The European Council’s proposals on the internal energy market fundamentally weaken the framework that is needed to deliver an integrated market that will benefit European energy consumers, write Philip Baker and Christos Kolokathis from the global energy policy advisors Regulatory Assistance Project (RAP). They may even legalise practices that are currently – and should remain – illegal. The authors call on European policymakers to support the European Commission’s proposals in the Clean Energy Package.
Europe can deliver enormous benefits to its electricity consumers by accelerating progress toward an integrated internal energy market. There are three key pathways for unlocking this potential, all involving a more regional approach to operating Europe’s electricity grid. These are: increasing the interconnector capacity made available to the markets and taking a more collective or regional approach to both assessing resource adequacy and energy balancing.
The European Commission’s Clean Energy for All legislative package (CE4All), published on 30 November 2016, represents significant progress in the right direction. The Commission’s proposals are now being negotiated by the European Parliament and the European Council (the Member States). The outcome of this process will make or break progress on the EU’s energy market integration for the next decade. Unfortunately, counter-proposals made by the European Member States threaten to halt progress – or even reverse it.
Market integration lowers costs
Regionalisation will have many benefits—allowing customers to access the cheapest sources of energy, pooling risk and exploiting geographic diversity, and reducing the need for new generation capacity. Estimates by Booz & Co and others suggest that the increase in social welfare of fully integrating Europe’s electricity markets, some of which have already been achieved through market coupling, could lie in the range of €16 to 43 billion per year by 2030.
Member States need to take appropriate account of potential support from neighbouring systems when assessing security of supply
The magnitude of future savings depends on the extent to which Europe’s generation portfolio can be optimised and the necessary interconnector capacity developed. As shown by the chart below, the bulk of these savings will be accrued by harmonising and lowering wholesale energy prices, with smaller but still significant savings arising from a more regional approach to resource adequacy and balancing.
While investment in new capacity will be required, there is considerable potential to increase the utilisation of existing interconnector capacity.
Analysis by the Agency for the Cooperation of Energy Regulators (ACER) shows, as depicted below, that only around one-third of the realistically available cross-border capacity is currently offered to the market in the Core —excluding the Central Western—region, which covers the majority of continental Europe.
In some instances, the capacities offered are even lower. For example, Germany limits imports from the Netherlands to some 12 percent of available interconnector capacity, while the Netherlands manages to allow 83 percent for flows in the opposite direction.
Aggregated tradable interconnector capacity compared with benchmark. ACER/CEER 2017
The low level of interconnection capacity made available to the wholesale markets results, to a large extent, from the practice of reducing congestion within national borders by limiting cross-border flows.
Despite the fact that Article 16 of Regulation EC 714/2009 prohibits “moving internal congestion to the borders,” ACER’s analysis shows that the practice is widespread. This is all the more remarkable given that the practice is analogous to imposing a cap on cross-border trade in goods in order to protect the interests of a particular Member State—a practice that would not be tolerated in any other area of the European Single Market.
Council’s proposal reverses progress on interconnector usage
In Article 14 of the Regulation on electricity markets, the Commission proposes to address this situation by stipulating that re-dispatch and counter-trading (i.e., adjusting generation schedules to manage internal congestion) should be used to maximise cross-border capacity, provided that it is economically beneficial to do so “at a Union level.”
However, the Council has proposed that the increase in interconnection capacity offered to the market should be allowed to follow a linear progression, starting at the level of capacity offered at the point of enactment and rising to 75 percent of available capacity after four years, or by 2025.
It is also interesting to note that, of the Member States that assume zero or little interconnector contribution, five are implementing or planning to implement capacity mechanisms
This represents a significant retreat from the current legal position, which is that interconnector capacity offered to the market should be maximised and should not be reduced by “moving internal congestion to the borders” – subject to grid security not being compromised. In addition, the proposal seems entirely arbitrary and could encourage Member States who currently limit interconnector capacity to delay taking action, thus ensuring they have a low baseline for the proposed linear progression.
The Commission’s original proposal should therefore be supported and the Council’s counter-proposal rejected.
It is also important to rigorously enforce existing legislation that prohibits moving congestion to the borders. If a Member State seeks to be derogated from this requirement, it should be required to demonstrate that the costs exceed the regional benefits or that security would be compromised.
This legislation should protect the interests of Europe’s electricity consumers as a whole, rather than those of any individual Member State.
