The creation of a single European electricity market has been moving in a positive direction. With the EU Electricity Liberalization Directive agreed by all Member States forming the framework of EU energy policy, the overarching goal is for consumers to benefit from an internal market governed by coordinated rules — for the implementation of renewables and development of the electricity network. A market-oriented European energy system also aims to make the most of different types of power generation and to optimize the costs associated with managing, maintaining and evolving the grid infrastructure.
Naturally, there is still a long way to go in terms of establishing a single market, particularly in terms of the connection and integration of national electricity markets, the physical interconnections between Member States, and the promotion and facilitation of cross-border market-balancing. The same is true for the coordination of investment in generation, transmission and storage capacity. A further challenge in taking these goals forward are EU targets in other areas such as climate change and energy security.
Ensuring energy independence at the same time as building greater interconnectivity between Europe’s energy markets may seem like a ‘catch 22’ when seen at a national level, but this is not the case when considered from an EU perspective. To sustain the increasing penetration of renewables, Member States must consider their national energy independence criteria in the context of a single European energy market.
The alternative to building greater interconnectivity and a single energy market would be that in each EU Member State a full peak load operative thermal capacity is maintained, or a full peak-load seasonal storage capacity deployed. Both of these options would come at a huge cost, whereas the rapid deployment of long-distance electricity transmission and interconnectivity — also known as the ‘EU super-grid’ — is an efficient and cost-effective way of accommodating the rapid expansion of renewables across Europe.
To ensure grid stability in the future power market, renewables need to contribute to security of supply just as fossil fuel operators need to contribute to climate protection. This could be achieved by renewables supporting the efficiency of the overall system by being traded together with stable forms of generation – and specifically in combination with efficient fossil fuel generation. The market would also need to factor in the cost of increased intermittency. The experience in Germany however, has demonstrated that the incentives for renewables can be overgenerous and distort investment. The rules governing the internal market will have to be considered carefully, especially in a context of flat or even decreasing electricity demand.
The energy market in Germany has proved a true test bed given the numerous changes it has witnessed recently in terms of policy implementation. In the past two years, the country has taken the decision to exit nuclear generation, whilst moving to an ambitious penetration target of 70 GW of renewable comprising wind and solar PV capacity. The consequences of these policies have seen structural imbalances in the transmission network from North to South, the mothballing of combined cycle gas turbine (CCGT) assets (some of which were new), a drop of 30 per cent in base-load electricity price, and consumer electricity bills that are more than 50 per cent higher than the average EU domestic kWh price.
The main lesson learned from the experience in Germany is that the energy sector requires a long term strategy given that it is asset- and capital-intensive. As such, it requires a stable policy framework. It will be interesting to observe how Germany will restore stability and confidence in its electricity market fundamentals while maintaining industrial competitiveness, keeping consumers onside, and achieving its target of a 40 percent reduction in CO2 emissions by 2020 relative to 1990 combined with 35 percent of renewable penetration as share of electricity.
Even Playing Field
Governments can help by providing long-term and stable regulation that creates an even playing field for all decarbonized power generation solutions. It must be based on the true cost of dependable electricity supply. They should also provide for visibility on renewable penetration goals, the efficiency improvement and carbon reduction objectives. Furthermore, politicians must look to redress the EU ETS market, which is currently failing to provide a meaningful CO2 price.
The Europe power market today is being held back by a number of recurring questions around regulation, scalability and replicability. Investment in the new grid will require new business models, which will emerge from the demonstrators and pilot projects around Demand Response, storage, and distribution control currently underway. Alstom for example, is already actively participating in such projects.
Certainly the challenges that have to be addressed — namely competitive electricity, reduced environmental footprint and energy security — require urgent action. We don’t yet have all the tools in place to incentivise and deliver all the changes in investment needed, at the necessary pace.
Avoiding the Danger Zone
Although the threat posed to grid reliability by the rapid rise of renewables in Europe has not yet materialised, the on-going mothballing of CCGT plants, combined with the coal plant retirements planned under the EU’s Industrial Emissions Directive (IED), mean that we will soon have exhausted the hefty reserve margin of 40 percent. And, with the weight of renewable energy in the system increasing, the overall stability of the grid will undoubtedly be undermined. We could enter the danger zone as early as 2016/17, or possibly sooner if the economy picks-up rapidly in the EU.
Fortunately, the installed thermal base, and especially coal power plants, has proven a lot more flexible than was anticipated initially. Continued efforts on energy efficiency should also keep demand in check. Nevertheless, EU energy security and unification are complementary goals — in that the latter will deliver the former. To achieve these goals the industry must now work together with regulators to ensure third parties have better access to the interconnectors that are being built, while unlocking the financing and implementing the new business models necessary to support these investments.
Addressing the Utility Issue
Proof is made that “energy only” markets do not function properly with a high level of renewables penetration. Electricity market price formation should include both energy and dependable capacity components in the traded kWh. Resolving this question is the most urgent priority. Utilities should be compensated for providing the underlying base power required to ensure a more reliable source of energy. The so-called capacity market is one of several potential solutions to this issue, but it is Alstom’s belief that national initiatives would need to be closely coordinated at EU level to avoid another layer of regulation complexity that could potentially further undermine the situation.
Alstom is participating in a number of pilot projects in order to help new business models emerge. These are designed to help develop new contractual frameworks for renewable integration, and to minimise the integration costs and delays resulting from network reinforcement, as well as incentives. The integration of distributed energy resources aggregation also offers a potential alternative to traditional generation.
However, the contractual framework for storage connection to the grid will need to be clarified, as will the management of Smart Metering data, and the questions revolving around its ownership, security and privacy. Lastly, the facilitation of self-consumption and peer-to-peer energy exchanges within distribution networks will bring new challenges.
Today, it is still too early to be able to say with certainty how all these issues will be solved. The technical and regulatory issues are similar in every country, but the answers are likely to differ, because of the differences in energy mix and societal models. Directionally, we believe that true pan-European market based solutions should be favored over additional and scattered regulatory measures.
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