand-side innovation and energy efficiency
Eurelectric writes that because electricity suppliers buy energy ahead of time, they lose revenue when consumers decide to reduce their consumption and/or provide flexibility to the system – and that, therefore, suppliers should be compensated (“The energy that is not consumed by the end-customer but diverted by the third-party aggregator is still sourced by the supplier of the activated customer. Therefore, this electricity has to be paid for”).
This is tantamount to saying they should be rewarded for failure, a failure to accurately account for important new innovations aimed at helping consumers and taxpayers save money. If such disincentives to efficiency were agreed to, what would stop suppliers systematically over-procuring energy consumers don’t want or need?
In the name of creating a “level-playing field”, Eurelectric calls for citizen and community-owned renewables to be treated as though they were large utility-scale projects
Over time, one would expect suppliers to become better at anticipating on reductions in energy sales and adjust their energy procurement strategies accordingly. In fact, it is likely that suppliers will find it in their interest to develop their own demand response services for consumers. On the other hand, having to compensate suppliers would harm aggregators whose business model relies on helping consumers save money from energy savings.
Clearly then, “compensation payments” must be avoided in order to have a chance of developing demand-side flexibility across Europe, as independent think tank Regulatory Assistance Project (RAP) also argues in this paper.
2. An extra burden on fledgling community energy schemes
In the name of creating a “level-playing field”, Eurelectric calls for citizen and community-owned renewables to be treated as though they were large utility-scale projects (“Any kind of positive discrimination at the expense of other parties must be avoided”).
But exposing (for example) village-scale projects to the same complex regulations big utilities are subject to would choke a promising market that is only just emerging, before the right new products and services can be developed.
The idea of a “level playing field” is central to the idea of free and fair competitive markets. It means that every actor – no matter its size or current power in the market – has a fair and equal chance of succeeding if they have the right product or service. This requires fair treatment rather than identical treatment.
While large-scale renewables are getting ready to participate in electricity markets unsubsidised and on the same basis as other sources of generation, it is too soon for small-scale renewables. In most cases, their full market participation would require facilitation by third parties, such as ESCOs (energy service companies) or aggregators, which themselves rely on hedging products to minimise their exposure to changes in weather, changes in electricity prices, etc. The problem is that these services and products are still too scarce for individuals or communities to be able to use them.
The good news here is that, if implemented, the Commission’s legislative proposals would certainly incentivise their growth – and the growth of community-level energy projects in the process.
3. Money for aging power plants, with “no strings attached”
Thirdly, Eurelectric calls for capacity payments but rejects the safeguards proposed to minimise their likely impacts on competition, energy bills and the environment. If implemented, these recommendations would not only prolong the use of subsidies, even to aging and highly-polluting coal plants, but would also disincentivise the clean energy investments progressive companies are already making, e.g.in offshore wind, and delay the creation of competitive wholesale electricity markets to the detriment of European citizens and businesses.
Although a highly contentious topic, there is broad agreement in EU policy circles on the fact that Member States should have the right to revert to capacity payments as a last resort to guarantee security of supply, but also that these mechanisms present serious threats to the development of competitive, low carbon and integrated markets.
To all of this, Eurelectric says ‘no thanks’, revealing itself as a roadblock to reform
The Commission’s legislative proposals offer a framework to minimise these risks through consistent and transparent justification criteria for the use of capacity mechanisms, ensuring that they are open to all available resources, and that they are consistent with decarbonisation policies by, for example, preventing subsidies to coal. To all of this, Eurelectric says ‘no thanks’, revealing itself as a roadblock to reform.
The problem is that prolonging subsidies to old plants would also require the extension of subsidies for new projects. As recent auctions for offshore wind in Germany have shown, energy companies like DONG or EnBW (both members of Eurelectric) are ready to build large-scale renewable generation without subsidy by 2025. But this remains dependent on the ability to restore effective wholesale energy pricing, notably by putting an end to handouts to the old and unprofitable coal fleet.
So Eurelectric has a choice. Either it supports the market principles underpinning the Clean Energy for All Europeans package. Or it defends unfair privilege for current incumbents, even though many of those very incumbents are themselves ready and willing to make the transition. But in that case, it should not claim to be a supporter of fair competition and decarbonisation.
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I disagree with this review of the Eurelectric response to the CEP and I have the impression that it’s based on misunderstandings.
@1. Of course consumers are free to adapt their demand and if this is done in response to the retail price, then there is indeed no need for compensation. However if the the consumer wants to be active on the market (directly or through an aggregator) and at the same time wants to be supplied by a supplier that is sourcing this consumer from this same market, then of course the supplier needs to be involved and should be allowed to adapt it’s retail price.
@2. Local energy communities can be establishes already now. It is for me incomprehensible why such communities would need require preferential treatment.