Regional assessment of resource adequacy necessary
While some Member States are forecasting capacity deficits in the years ahead, others are forecasting surpluses. Taking Europe as a whole, most Member States are situated in regions with a healthy resource adequacy situation. Aggregating these surpluses and deficits over appropriately defined regions will reduce the overall need for investment in new resources. At the same time, it will allow supply reliability to be maintained at a lower cost than would be the case if Member States continue with a “self-sufficiency” approach.
While responsibility for security of supply remains a matter for individual Member States, this responsibility needs to be squared with the benefits to those same Member States and their consumers from a more collective approach to resource adequacy assessment in order to realise the potential savings in investment costs. Member States therefore need to take appropriate account of potential support from neighbouring systems when assessing security of supply.
To some extent this already happens. However ACER’s 2017 Market Monitoring Report exposes the wide disparity in the extent to which interconnection contribution is taken into account. ACER’s analysis shows that, out of 21 Member States surveyed, 10 did not take any account of interconnection contribution to resource adequacy. Of the remainder, the extent to which interconnector contribution was taken into account varied widely.
It is also interesting to note that, of the Member States that assume zero or little interconnector contribution, five are implementing or planning to implement capacity mechanisms. This begs the question: would those mechanisms be necessary if proper account was taken of potential interconnection contribution?
Clean Energy for All package mixed on shift to regional resource adequacy
The failure of Member States to fully take into account interconnector contribution to resource adequacy risks unnecessary investment in generation capacity—costs that will be borne by electricity consumers.
Furthermore, the wide disparity in the level of contribution assumed underlines the need for a common methodology and a coordinated approach to analysis across the internal energy market. The Commission’s CE4All package recognizes the need for a coordinated approach, with Article 18 of the recast Regulation proposing that Member States monitor capacity requirements based on the European-wide assessment carried out by the European Network of Transmission System Operators, ENTSO-E.
In addition, Article 22 proposes that non-domestic generation capacity should be allowed to participate in capacity mechanisms and that the Regional Operational Centers (ROCs) should have a meaningful role in deciding on the level of participation.
The Council is resisting a more regional approach and has proposed that transmission system operators (TSOs) continue to be responsible for balancing requirements
The Commission’s proposals for a coordinated approach should be supported. The introduction of a European, or preferably a regional, resource adequacy assessment would allow capacity surpluses and deficits to be aggregated on a regional basis, raising the value of existing resources and reducing the need for investment in new resources.
By contrast, the Council’s watered-down proposal would allow Member States to continue to assess capacity requirements on a national basis, albeit “taking note” of any European assessment and opinion issued by ACER. The Council’s proposal therefore risks failure to deliver the benefits that a more coordinated resource assessment could bring.
Regional electricity balancing most effective approach
The need to minimise imbalance costs will assume increasing importance as the deployment of wind and solar continue and balancing energy over wider areas will allow geographic and technical diversity to be exploited, reducing balancing volumes.
While analysis suggests that the potential savings in balancing costs will be relatively modest compared with savings from market integration and a coordinated resource adequacy assessment, the savings to be achieved by balancing across wider areas are still significant at about €3 billion per year by 2030.
There has been relatively little progress in coordinating national balancing activities in Europe to date. In fact, analysis shows that imbalance price differentials are far greater than in the day-ahead and intra-day markets. These price differentials are significant for a number of reasons. Imbalance prices ultimately provide a cap or collar on day-ahead and intra-day prices and will therefore impact the extent to which these prices can be harmonised across Europe. Furthermore, unnecessarily high imbalance prices, i.e., where prices are inflated due to a lack of competition or liquidity, represent a barrier to market entry—particularly for small entities and for intermittent renewable resources, which cannot easily respond close to real time.
Difference in upwards balancing energy price and day-ahead energy price, 2016 ACER/CEER 2017.
The Commission’s Clean Energy for All package
Article 5 of the Commission’s recast Regulation on energy markets proposes that balancing and reserve capacity should be calculated and procured on a regional basis. In addition, Article 34 requires that ROCs should have a meaningful role in these activities. This is eminently sensible and necessary if the benefits of balancing over wider areas are to be realised, and the Commission’s proposal to regionalise these activities should be supported.
The Council’s position, at best, waters down the Commission’s proposal and perpetuates the status quo. At worst, it represents a large step backward
Unfortunately however, the Council is resisting a more regional approach and has proposed that transmission system operators (TSOs) continue to be responsible for balancing requirements, although noting that this “may be facilitated on a regional level.” Exactly what this means is unclear.
