Eurelectric: Renewables 'could drive EU electricity market integration' 

Lars G. Josefsson is president and CEO of Vattenfall. He serves as president of the European electricity industry association Eurelectric. 

To read a shortened version of this interview, please click here.

The new EU Renewables Directive sets a binding target to source 20% of EU energy consumption from renewables by 2020. What are the main challenges that this poses to the electricity sector? 

New renewable energy sources (RES) will play a valuable role both in diversifying Europe's energy supply over the coming decades while also reducing emissions of greenhouse gases from electricity generation. However, a 20% target for overall energy consumption translates into a 35% share for RES power in total electricity, up from around 15% today. 

This is extremely ambitious as it will require not only construction of the necessary power generation facilities - largely onshore and offshore windpower and biomass-fired plants - but also adaptation of the grid infrastructure and operation plus the necessary back-up plant to take account of the fact that wind power is intermittent – the wind doesn't blow all the time and you can't easily store electricity on a large-scale for another day.  

However, an equally challenging aspect is that, at a moment when EU legislators have just adopted a third package of laws designed to drive forward a competitive European internal market in electricity, the new Renewable Energy Directive paradoxically encourages the persistence of 27 different national support policies for RES, i.e. well over a third of all European electricity may be carved out of the market and cordoned off in a separate non-market enclosure.  

That's why Eurelectric is urging the European Commission and the governments to see how full use can be made of the flexibility-cooperation mechanisms provided by the directive, such as setting up joint RES projects, joint support systems and joint certificate schemes, which would have the extremely positive effect of encouraging regional market integration. 

Our figures show that as much as an annual €17 billion by 2020 can be saved on the cost of supporting RES deployment if cross-border trade in RES-power is allowed. At this time of economic difficulty, a €17 billion saving to the electricity retail customer – who at the end of the day has to pay for more expensive electricity – is hardly negligible.

How can we ensure that the renewables increase their market share significantly when many of the technologies are not mature enough to compete with fossil fuels?

Well it's a fact that we will be relying on technologies that are sometimes significantly more expensive than currently competitive conventional power generation. 

Considerable research and development efforts will be crucial to bring innovative RES technologies to the market and national support schemes are set to continue. But this is a political choice which Europe's lawmakers and governments have signed up to. Existing support schemes, such as feed-in tariff and quota-based systems, already provide major incentives for increasing the share of renewables.  

However, current schemes are likely to be insufficient for reaching the 2020 targets. If member states attempt to achieve the targets by upgrading existing national schemes, many will face very large rises in energy costs. 

Trading in RES-power between member states would reduce these costs by incentivising construction in least-cost locations. 

In addition, a strong implementation of the revised EU emissions trading system, with as few exceptions as possible to full auctioning of emissions allowances, will provide a strong carbon price signal in favour of renewables. Indeed, we would argue that in the long-term, the carbon price itself should provide a sufficient economic signal to deploy RES without additional subsidy schemes.  

Which renewable energies do you expect to see entering the electricity market on a large scale in the run-up to 2020?

Onshore wind power will continue to increase somewhat, but is subject to significant public opposition in many member states and politicians will need to address this. Offshore wind power has huge potential and does not have the same planning problems, but it remains expensive and grid connection is a real challenge. Significant co-operation between member states will be needed to realise its potential.

The use of biomass will increase significantly and should not be restricted by too onerous sustainability criteria. 

Given the short time scale, we do not expect to see a significant role for current niche technologies such as wave-power and photovoltaic. We will have to rely on technologies available at reasonable cost today. 

What support mechanisms do you think will be necessary to aid the integration of renewables into the market? Should there be a differentiated approach to renewable technologies at different stages of development?

A differentiated approach has some merits. New technologies can be supported through research, development and demonstration funds.

However, once technologies are reasonably mature, they should freely compete with each other just like other forms of power generation. Open-ended, technology-specific subsidies are not the answer.

A shift to renewables is expected to bring big greenhouse gas savings, helping the EU reach its climate commitments. What other opportunities do you think the electricity market transformation brings? 

As I mentioned a moment ago, RES-power may serve to drive forward regional market integration if – and we are working hard to convince national and EU authorities that this is a vital need – member states work together using the flexibility-cooperation mechanisms.

In addition, managing the system-integration of intermittent RES-electricity will necessitate greater regional market integration. Intermittency can be managed somewhat through greater cross-border flows – studies have shown that with better interconnection, average fluctuation in wind power across different areas can be 'smoothed out'. However, this will also require significant expansion in grids, which cannot be achieved in a short timescale.

How do you expect the third energy market liberalisation package to impact on large-scale penetration of renewables? Do you think more integrated electricity markets will provide incentives to invest in the smart grids required to actually deliver renewable energy to customers?

It is clear that the networks will have to be upgraded and expanded to better adapt to the dynamics of RES-electricity and distributed generation, and facilitate unlimited penetration, with all its benefits to the consumer. 

Today's electricity grid was designed to ensure power flow from centralised sources to fixed, predictable loads. This grid topology and operational logic makes it impossible for the grid to accept massive input from myriad distributed energy resources.

And because resources such as solar and windpower are intermittent, the grid will require integrated monitoring and control, with substation automation, to cope with differing energy flows and plan for the necessary standby capacity. 'Smart grid' capabilities will facilitate bi-directional power flows and monitor, control, and support these distributed resources, facilitate demand-side management and improve information flows so as to improve integration. 

To answer your question more directly, it is smart grid development that will facilitate market-integration rather than the other way around. 

On a retail market level, smart grids will provide both suppliers and customers with tools to amplify the benefits they draw from a working market. A roll-out of smart meters, as clearly called for in the new Electricity Directive wherever the cost-benefit ratio is positive, is also essential.

However, the necessary investments cannot be automatically recovered through the market and electricity distribution system operators (DSOs) will need a conducive regulatory regime. To encourage DSOs on to the path of smart grids, we really need "smarter regulation" and better incentives both for research and development work and for the deployment of new technologies. 

Although it is the national regulators who have the powers to drive forward on smart grids, Eurelectric would like to see an EU-wide harmonised approach to this as far as possible. The 3rd Electricity Market Directive goes in this direction in calling on member states and regulators to encourage the introduction of smart grids in order to support decentralised power generation and foster energy efficiency.

What impact will large-scale market introduction of renewables have on customers? What sort of electricity price hikes can we expect to see?

Increasing RES-power development will result in higher electricity prices. The level of this increase will depend on political choices regarding the support schemes, such as technology-specific measures and which customers pay for the schemes. 

The least-cost solution would undoubtedly be a technology-neutral RES-trading system across the whole EU.  In this context, electricity price increases will largely be determined by political decisions.

We hope that the European Commission's review of the directive in 2014 will lead to increased opportunities for co-operation between member states, and accelerate the move towards full trading in renewable energy.