Utilities in Europe and North America “have to change their business model, whether they like it or not”, says the International Energy Agency (IEA). At the same time, the IEA is very critical about the plans of several European countries to set up capacity schemes which the large European enegy companies are pleading for. “We should try energy-only solutions first before we try capacity schemes”, says Maria van der Hoeven, Executive Director of the IEA.
The International Energy Agency (IEA) recognizes that EU and US utility companies are under heavy pressure in the current market, but does not believe that capacity mechanisms should save them. Capacity mechanisms are “a short-term fix for a long-term issue”, said IEA’s Executive Director Maria van der Hoeven at a press conference at which she presented the IEA’s new Medium-Term Renewable Energy Market Report published on 28 August. (See our coverage of this report here.)
The IEA recognizes that with (distributed) renewables having become “much more competitive” with traditional forms of electricity generation, such as the centralised fossil-fuel plants that incumbent generators rely on, “all power generators are struggling in OECD markets where there is oversupply and low wholesale prices.”
In response, many incumbent energy generators, such as RWE and Eon, have called for the establishment of capacity mechanisms, in which they would get paid for keeping power plants on standby. They view such “capacity markets”, which they say would support the integration of variable renewable energy sources into the system, as an important source of revenue for the future.
The UK has recently announced, as the first EU member state, that it wants to launch a capacity auction in December of this year. Critics, however, argue that the UK scheme is not necessary and would in effect be a subsidy to keep fossil-fuel plants in operation. The European Commission has approved the UK scheme, which Brussels says is not being in violation of EU State Aid rules.
The IEA, by many regarded as the world’s foremost energy think tank, appears to look not very favourably on the idea of establishing national capacity schemes in Europe. They have “several drawbacks”, said Van der Hoeven. “For instance, national capacity markets are a hindrance to European market integration”, she said. Rather than capacity mechanisms, Van der Hoeven said, “we need flexibility in the system, which means: flexible supply, stronger grids,more storage where appropriate, more demand side response.”
“Let’s try energy-only markets first, before adopting capacity markets”, the IEA Director added. She noted that “balancing markets” – the “normal” method used by grid operators to ensure the stability of the grid – “remain underdeveloped and fragmented across the EU”. She also pointed out that capacity schemes would be more appropriate to markets with undercapacity, not to markets where there is oversupply, as in Europe.
According to Van der Hoeven, the current problems of utilities “can be solved”, but this means “they have to change”.They have to find “new ways to balance the grid through new infrastructure, interconnections, storage solutions and smart grids. This requires creative thinking, but that’s part of this new market era”. Van der Hoeven said that in a stagnant market like Europe renewables will inevitably “come at the expense of other options”. So “the question is, who has to go? Energy companies have to be aware of that, because renewables are here to stay.”
Paolo Frankl, Head of Renewable Energy Division of the IEA, said at the same presentation that “utilities have to change their business model, whether they like it or not.” He added that many in fact are already doing so. “Even those who publicly say they are concerned, are already doing it. There are some in the United States in particular that are agressively changing their business model.”
Frankl also said that the pace of change “should not be too disruptive”. Policymakers should consider a “range of instruments”, like storage, demand side management, some grid reinforcement, and perhaps adapting the allocation of network costs, to ensure a gradual transition to a market dominated by renewable energy.