The share of renewable generation in Europe’s power system is rising fast, but interconnection is not keeping up. Join us on May 19, 2020 to discuss this and related issues. More wind and solar makes the supply of electricity much more dependent on the weather. Nobody wants to build capacity only to switch it off when there’s too much heading onto the local grid. This could put an extra strain on delivering the Green Deal. One solution is to increase cross-border trade of spare capacity. Without this, will we achieve a net-zero economy by 2050? That is the subject up for discussion on May 19, 2020 at Energy Post’s online event. Panelist Professor Machiel Mulder (RUG and Centre for Energy Economics Research (CEER)) explains in advance the three main benefits from his point of view: it extends the reach of competitive prices improving efficiency, increases flexibility and lowers costs for consumers. All-in-all it makes the transition more affordable. So why is the existing available capacity so under-used? The target is to get to 70% capacity by 2025. We are currently at just 50%. In this article, Mulder runs through the policy challenges as he sees it, opening up the discussion which we will continue on May 19th. You can register now
The climate-policy objectives of the European Union require a tremendous change in the structure of energy systems in general and of electricity systems in particular. The share of renewable generation will increase dramatically, making the supply of electricity way more weather dependent.
In addition, the demand for electricity is going to expand strongly because of the electrification in transport, the industrial activities and heating of (residential) buildings.
Importance of cross-border trade: 3 key benefits
This transition of the electricity system makes the possibility of international trade among EU Member States more important. The more market parties have the option to make use of cross-border trade, the lower the costs of the energy transition for energy users. These costs reductions result from a number of mechanisms.
One of the mechanisms is the effect on productive efficiency. In the absence of cross-border constraints, electricity will only be produced in those locations where the generation costs are the lowest. The more the electricity supply becomes weather dependent, the more often differences in generation costs across the EU occur, which creates a constant change in the demanded directions of trade.
Another mechanism is the effect on flexibility. The more power systems are connected to each other, the more options become available for adapting generation and load in order to realise network balance. This has a downward effect on the electricity prices. Moreover, a higher availability of resources in an integrated market makes the system more reliable, which reduces the need for reserve capacities and, hence, the costs for consumers.
Finally, a more integrated market makes individual market parties (producers) less indispensable and, hence, their abilities to behave strategically are reduced. All these effects result in lower costs of the energy transition for consumers.
Removing barriers to cross-border trade
In the EU electricity markets, market parties may assume that transport capacity is unconstrained within the so-called market zones (typically, but not always equal to countries), but between these market zones capacity constraints limit the abilities of market parties. These capacity constraints can be reduced through three types of activities.
- The most evident measure network operators can take to relieve these constraints is building more cross-border transport capacity. This results in more so-called technical capacity. This measure has been taken on many European border in the recent years, but more investments will follow in the near future. This measure is, of course, fairly expensive, and should only be done when the existing capacity is already efficiently used.
- One of the crucial aspects in using this technical capacity is the calculation of that part of the capacity that can be made available to market parties. The magnitude of this capacity is based on the technical transport capacity after controlling for a reliability margin which is required to deal with uncontrolled flows of electricity (loop flows) and to deal with emergency situations. Although the European ambition is to have at least 70% of the technical capacity available for commercial purposes, it appears that this share is much lower on many borders (ACER, 2019).
- When the size of the capacity that is available for commercial trade has been determined, the next issue is to allocate this capacity as efficiently as possible. Through the introduction of (flow-based) market coupling, in which the trade in electricity is integrated with the allocation of cross-border capacity, the efficiency of capacity usage has increased strongly over the past years.
Although significant progress has been made on all three aspects, there is still a lot to do. This follows from the fact that the market integration within the EU is still not fully realised. The ultimate measure of market integration is the degree of cross-border price harmonisation. On about 50% of all European borders, the absolute cross-border differences in prices are higher than 5%, while on about 10 borders the absolute price difference exceeds 10% (ACER, 2019).
Professor Mulder is one of Energy Post’s panelists at an important discussion on this topic in advance of June’s Energy Council meeting. The full confirmed line-up is:
- European Commission – FLORIAN ERMACORA, DG Energy (Head of Unit B.2) Wholesale Markets – Electricity & Gas
- Independent expert – Professor MACHIEL MULDER, Energy Regulation, Groningen University and CEER
- Voice of Solar – AURELIE BEAUVAIS, Policy Director and CEO ad interim, SolarPower Europe
- Voice of Smartgrids – FREDERIC VASSORT, CEO Ampacimon (DLR technology)
- Voice of wind generation – PAUL GIESBERTZ, Head Advisor Market Policies & Regulatory Affairs, Statkraft
- Moderator – ERIK RAKHOU, alternate member ACER Board of Appeal and Managing Consultant, Baringa
You can register here to take part
The persistence of price differences is related to remaining differences in national electricity systems and the growing influence of renewable generation. What can regulators do to foster the cross-border trade in electricity which contributes to reducing cross-border price differences?
Looking at the above three types of measures to stimulate market integration, the key measure to focus on now is to increase the capacity which can be made available for commercial purposes. After all, in the field of investments in technical capacity, the current regulations of tariffs and investments seem not to be a bottleneck for further development, while in the field of capacity allocation huge progress has already made through the introduction of (flow-based) market coupling.
Regarding the capacity calculation, the focus in the regulation has been on the procedures used for the calculations and the compliance with the 70% target. Hence, this regulation is strongly directed at monitoring and prescribing what TSOs should do. This is a kind of input regulation which is deemed to be costly and ineffective because of the fundamental information asymmetry between regulators and TSOs.
As an alternative to this regulation, TSOs may be given stronger financial incentives to maximise the capacity which is made available for commercial purposes. This incentive should be related to the social value of reducing cross-border price differences by increasing the commercial capacity. In order to prevent any adverse effects on the reliability of the electricity system, such regulatory incentives should of course be accompanied with incentives for reliability. As TSOs can only successfully do this by coordinating their activities, this incentive should be given on a European level. This regulation would mean that the European TSOs are jointly rewarded for realising minimum cross-border price differences, while they remain incentivised through the national regulations to reduce the costs of their operations and to maintain the reliability of their electricity systems.
- Professor of Regulation of Energy Markets, University of Groningen. ↑