@3. I am not advocating capacity markets. However a well designed capacity market is not a subsidy. And if a capacity market is implemented it must be technology neutral and, for example not favour new investments over existing capacity.
Manon,
Thanks! A short, excellent article.
The Eurelectric point of view : “This electricity has to be paid for”, is a monopolistic view.
It shows they want to escape the competition of a free market which operates in many markets very successful for the citizen.
@Paul,
Your response to argument #1 is besides the point made by Manon.
Yes, suppliers have the right to adapt their retail price to charge for uncertainty resulting from participating in demand response, but that is a matter of segmenting your customers.
Manon´s point is that diverted energy by demand response should not have to be compensated because that would remove the incentive on the side of the supplier to adapt the consumption estimates and anticipate the effect of demand response.
In the case that suppliers would indeed adapt their estimates, the flexibility service would not necessarily include the wholesale (or even imbalance) energy price as a cost. Since demand response would happen in response to market conditions, the effect on their consumption portfolio can in principle be predicted by retailers. This anticipation could be further facilitated by sharing the information on demand response activations, enabling suppliers to change their positions.
The official Eurelectric point of view however is simply that “This electricity has to be paid for”, so that this new kind of flexibility (i.e. created by independent demand response aggregators) on the demand side would not be supported by flexibility on the generation side, other than letting the TSO deal with residual imbalance.
Manon has a point using this Eurelectric position as an argument for her initial statement that it is more ´defending the vested interests of the market players than defending of the European consumer and the internal energy market´. Consumers could benefit from independent aggregators that focus on certain applications like storage across retail portfolios. The internal market could also benefit from a liquid market for aggregated demand side flexibility.
Hi Sander
I am happy that we seem to agree on the principles, namely that a supplier should be free to adapt its price if the consumer decides to become active on the market (directly or through an independent aggregator). The point is that the CEP means that suppliers would not have that right. And it is my understanding that that is also the concern of Eurelectric. By the way, such a concern is recently also expressed by the Nordic regulators. See: http://www.nordicenergyregulators.org/wp-content/uploads/2017/04/NordREG-response-to-Clean-Energy-for-all-Europeans-Aggregation-services-and-demand-response.pdf
best regards
Paul
Hi Sander
From your first sentences, I read that you do agree with my statement namely that suppliers have the right to adapt their price if consumers decide to become active on the market (directly or through independent aggregators), so on the same market that is used by the supplier to source this consumer,
Please not that this for of DSR is also called explicit DSR. This is very different from implicit DSR. In case of implicit DSR the consumer reacts on the retail price (again either directly or through an independent aggregator). In the case of implicit DSR, there is no involvement of the supplier and certainly there is no need for compensations.
Eurelectric is referring to explicit DSR. And the point is that the CEP implies that suppliers would not have the right to adapt their retail price, if the consumer becomes active on the market (to respond to market prices) in parallel of being supplied by the supplier. This is the justified concern of Eurelectric. And this concern is recently also expressed by the Nordic regulators. See: http://www.nordicenergyregulators.org/wp-content/uploads/2017/04/NordREG-response-to-Clean-Energy-for-all-Europeans-Aggregation-services-and-demand-response.pdf
best regards
Paul
@Manon & Sander
Indeed, retailers are interested in and already developing their own demand response services including aggregation for consumers. EURELECTRIC fully supports enhancing customers’ participation into markets and a framework for aggregation. However, you miss a couple of important points:
• Aggregators re-sell electricity on the markets. Aggregators reduce the consumption of specific consumers to free-up electricity and be able to re-sell it on the electricity market to be consumed somewhere else in the system. For this very reason aggregators should pay for the energy that they re-sell. If suppliers, as you suggest, adapt their supply forecast to the demand response activations, there will be no demand response, because there will be no energy to re-route and re-sell.
• If the revenues generated by activation of DR are smaller than the costs induced on other market participants, demand response activation will not be effective from the system perspective. In other words, the current proposal implies that even customers who do not participate in any demand response programme will support the cost of the allowed free-riding.
• In our view balancing responsibility is at the corner stone of the electricity market and all market players should bear these market responsibilities. Otherwise the costs will just be supported by someone else.
Demand response deserves more than the proposed Directive. A solid framework for the next decade must be built on principles, not exemptions.
The current proposal is likely to open years of legal uncertainty by overlooking advanced Member States experiences (e.g., France, Germany and Belgium) and independent analyses (reports from electricity regulators, report of the EG3 driven by the Commission: http://ec.europa.eu/energy/sites/ener/files/documents/EG3 Refined Recommendations_FINAL_clean.pdf ).