However, what is clear is that unless reserve and balancing capacity requirements are assessed at a regional level and procured via a regional platform as proposed by the Commission, the potential cost savings associated with energy balancing and the integration of renewable resources will not be realised. The Council’s position, that balancing remains a TSO responsibility, with ROCs having no meaningful role and unable to apply their regional focus and expertice, risks placing these savings out of reach.
Don’t lose sight of the forest for the trees
When considering specific issues related to power market and system operation, it is easy to lose sight of the overall benefits to consumers that regionalisation and market integration can deliver.
We must be aware of those benefits and recognize the fundamental importance of regionalisation and market integration in the cost-effective, reliable transition to a decarbonized power sector. The Council’s position, at best, waters down the Commission’s proposal and perpetuates the status quo. At worst, it represents a large step backward.
Philip Baker is Senior Advisor at the Regulatory Assistance Project. Christos Kolokathis is an Associate at the Regulatory Assistance Project.
The Regulatory Assistance Project (RAP) is an independent, non-partisan, globally operating non-governmental organization dedicated to accelerating the transition to a clean, reliable, and efficient energy future.
Frans Rusting says
Regrettably, I am not surprised. Every EU Member State is responsible for its own provisioning of energy. ‘Energy’ is of extreme importance for the economy of a country; apparently governments believe that this means that their country needs to be independent from the other EU countries for the provisioning of electricity.
Maybe most countries don’t rely so much on other European countries. But there is a very significant dependence of non-EU suppliers of oil, gas and uranium. Apart from important arguments against use of these sources of energy: is it fair to say that dependence on EU-countries seems to be preferable?
It is clear that adequate interconnection capacity is very important. But relying on the TSO’s for deciding which capacity is needed is maybe not such a good idea. TSO’s are very competent entities, but they are at least strongly regulated by the same governments that find it difficult to cooperate. There is, however, a simple way in which governments and their TSO’s can cooperate without giving up their independence.
One European market for electricity is what is needed to ensure a reliable provisioning of electricity. This is certainly true because of the increasing use of wind and sun. Only a large area like that of the EU can guarantee that there is always somewhere enough wind/sun available.
Storage does help, of course, but which capacity is needed to guarantee that there is enough electricity available? And for how many days/weeks? Fact is, that large scale capacity storage is not yet available. It still needs much development, the costs are unknown and when it would be available is also unknown.
Direct interconnections between all countries would result in the required ‘one market’, and they very much decrease the required storage capacity.
A simple way to realise these direct interconnections is to install an independent ‘overlay network’ which connects all the national (TSO) networks. This overlay network is to be engineered, installed an operated by a cooperative company, owned and governed by the TSO’s and controlled by the governments.
TSO’s are also customers of the cooperative and they can use its network as and when required. Countries remain independent.
The network can be constructed using existing technology and hence the costs are known.
I strongly believe that the above deserves serious study and discussion.
Bas Gresnigt says
– the continued decrease of the costs to produce electricity in ne4xt decade, as well as the improving speed to install new local generation capacities;
– the far less decrease of the costs of transmission of electricity
(rights-of-way, NIMBY, etc).
– the upcoming of micro-grids, energy independent houses/buildings using the surplus of rooftop solar, etc.
Then the cost optimum balance seems to shift to local generation.
And we don’t know where this shift will end.
Hence the conclusion that such overlay network may become a burden with its high costs and in-flexibilities seems justified.
Consider the more than a decade needed to install the N-S lines in Germany.
Frans Rusting says
“…overlay network may become a burden with its high costs and in-flexibilities…..”
– High costs: an argument often used. Allthough I am not able to calculate the required investment (one of the reasons why I say that discussion and study are needed) it is possible to put this in perspective.
A total investment of € 200 billion could be the right order of magnitude.
True, a large sum. However: imagine that this sum will be spent over a period of 20 years: 10 billion per year. Suppose that half of that amount is to be paid by or on behalf of the 500 million inhabitants of the EU (the other half relates to industry): € 10 per year per European.
Inflexibilities: yes, very inflexible, unless the network is well designed and operated by one entity. This, and the proposed very specific way for TSO’s to cooperate -a cooperative company- are other reasons for saying that discussion and study are needed.
