ACER, the EU Agency for the Cooperation of Energy Regulators, has delivered to the EC its preliminary assessment of Europe’s high energy prices and the current wholesale electricity market design. Simon Skillings and Lisa Fischer at E3G interpret ACER’s assessment as showing it wants to maintain the status quo. However, long-term changes in market design are inevitable. The authors want ACER to accept this reality and ensure the changes are driven by consumer interests rather than those of network operators. They first summarise ACER’s analysis. They then make their own recommendations which include investment programmes that make demand management technology affordable to all, not just the wealthy; marginal cost calculations for electricity that properly account for regional variations; market reform that enables consumers to manage their own demand and thereby provide needed flexibility to the grid as it drives for cleaner power. ACER will deliver its broader assessment in April 2022.
Part of the fallout from the recent political panic over high gas prices has been that some countries, notably Spain and France, have argued that the rules of EU electricity markets need to change. This is because gas price increases have directly fed through to electricity price increases, even though gas makes up only a part of the electricity mix. This has led to an equally strong response from other countries arguing that no change is required. The European Commission called on ACER to referee the dispute and it has just published preliminary findings.
The ACER analysis shows that countries with lower proportions of gas in the electricity mix, and those with better interconnections with neighbours, have been less affected by increases in electricity prices. This is an unsurprising but important observation. Reducing levels of fossil gas in the energy mix and sharing electricity resources across the EU must remain top policy priorities.
ACER goes on to argue that increased volatility in gas and electricity prices will be an inevitable consequence of the move to a renewables-based energy system. However, rather than try to suppress this volatility, ACER says we should learn to live with it. This is because it is necessary to drive the investment in flexible resources, including demand response, which is essential to keep the lights on as renewable volumes increase.
Despite this push-back, ACER has not entirely rejected the claims by Spain and France. It has deferred consideration of two key issues until a final report in April. These are whether short-term price signals are the best way to drive investment and how to protect consumers from price volatility.
What’s needed: protecting vulnerable consumers
Viewed through the eyes of consumers, these questions are closely linked. The current rules mean that consumers must justify investment in instrumentation and control technology on the expectation that they will save future energy costs. This will remain the preserve of the wealthy and engaged for some time to come. Everyone else must endure the consequences of volatile prices. This is not acceptable from a climate or social perspective. It is necessary to undertake an urgent programme to deploy the digital technology that will create flexible demand and do so in a way that is socially fair. This will enable the deployment of renewables to continue at pace and ensure that the most vulnerable consumers will be insulated from periods of high energy prices.
…More region-specific marginal cost calculations
Perhaps the biggest blind spot in the ACER commentary is the implication that the current system produces prices that accurately reflect the marginal cost of electricity production. Prices are averaged over large balancing zones, often covering entire countries, ignoring the different values of electricity at various locations. With more renewable electricity and new demands from the electrification of heat and transport, system balancing must happen locally. This will require marginal cost calculations which are much more granular than produced by the current system. Moreover, the cost of non-energy services, such as inertia and reactive power, will become a more significant part of overall consumer costs.
…Electricity market reform
Electricity market reform will be essential to cope with the emerging situation. It will happen in one of two ways. Either the current wholesale market rules will remain unaltered and grid operators (at both transmission and distribution levels) will have to strike flexibility and other contracts to operate the physical grid. These contracts would, by default, become the key component of the market arrangements. However, grid contracts have traditionally been bureaucratic and have failed to stimulate rapid growth in demand response. Eurelectric has recently published a report which sets out the approach envisaged by the industry.
Alternatively, a programme of market reform could create prices that vary between locations and even include non-energy cost elements. In this situation, consumers could provide the required flexibility simply by adjusting consumption to avoid high prices. This would be much easier to manage for those looking to offer new energy products and services to consumers.
The debate over electricity market design is not one of change versus no change. Instead, it is between an increasing dependence on explicit grid contracts or our willingness to create the new markets that allow a direct consumer response to price.
The reform process is already underway and must continue at pace to ensure a lack of flexibility does not apply a brake to energy system decarbonisation. ACER must accept that reform is inevitable and decide which pathway best serves the interest of consumers.