Local energy communities: They are a way to further empower energy citizens through a direct participation into, for example, a renewable project. These initiatives are great opportunities for utilities to partner and engage with active groups of citizens. For example there is a joint project in Belgium called “Rieme North” in Gand: Ecopower, a cooperative, created a civic cooperation for the direct participation of the population and EDF Luminus is the industrial partner providing the technical and building expertise. The project consists in 4 wind turbines with expected annual production of 28 GWh, good for 21.000 households.
Such communities can be fully integrated in the market in order not to shift costs to other consumers. Network charges and policy support have to fairly paid and shared for the same reason.
Best regards,
Pavla on behalf of EURELECTRIC
While the Clean Energy Package gets the framework right for market integration, we believe that it fails in providing a market design fully fit for the energy transition. Contrary to what is argued in the article, EURELECTRIC’s recommendation aims at complementing what is proposed in the CEP and at ensuring that energy, flexibility and availability of capacity are adequately valued.
First of all, we fully share the EC views that the need for capacity mechanisms should be justified and that the source of the adequacy concerns should be identified. The move towards a European/regional approach to security of supply is welcome as it will bring benefits and synergies. Our only comment is that the European resource adequacy assessment shall be factored in but shall however not be considered as the only binding factor for Member States to introduce security of supply measures. Several adequacy assessments with different geographical scope (European, regional, national) and granularity in the underlying assumptions should be considered by MS. This allows a more informed decision making process to ensure system adequacy.
Secondly, we fully share the EC views that, where needed, capacity mechanisms shall be well-designed not to distort markets. We regret to see that the Clean Energy Package, contrary to what has been done by DG COMP in its sector enquiry, does not define very clear design features that would facilitate a European coordinated approach on capacity mechanism. We have always been calling for capacity mechanisms to be market-based, technology neutral (e.g. open to demand response, storage and generation), non-discriminatory between existing and new plants and open to cross-border participation.
Instead of doing so, the EC comes up with a command and control approach through an Emission Performance Standard. Despite our strong commitment to achieve a carbon-neutral electricity supply by 2050 (see our recent statement on the energy transition), EURELECTRIC is really not convinced that an EPS is the right instrument to deliver a cost-efficient low-carbon transition. In particular, such instrument undermines the EU ETS as a key tool to ensure the achievement of the EU decarbonisation objective and should be further assessed as it could have unintended consequences on competitiveness, decarbonisation and security of supply.
On a side note, EURELECTRIC is not calling for “capacity payments” but for well-designed “capacity mechanism” where needed to ensure long-term system adequacy. Capacity payment is only one type of capacity mechanisms. Regarding this very specific mechanism, we agree with the DG COMP’s sector enquiry conclusions that because it depends on “administrative” price, it implies a high risk of under- or over-procurement of capacity – especially as such schemes tend to react slowly to changing market circumstances. For more detailed information, please have a look at an infographic we published some time ago explaining the different types of capacity mechanisms (http://www.eurelectric.org/media/283267/capacity_mechanisms-final-2016-030-0347-01-e.pdf).
Charlotte Renaud
on behalf of EURELECTRIC
It would be great for this discussion if the author, Manor [Manon Dufour], would react to these comments.
I will ask her
Dear all,
Thank you for the numerous comments.
First of all, I am happy to hear of your “strong commitment to achieve a carbon-neutral electricity supply by 2050”. I was however concerned that the April 5 statement claiming that no new coal plant would be built in the EU conveniently leaves out Poland and Greece (which are the only two countries likely to build new coal plants), and says nothing regarding an exit strategy from the 200+ EU coal plants currently in operation.
Regarding demand response, generators should of course be paid for electricity generated.
Regarding local energy communities. They are good for consumers and communities, they strengthen the local economy, they are contributing to the necessary transition to a zero-carbon energy system. They should be encouraged. It is great that utilities engage with some of them, but it is not the only way. Community projects need fair and non-discriminatory access to energy markets.
Regarding capacity mechanisms. We seem to agree that, in order to build an internal energy market while guaranteeing security of supply, capacity mechanisms (when needed as a last resort option) should be open to demand response, storage, generation, and cross-border participation in order to limit distortions.
It is perfectly logical that, in order to deliver on decarbonisation objectives while guaranteeing security of supply, capacity mechanisms (when needed as a last resort option) should be designed in a way that do not prolong Europe’s reliance on the most polluting power plants.
The idea of introducing a sustainability criteria in capacity mechanisms does just that. It is not a decarbonisation policy, it does not prevent coal generation, it just tries to limit additional subsidies going towards coal. If anything, the sustainability criteria prevents such subsidies distorting what the ETS signals by avoiding situations where the polluter pays under one policy, and where the polluter is paid under another. It is hard to see how a “strong commitment” to carbon neutrality can be met by artificially keeping the most polluting plant on the system.
I take your point on capacity mechanisms vs capacity payments.
Best regards,
Manon Dufour
On behalf of E3G