Delivering the internal market in electricity and making the most of public interventions

Inge Bernaerts – Head of Unit DG Energy Unit B2 Wholesale markets : electricity and gas Brussels, November 28th, 2013

2

Communication on

public intervention

Capacity

mechanisms

Demand

response

RES support

schemes

Cooperation

mechanisms

The Package:

Principles for efficient public interventions

1. Let markets work!

2. Identifying a specific problem and its cause

3. Assessing potential interplay with other policy objectives – holistic approach

4. Evaluating alternative instruments promoting market based solutions, including European options

5. Encourage changes in consumer behaviour

6. Minimising impacts on operating of electricity systems

7. Keeping costs low (competition of technologies and of suppliers, potential of other Member States)

8. Considering the impact on costs of consumers

9. Monitoring, evaluation and phasing out

Guidance on public interventions to

ensure Generation Adequacy

Capacity mechanisms

• On 22 May 2013 the European Council called for guidance on capacity mechanisms.

• Guidance in the Communication and elaborated in this Staff Working Document

• Aim to help ensure that capacity mechanisms

• meet aims of EU energy policy aims (IEM)

• comply with the common competition rules BUT detailed treatment of capacity mechanism and State aid in forthcoming

Energy and Env. SA guidelines

Context for today's discussion

• Ensuring generation adequacy is also one of the main challenges as the Union moves towards a low carbon energy system.

• SAME time as completion of IEM Mutual interdependence of MS for SoS

SHORT TERM (operational) and LONG TERM….

• SAME time as major technological change SMART GRIDS, Demand side participation in market etc.

• SAME time as economic crisis shows overinvestment in past – impact on incumbents

EVIDENCE BASED POLICY MAKING

analyse objectively generation adequacy concern

• Recognize the reality of coupled markets: cross-border assessment is needed

• Maximize interconnection capacity

• Include the potential of demand response in generation adequacy assessment

• Distinguish generation adequacy concerns from profitability concerns (take into account overcapacity and economic crisis)

Identify the causes of the concern

• Regulated wholesale and retail prices:

• as a general rule further public interventions not proportionate if price caps reduce investment

• Existing support schemes:

• are RES support schemes in line with best practices?

• Support for fossil and nuclear generation?

• Do effective intraday and balancing markets exist?

• Can the demand side participate in these markets?

Costs, benefits and alternatives

• The cost of capacity remuneration schemes can be very high (over 10% of wholesale electricity costs)

• Promote (local) generation or increase interconnection capacity?

• Promote generation or promote demand response?

• Impact on electricity bills? Is the cost of intervention not higher than the value of lost load?

• Impact on CO2 and RES targets: how to avoid lock-in effects?

EFFECTIVE AND EFFICIENT INTERVENTION

Design of public intervention

• A strategic reserve is normally less distortionary, less costly and easier to implement; BUT not suitable for every problem

• One-off tendering could be less distortionary and easier to implement when there is a clearly identified and temporary investment gap – must be credibly one off

• Where market wide capacity remuneration schemes are considered, capacity payments are less desirable and capacity markets are to be preferred

Design features

Technological neutrality

old + new production, demand participates on equal basis

Transitional with an exit strategy

allow price to fall to zero, address market and regulatory failures

Regional schemes least cross-border participation

RECOGNISE practical difficulties

BUT vital to account for benefits of IEM

Minimizing distortions of competition and trade

no adverse effect on market coupling; no export restrictions)

Financing – beneficaries of SoS should pay

Guidance for MS Choices

• Intervention after:

• careful and objective assessment of needs

• Addressing regulatory and market failures cost/benefit analysis compared to other solutions and value of lost load

• Recommendations:

• chose the right instrument to address the problem identified

• Design the measure to minimize distortions

• Ensure mechanism is reviewed as underlying concern addressed

Renewable energy support schemes – EU

guidance on best practice

Market integration: support schemes & market rules

Feed-in tariff Premium Quota

Phase in market exposure: Competitive

allocation mechanisms

Mechanism to reflect maturity of technology

Competition among RES – technology development

Minimise impact on production decision

Phase in equal treatment: Balancing

obligations Bearing of grid

costs

Dispatching rules

Different degrees of harmonisation for all users

Cost control

Avoidance of over-compensation: Competitive

allocation mechanisms

Objective cost and

revenue calculations (LCOE)

Automatic digression

Limited time frame

bubble

Demand Response:

A Sustainable Win-Win for All

Benefits and Potential

• Individual energy savings/reductions: 2-4%

• Partial shift to cheaper periods: ca. 10% (HH), 20%+ (I)

• (Lower system costs)

Reduced Consumer Bills

• Reduced peak generation: up to 60 GW (controllable load) • Reduced grid needs

System Efficiency

• More RES possible on the grid • Environment/CO2 reductions

• Consumer engagement/empowerment

Vicarious benefits

Demand Response: What is Needed?

• Dynamic pricing and reward structures

• Data protection and security

Market-based & transparent incentives

• Equal footing with supply

• Contractual/technical rules, e.g. network codes

Opening up the market to DR

• Smart meters

• Smart appliances

Bringing technologies into the retail segment

Thank you for attention

More information available under:

http://ec.europa.eu/energy/