This article is part of our special report Electricity prices.
With growing shares of renewable energies added to the system, the dynamic pricing of electricity becomes even more important in order to provide flexibility on the demand side, says Pierre Tardieu. This is why regulated energy prices can only slow the pace of the energy transition, he argues.
Pierre Tardieu is the chief policy officer at WindEurope, the trade association representing the European wind power industry.
- Dynamic pricing of electricity becomes more important with higher shares of renewables
- Wind power is more efficient when sold as close to real-time as possible
- Consumers need efficient price signals to adapt their energy use
- The end of regulated prices doesn’t mean the end of fixed price contracts
- Vulnerable consumers should not be used as a smokescreen to maintain regulated prices across the board
Do regulated energy prices act as a break for the development of wind power? Or do they provide the stability required for investments into new renewable capacity?
There are two types of regulated prices that need to be distinguished here: those in place for industrial consumers of energy – which are being phased out – and those in place for private households, which are still in place.
We’re basically advocating for the phase-out of both. Because it’s extremely important for the energy market to send signals that value flexibility. And when you have regulated prices in place, not only are you limiting price formation but you’re also completely dis-incentivising any innovation on things like demand-response.
And that is important because we’re moving to a system with much higher shares of variable renewable energies, which means we need flexibility on the demand side to manage that. The International Energy Agency said recently that wind power would be the number one source of power generation around 2027, so the issue is becoming more pressing as time goes by and more wind power is added to the system.
Do regulated prices prevent new wind capacity from being installed? After all, regulated prices have been in place across many European countries for a long time and that hasn’t stopped them from installing massive amounts of new wind power capacity over the past years…
Regulated prices haven’t prevented renewable energy investments from happening. But if we want to fully decarbonise, we’re going to need a new energy system. And that means unlocking investment in flexibility in various forms – storage, interconnections, or variable generation like hydro. All these provide various sources of flexibility.
If prices are regulated, consumers don’t see the value of the electricity that they’re buying – they have no incentive to have a dynamic approach to the way they consume energy. In the end, that can only slow the pace of the energy transition.
Renewable energies are in fact often criticised for their intermittency…
We don’t talk about intermittency but variability. Because intermittency conveys the notion that it’s completely impossible to predict wind generation when we have extremely sophisticated forecast models that allow you to see 24 hours in advance what the production is going to be hour by hour.
The critical point here is to sell your production as close to real-time as possible and over a geographic area which is as broad as possible. If you’re able to do that, you will have less variation between your expected production and your actual output. And the system operator will be able to manage it more easily. The good news is that the clean energy package allows doing that, to some extent.
And dynamic prices are a necessary condition to do that?
It helps but it’s not a necessary precondition. The variability of renewables is easier to manage over a broader geographic area. And doing that as close to real-time as possible means you have less difference between the expected output and what actually happens.
When the wind blows, prices go down. When it stops, prices go up. Do regulated prices offer some kind of insurance policy against these fluctuations?
Fluctuations in prices are normal in wholesale markets. At retail level regulated prices only displace the problem. With low regulated prices, it means there is a gap between what the consumers are paying for and the actual costs of producing energy. And those costs need to be recouped elsewhere with other types of levies, taxes, etc.
So regulated prices are not a structural solution to deal with price fluctuations, it’s a completely different issue. At the end of the day, they are only distorting the market.
The European Commission argues that regulated prices act as a protectionist measure to shield former state monopolies, such as EDF in France, from competition. Is that criticism founded in your view?
What’s very clear is that, if you want to empower consumers, you need to have efficient price signals, it must be easy to switch between suppliers, and there must be effective price comparison tools. The basic thing is to have a dynamic market where you can have new players with new business models. That way, the consumer wins.
Price regulation is actually meant to protect consumers by offering the poorest households some comfort that their energy bills won’t go up. So you believe regulated prices don’t fulfil that role?
The end of regulated prices doesn’t mean the end of fixed price contracts. It’s a common misconception that, with the abolition of regulated tariffs, consumers will be suddenly exposed to market dynamics and become more vulnerable from one day to the next.
It actually doesn’t have to be the case: electricity providers have all sorts of hedging mechanisms that allow them to offer fixed-price contracts to consumers. But hedging has a value and that would be priced in the final bill.
That said, protecting vulnerable consumers is extremely important. They must be clearly defined so that appropriate policies can be implemented to support them. But having regulated prices across the board is not an appropriate solution to address this issue.
Vulnerable consumers should not be used as a smokescreen to maintain regulated prices across the board. There are other ways of dealing with that problem.
Can you give some examples?
One example is to promote energy efficiency. If you give proper incentives to things like building renovation, households will consume less, and better. And that will bring down their energy bill.
Of course, there are other ways of supporting the poorest households. But regulating prices across the board for all consumers won’t help them.
Energy prices are also meant to reflect investments in wind power that didn’t come cheap – they were supported by the state budget through feed-in tariffs, etc. So it would only seem normal that the government would want to regulate prices…
Yes, feed-in tariffs and other support mechanisms really gave a boost to the development of wind power and other renewables. They were necessary considering the investment risks and market entry barriers at the time.
But the way renewables are incentivised today is completely different. It’s usually done through feed-in premiums, which ensure that generators respond to market signals. And it’s allocated via an auction – so it’s always the most competitive projects that win, which means you’re adding zero-carbon generation at the most competitive price.
And regulated prices, again, don’t cover the actual cost of generating electricity. So they’re not helpful in the sense that they don’t give the consumers an adequate idea of what they’re buying.
Nowadays, regulated prices are seen as a break to the deployment of demand-response technology, which allows consumers to lower their bills by using electricity when it is cheapest. Is that indeed always the case?
Yes. Demand-response needs a market signal. If you get a stable price no matter what your consumption is, you get no incentive to change your consumption patterns. And so you’re really limiting the space for innovative technologies and business models to unlock demand-response.
For the time being, consumers can get a lower price by switching their dishwasher at night because there is dual pricing in place. But we could do a lot more if we had cost-reflective prices.
As the wind power industry, we have a lot to gain from it. Flexibility becomes even more important as we move to an energy system with high levels of variable generation. And demand-response is a key ingredient in that context.