– “Consider the more than a decade needed to install the N-S lines in Germany”
True, but this is indeed largely due to the NIMBY effect. However: long distance transmission will be largely DC. Underground is therefore a realistic option, and for a large part this is possible below existing in-the-air cables.
Four other remarks:
-NIMBY is also a major stumbleblock when installing windturbines and even solar panels. That is a major reason why using e.g. the North Sea area is so attractive.
– Energy independent houses/buildings: there will be some. But in many cases with existing buildings this will not work. Which means that networks will be needed to allow use of, e.g., solar on other locations. This must be ‘intelligent’ networks, which also connect to storage facilities. A very major problem with intelligent networks is that they are interesting for hackers, which may include terrorists.
– There will always be a need for storage. For storage, the question is: for how long will it provide adequate back-up? This question needs to be answered per building, per micro-grid, per smart grid, per region. But for a reliable supply, some kind of back up will always be required. One of the advantages of the proposed overlay network is, that for this back-up use can be made of the weather differences over large distances. This does not take away the necessity of storage, but the required capacity is much smaller and efficient common back-up production facilities become possible. These could be operated by or on behalf of the same cooperative company.
– Apart from hydro storage in the mountains, large scale storage still needs to be developed. It is still unknown when this will be available and what the cost would be.
Bas Gresnigt says
“…inflexible, unless the network is well designed and operated by one entity.”
Opposite: That one entity will develop itself even while the network no longer serves European citizens as its too expensive, etc…
Just consider the regional organizations in USA. They contributed to the present backwards state of electricity delivery in USA (~10 times less reliable than in Germany, etc).
“… for this back-up use can be made of the weather differences over large distances … the required capacity is much smaller and efficient common back-up production facilities become possible.”
With the fast decreasing prices of electricity generation and local storage (via a.o. PtG) the transport costs over large distances become gradually an expensive factor. Implying that it will become gradually less and no longer efficient….
In addition: Present situation delivers already such major “ausgleich” via the coupled power exchanges (APX’s) and transport facilities.
The most cost effective way forward is to gradually solve transmission bottle necks (e.g. the new NL-Dld interconnection) and install lines when all local parties see the cost benefits (e.g. the new DK-UK line).
My concern is that the EU has opened up for merchant cables where utilities are allowed in to build own and operate. likely in frustration as many nations dont see it in their interest to expose domestic markets to higher priced markets or opposite. Utilities grab this opportunity to profit from higher power prices and bottleneck income while it invited gaming of the market, as the Commission warns against when utilities are not split from grid operations. It violates the principles of unbundling, just as the EU has forced unbundling.
Til now, Norwegian utilities and Statnett TSO have pushed through way many more interconnectrors than needed for security of supply and manyfold more then EU 15% goal. Norway is well on its way to full price exposure to most markets and fulldebottlecking. In a few years, Norway can export 70% of all its power while the energy balance creeps towards 0. All this in an effort to increase Norway’s power prices while sending 100% of the cost to consumers.
Industry has seen its grid tariffs more than double and more to come as a consequence. Market volatility and increased power prices makes contracting long power deals extremely difficult for an industry with 30-40 year outlook. Norway is Europes center for power intensive primary metal and alloy production but they now face serious problems as power prices are set to double by 2030 according to the IEA with 3 new interconnectors.
Line losses -from hydro plants through interconnectors to foreign markets – now exceed many TWh per annum and apporx 20% of all the new renewable power invested in during the Green Certificate market, all paid by consumers. Norway increasingly also imports large amounts of CO2 intensive power while having sold the right to nearly all of its hydropower to consumers in Europe wanting to feel greener.
Island is the second largest metal producer and now likely face similar problems as EU has given PCI status for an interconnector to UK which has more than twice the power price to Iceand. In liquid markets, supplier of last resort sets the price and as hydroreservoars are drained, they’ll re- import high prices as we’ve seen in Scandinavia. Small countries like Norway and Iceland dont set the price in the market.
I offer off this read again https://www.linkedin.com/pulse/critical-need-life-cycle-impact-analysis-climate-geir-vollsaeter to illustrate some of the paradoxes with Norway and EUs push to debottleneck all of EU, other climate efforts that just shift emissions within Europe, and how it impacts competitiveness for not only Norways industries but also Europe. Keep in mind these industries compete with Canada, US, China and ME, where markets are not deregulated and prices are a fraction of EU power prices.
While deregulations stated goals are lower prices and increased competitiveness for EU industries, the effect seem to be the opposite for Europes industrial hubs