Consumer participation in the electricity market is essential to make the energy transition possible. However, writes Philip Baker of the Regulatory Assistance Project (RAP), a think-tank specializing in regulatory and market policy, incumbent suppliers cannot be relied upon to make this happen. Therefore, the European Commission needs to ensure that new players can enter the market.
Allowing customers to participate directly in electricity markets is crucial both to making those markets more efficient and to reducing the costs of integrating renewable energies. The Commission’s Energy Union Market Design Initiative currently under development represents a unique opportunity to facilitate this participation and ensure that all Europe’s citizens and businesses share in the associated rewards and benefits.
It would be unwise to rely on incumbent suppliers to encourage customer participation, as this is not a natural fit with their business model
Currently, the majority of customers are unable to respond to price variations in the market. This gives rise to price spikes as generation capacity becomes scarce. This in turn encourages Governments to cap wholesale electricity prices, reducing the ability of generators to cover their costs. Governments are then forced to introduce measures such as capacity payments to compensate for the generators’ loss of revenue and ensure that the investment in new resources necessary to ensure security of supply takes place. These measures tend to distort cross-border trade and could compromise the realization of the Energy Union.
More costly and carbon-intensive
This vicious circle can only be broken if more customers are able to flex their demand in response to wholesale price variations. With increased consumer participation, price spikes can be softened and the need for price caps and separate capacity payments reduced. Price-sensitive demand is therefore a pre-requisite of an efficient electricity market.
In addition, the ability of customers to adjust their energy consumption patterns will allow the variable output of renewable technologies such as wind and photovoltaics to be accommodated more cost-effectively. By reducing or increasing their energy consumption in response to market signals, customers can collectively respond to variations in the output of these technologies. Without that ability, Europe will need to rely on more costly and carbon-intensive coal and gas plants, which hinder the transition to a low-carbon electricity sector.
It is therefore entirely appropriate that the Energy Union vision focuses on developing an electricity market that enables consumers to be directly involved. But how is this to be achieved?
The credit requirements imposed by market administrators favour big, established, market players and are a particular barrier to new entrants
It would be unwise to rely on incumbent suppliers to encourage customer participation, as this is not a natural fit with their business model. Similarly, generators will worry about the ability of demand flexibility to attenuate electricity price spikes when capacity is scarce and are likely to prefer the security of guaranteed support through discrete capacity payments. This means there is a clear need to open up the electricity market to new players, such as EnerNOC, KiWi Power, Tesla, Google and others, who can help customers to manage their electricity demand.
These players are already active in the US, where demand response is well established in some States and is very effective.
In particular, so-called ‘independent aggregators’ allow medium-sized or smaller customers to actively participate in electricity markets. Unlike traditional energy companies, their business model depends on expanding the volume of flexible demand rather increasing energy sales. These companies can help assist individual consumers manage energy demand and reduce costs, causing the overall demand characteristic to become more price-sensitive. Alternatively, they can aggregate the demand of many customers to provide a cost-effective and clean alternative to the services currently provided by coal and gas fired generation. These flexibility services will become increasingly valuable as the transition to a low carbon electricity system progresses.
While “independent aggregators” are gradually becoming established in some Member States, significant barriers to their involvement remain. Participation in electricity markets normally involves dealing in quantities that are beyond the capability of medium-sized consumers, let alone the residential sector. Furthermore, the credit requirements imposed by market administrators favour big, established, market players and are a particular barrier to new entrants.
There is much that the European Commission could do to address these inherent barriers. First, if the Commission wants to create an efficient energy market, it needs to recognise that a “one size fits all” approach is untenable. It should insist that the market rules being developed by ACER and ENTSO-e in the form of “Network Codes” enable the participation of all customers, both large and small. These Codes often make supportive comments about the need to facilitate demand response, however the detailed arrangements that will in practice determine whether or not progress is made are currently left to individual Member States. Allowing the wide differences in the treatment and status of demand response across Europe to continue creates a risk of losing the opportunity to realise the rewards that increased demand response can bring.
The Commission now has a unique opportunity to address the barriers to customer participation in electricity markets across Europe. It should insist that the Network Codes currently being developed remove unnecessary restrictions on minimum trading volumes, ease credit requirements for smaller players and ensure that negotiations between suppliers and independent aggregators take place within a framework that ensures effective delivery of flexibility services.
This would send a clear message to new players who have the potential to mobilise the participation of smaller industrial, commercial and residential sectors. It would allow Europe’s citizens and businesses, large and small, to share in the cost, efficiency and environmental benefits consumer that market participation and demand flexibility would bring. It would also demonstrate that Europe’s electricity markets are open for business and that the Energy Union vision will be realised in practice.
Philip Baker is Senior Advisor at the Regulatory Assistance Project (RAP), a think-tank specializing in regulatory and market policy.