Electricity market of Europe (trends) with a special focus on EU generation capacity gap by How to deal with it-

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1 Electricity market of Europe (trends) with a special focus on EU generation capacity gap by How to deal with it- Hans ten Berge, Secretary General Budapest, 03 September What incentives are there for investment into power plants which would not count as prohibited state aid in the EU? The state aid guidelines set these rules up to 2020 For RES, the rules for support schemes are also laid out (e.g. preference for tendering) In terms of security of supply, capacity mechanisms which can help promote investments have specific rules for compliance (market-based, tech neutral, open to new and existing plants, open to cross-border participation, etc.) Practical examples of implementation have already been approved in light of the state aid guidelines (UK capacity market for security of supply and UK contracts for difference for RES) 1

2 More in depth Final guidelines: What s in... for rules on RES support Aid can be granted as investment or operating aid Replacement of feed-in tariffs by feed-in premiums Balancing responsibilities will apply to >500 kw (wind >3 MW or 3 generation units). Competitive bidding Pilot stage : Bidding on aid for at least 5% of new capacities 2017 onwards: bidding mandatory Bidding can be limited to specific technologies No requirements on support for small scale RES No retroactivity: EEAG will not affect schemes approved under the existing rules More in depth Final guidelines: What is in... rules on generation adequacy CRM is not a priori considered as aid to generation adequacy. This depends on design. CRM to be open for existing and new units for generation, storage, demand and cross border participation A clear technology-neutral approach not fully respected: preference to low carbon generators in case of equivalent technical / economic performance 2

3 Role of nuclear energy in EU power generation mix The total electricity production in 2013 amounts to 3,101 TWh This represents a decline of less than 1% compared to 2012 RES and Nuclear are contributing to this total equally with 27% Fossil fuel generation decreased by 8% compared to 2012 From the perspective of security of supply, competitiveness and CO 2 emissions, nuclear energy has the potential to make a valuable contribution to the EU power mix for years to come. The European Commission s 2050 roadmap indeed foresees an important continuing role for nuclear power in the EU. However, the present pace of new nuclear construction in Europe is clearly not in line with long term forecasts indicating stable nuclear power production until Optimal and suboptimal power generation mixes for CEE region The overarching goal of a holistic market design is to deliver an optimal power system Energy and flexibility markets deliver optimal dispatch and short term system operation and capacity markets deliver long-term system adequacy. All of these markets should have a few fundamental features: Technology-neutral All technologies should be able to participate in the markets without discrimination; Open to new and existing participants The markets should be based on a level playing field between both new and existing participants, including cross-border participants; Open to generation, demand response and storage All participants throughout the value chain should be able to participate in the market. 3

4 Effect of CRM regarding security of supply Our customers expect a reliable supply of electricity whenever they need it! Increasing market uncertainty for all market participants: Existing capacity and new investments lack visibility on what the energy market will look like in the future. The energy-only market provides increasingly shorter term signals whereas existing and/or new firm capacity needs more visibility into the future to be available and thus provide security of supply. The need for firm capacity that delivers long-term system adequacy Political reluctance to leave security of supply to the energy market: Security of supply is viewed as a common good. High peak prices or curtailing a subset of consumers as the outcome of a normally functioning energy market lack political acceptance. Governments thus tend to create a form of insurance that the lights do stay on for everyone, following the goal of the Security of Supply Directive. The need for an evolved market design that reconciles the Internal Energy Market (IEM) with capacity markets Energy + capacity markets (including flexibility) Energy DA & ID Balancing Capacity ETS /MWh /MW Conventional generation Demand Storage RES generation 1 1. Support schemes based on investment or operational aid may still be granted for immature technologies 4

