How to Reinvent Electricity Markets after COP21? Manuel BARITAUD Senior Energy Analyst, International Energy Agency

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1 How to Reinvent Electricity Markets after COP21? Manuel BARITAUD Senior Energy Analyst, International Energy Agency EPRI ENV VISION Washington DC May 11, 2016

2 Power markets must evolve to facilitate low carbon transition Objectives of market design for decarbonisation: to enable the transition to a low-carbon electricity system, at least cost, while maintaining electricity security Are current competitive markets challenged? Outline Aligning market design and low-carbon power system Low-carbon generation investments Resolution of short-term markets Efficient retail pricing

3 A 2 C pathway is still some further efforts away Gt Baseline 17.9 Gt Energy efficiency Fuel & technology switching in end uses Renewables Nuclear Scenario CCS Other A peak in emissions by around 2020 is possible using existing policies & technologies; technology innovation and RD&D will be key to achieving the longer term goal. Source: World Energy Outlook Special Briefing for COP21

4 The power sector is central to a low carbon world Electricity generation by technology and CO 2 intensity in the 450 Scenario 14 OECD China Other non OECD 1.4 Thosuand TWh gco 2 /kwh Fossil fuel plants fitted with CCS Fossil fuel plants without CCS Renewables Nuclear CO2 electricity emission intensity (right axis) Low carbon power generation needs to quadruple with respect to today, with renewables reaching half of the global power mix in 2040 Source: World Energy Outlook 2014

5 Aligning market design and low carbon power system: what does it take? Low carbon generation technologies available High High diversity Mainly wind and solar Flexibility (Demand and storage) Low Nuclear CCs Commodity Diversified supply Other renewables VRE + flexibility Storage Limited technologies Variable renewables Demand response For the long term, the design of electricity markets hinges on the portfolio of technologies available and improvements are likely to be evolutionary.

6 Current wholesale prices and long term risks call for continuing support Year ahead forward market prices (Real price 2015), EUR/MWh France The Netherlands Germany /2/2008 1/2/2009 1/2/2010 1/2/2011 1/2/2012 1/2/2013 1/2/2014 1/2/2015 Long term arrangements are still needed to make up the difference in low carbon generation costs, and keep financing costs low for capital intensive investments.

7 Market value factor of renewables declines as market share increases Market value factor of wind and solar PV as a function of their market share in Germany Participation into markets provides an important feedback loop by revealing the value of different low carbon technologies.

8 Integrating high shares of wind and solar 80 New operational requirements with high shares of renewables (data for Germany using scaled wind data) 70 Contribution to peak demand 60 Load Load level (GW) Potential over generation Forecast errors Larger ramps Net load with 20% of wind 2energy in the generation mix Hours Source: Adapted from IEA (2014) THE POWER OF TRANSFORMATION Short term markets can unlock flexibility for efficient and secure system operations, and reap benefits of demand response, storage, flexible generation and networks.

9 Controllability of distributed variable generation is needed at high shares Load duration curve of wind and solar generation in Germany (2013) MW Wind Solar Hours Smart technologies enable to remotely control and curtail wind and solar in order to participate to system needs (y/c local congestion) and integrate higher shares

10 Increasing geographical resolution of short term markets Continental markets Locational markets Local, distributed markets Regional integration of markets Transparent prices and time prices with a high geographical resolution can provide incentives for efficient investments.

11 Increasing temporal resolution of short term markets Day ahead Real time Policy Existing: Day ahead and Real time Intraday price transparency Transparent intraday prices are needed to inform all market participants, including distributed ones, about electricity cost by location and time.

12 Demand response and storage can bring many benefits The different roles of demand response with high share of renewables (illustrative) With new technologies, small consumers can contribute to flexibility and must be treated in a technology neutral fashion.

13 Reliability is regulated in most countries Consistent market frameworks needed for electricity security, including Reliability standard Scarcity pricing during capacity shortage and possibly capacity mechanism Reliability standards Loss of Load Expectation 3hr/year in France and the UK 1-in-10 standard in North America Maximum Expected Unserved Energy of 0.002% in Australia

14 Capacity markets must be well designed Principles for coordination of capacity markets across borders Capacity requirements - Regional adequacy forecasting - Locational requirements - Shape of demand curve Capacity product definition - Avoid conflicting product definition - Availability period - Penalties - Demand response participation Avoid interference with the energy trade across borders During capacity shortage, ensuring maximum contribution of cross border capacity and efficient energy flows is needed to reap the benefits of market integration.

15 Investments in new interconnectors require a proper governance EU Transmission lines in the Projects of Common Interest (PCI) Integrated planning and consistent cost benefit analysis are needed to select projects and ensure cost allocation for financing of new projects

16 Distributed Vs centralised renewables

17 Modernizing retail tariffs Cost components and tariff structure of selected retail electricity prices (average for Paris, Berlin and Amsterdam) USD/kWh 100% 90% 80% 70% 60% 50% 40% 30% VAT 21% Levies and taxes 19% Network and metering 26% Fixed 7% Variable 93% Taxes and levies (US Vs Europe) Tariff structure Dynamic pricing 20% 10% Energy 35% 0% Costs components Tariff structure Prices have to better reflect the underlying costs level and structure in order to induce efficient investment in solar PV and batteries on the consumer side.

18 Conclusion: a consistent market frameworkis needed for decarbonisation Objective Policy Type of regulation Competitive market Low carbon investments Carbon pricing Additional policy Support schemes Carbon regulation Long term support instruments Carbon price (trading scheme) Long term contracts Auctions Integration in markets Operational efficiency/ Reliability & adequacy Short term energy markets Additional policy Capacity markets Market rules Scarcity pricing Reliability standards Capacity requirements Demand response product definition Geographical resolution temporal resolution of prices Price spikes Capacity prices DR participation Network efficiency Regulation Regional planning Network cost allocation Congestion revenues Transmission auctions Efficient consumption Retail pricing Network tariff structure Taxation and levies Retail competitive prices Dynamic pricing Distributed resources

19 Thank you

RE-POWERING MARKETS Market design and regulation during the transition to low-carbon power systems

RE-POWERING MARKETS Market design and regulation during the transition to low-carbon power systems EC-IEA Roundtatble on electricity market design and regulation Brussels, 18 February 2016 Power markets