5 To maximise cost-efficiency and market orientation, any capacity market should follow a set of fundamental design features Goal Product Design features Geography Description Overarching goal must be generation adequacy (i.e., firm capacity without any other political targets) Remunerate plant availability/firm capacity Market-based Technology neutral Open to new/existing plants Open to generation/demand response/storage Open to cross-border participation, while not distorting the energy market The completion of the IEM and coordination of the key elements of market design are crucial for EU energy policy Prospect of CCGT power plants in the balancing market Thermal generation is necessary to complement variable renewable power generation and ensure security of supply. The volatility of the demand that has to be met by capacity other than solar or wind power will increase and thermal generation will need to adapt to this. The new role requires above all high flexibility (faster start-ups and shut-downs, lower minimum generation) and reliability, as well as low CAPEX to minimise fixed costs. The European energy market should be fully implemented through integrated forward, intraday, day-ahead and balancing and ancillary services markets that ensure incentives for flexibility in a technology neutral manner. The design of the current balancing and intraday markets must be improved, introducing for instance a possibility to trade balancing forward and more sophisticated products and timeframes that better fit the flexibility requirements (ramp up and down rates etc.) 5

6 The cross-regional roadmap on Day-Ahead Market Coupling Good progress towards a single pan-european day-ahead market Ongoing extensions on the basis of a solution developed by a joint cooperation of Power Exchanges (PRC) and TSOs: Voluntary process What can we expect from regional electricity markets and from market coupling? Trends and effects- NWE pilot project went live in February 2014 (i.e. NWE + Baltic - 75% of the EU electricity market) Source: ACER The SWE region successfully coupled with the NWE region in May In the CEE region, the 4 Market Coupling project (CZ, SK, HU and RO) went live on 19 November 2014 Italian borders successfully coupled since 24 February 2015 Swiss borders technically ready but waiting for EU-CH agreement. Voluntary process The Cross-Regional Roadmap on Flow-Based Capacity Allocation A pilot project launched in the Central West Europe region (CWE) Unprecedented coordination challenges to be solved by the involved TSOs Parallel run simulations since early 2013 with promising results Operational since 21 May 2015 Extension to other areas (CEE) and to other timeframes to be undertaken soon as a second step Source: ACER 6

7 Voluntary process The Cross-Regional Roadmap on Intraday Key to integrate ID markets in the context of growing RES penetration Key prerequisite for integrated balancing markets. PXs and the service provider Deutsche Börse AG finally signed the contract (ESA = Early Start Agreement) in June TSOs and Power Exchanges are confronted to several technical and organisational difficulties along the path. Strong uncertainty about the success and timetable for this project, after several delays. XBID solution now planned for Q Source: ACER Crucial to progress on local implementation projects/smart planning Voluntary / Formal process The Cross-Regional Roadmap on Balancing and ancillary services OBJECTIVE: to ensure continuous balance of demand and supply at the lowest possible cost to customers A greater integration, coordination and harmonization of electricity balancing rules in Europe is expected to increase cross-border trading of balancing and ancillary services products and consequently to reduce costs and increase security of supply MEANS: Top-down: Electricity Balancing Network Code to be implemented by 2022 Bottom-up: several pilot projects at regional level in order to prove the feasibility of the target model CHALLENGES: Higher gap between the target model and existing initiatives Large differences between national models Higher interference with security of supply matters 7

8 Formal process The network codes/guidelines form the foundation on which the IEM is being built Internal electricity market 3 Connection NCs/GLs set requirements for - Generators - Demand-side (including DSM) - HVDC connections 3 Market NCs/GLs set market rules for - Day ahead/intraday & Capacity calculation - Long-term timeframes - System balancing 4 Operational NCs/GLs set common rules for - System security - Assessing adequacy - Planning outages - Emergency situations e.g. paving the way offshore wind for e.g. day-ahead market coupling e.g. regional security coordination initiatives Formal process Network Codes Development state of play Scrutiny Entry into Force Update Text Committee and Translation Committee and Translation Update Text Committee and Translation Update Text Committee and Translation Redrafting and Combining Committee and Translation 3 European Network Codes Stakeholder Committees to be set up by ACER and ENTSO-E to ensure stakeholders involvement throughout the NC implementation phase 8

9 How long might electricity prices fall? -Reasons for this trend and consequences- Low-carbon technologies have low variable costs which lead to a decrease in wholesale prices Demand has stagnated for many years now CO2 prices have remained low Is intervention necessary? *if yes, who, when and how should intervene? The completion of the IEM is key and interventions should be minimized so that we have normal market operation Topics which relate to a common good such as security of supply require intervention in the form of target setting but implementation should always be market-based (e.g. capacity markets) 9