Transparency, a central bone of contention in EU power market overhaul

Florent Marcellesi, a Spanish MEP, says more transparency is needed on "where the money is going". [© European Union 2017 - Source : EP]

Whether it relates to electricity prices charged to customers, the calculation of grid availability across borders, or the EU’s law-making process itself, the quest for transparency has emerged as a cross-cutting theme in Europe’s ongoing power market reform.

Florent Marcellesi is a Spanish Member of the European Parliament for the Greens political faction. As one of Assembly’s rapporteurs on the proposed revision of Europe’s electricity market, he sits in so-called ‘trilogue’ talks where negotiators from the European Commission, Parliament and Council get together behind closed doors to hammer out compromises on EU legislation.

As such, he should be well informed about the positions of the 28 EU countries. Yet, he says he desperately lacks information.

“We don’t know the position of the member states,” Marcellesi told a EURACTIV event last week, calling on EU countries to position themselves more clearly on issues such as the Efficiency First principle, which prioritises energy savings over production.

“I’m very curious about that because we don’t know,” Marcellesi said at the event, organised with the support of the French transmission system operator, RTE, and the French electricity trade association, UFE.

EU lawmakers have been looking into a proposed reform of the EU’s electricity market since November 2016, when the European Commission tabled its ‘Clean Energy for All Europeans’ package of laws, designed to boost renewables and energy efficiency.

One of the most disputed aspects of the reform is an attempt by the European Commission to curtail “capacity mechanisms” – or national aid schemes that remunerate power plants for remaining on stand-by in case of demand peak, typically during winter.

Capacity markets: A necessary evil in the energy transition?

Detractors of capacity mechanisms argue they are mere state aid for dirty fossil fuels that should be eliminated as soon as possible while supporters claim they provide vital back-up in the transition to renewable electricity. The fact that both are correct is leaving Europe in a quandary.

The Commission’s antitrust department cleared several of those schemes earlier this year, grudgingly accepting that they may be necessary as a last resort option in order to keep the lights on.

The fear in Brussels is that capacity mechanisms could be used as backdoor to subsidise polluting fossil fuels like coal. So it decided to impose an emissions performance standard on eligible plants. That has infuriated Poland which relies heavily on coal. But other countries like France have also stepped forward in defence of capacity mechanisms, although for different reasons.

At the heart of the disagreement lies a fundamental split over the role capacity mechanisms can play in the energy transition, said Klaus-Dieter Borchardt, Director for the Internal Energy Market at the European Commission’s energy department.

On the one hand, there are those like France who see capacity mechanisms as a complementary source of finance to attract long-term investments and ensure security of supply, he said at the EURACTIV event. While the other approach sees capacity mechanisms as “an instrument of last resort” to address well-defined security of supply issues “if the energy-only market fails to deliver”.

“It’s no secret that the Commission defends [the latter],” Borchardt said.

The lack of transparency about how the money is spent is probably one of the reasons why the Commission views capacity mechanisms with such suspicion.

A recent inquiry by Greenpeace suggested that governments across Europe have already spent €32.6 billion in various capacity schemes since 1998. A further €25.7 billion of funding has been lined up until 2040.

However, the exact figures aren’t clear. When EURACTIV asked the Commission to confirm the Greenpeace investigation, it said harmonised statistics weren’t available.

Greenpeace study throws light on Europe’s ‘hidden energy subsidies’

Figures compiled by the environmental pressure group Greenpeace highlight the lack of transparency about the amount of cash disbursed by national governments to support back-up power plants – mainly fossil fuels and nuclear.

20 gigawatt Russian Roulette

In fact, statistics say different things about how much “capacity” is needed to fill potential supply gaps in power generation. And the lack of comparable data fuels divergences in appreciation about whether capacity mechanisms are required at all.

“We had a situation in which the French adequacy assessment revealed problems” with supply security, said Colas Chabanne, a senior official at RTE, the French transmission system operator, who spoke at the EURACTIV event.

“A very simple way to explain it is what I call the 20 gigawatt Russian Roulette,” the French official said. In 2012, there was a very cold winter in France with a peak load reaching 102 gigawatts. Two years later, the winter was much warmer, with a peak load at 82 gigawatts.

“That’s a 20 gigawatt difference in terms of peak load,” Chabanne pointed out. “And of course you understand that to supply those 20 gigawatts of demand, you need assets – generation or demand-response – which were not used at all during year 2014.

“So there is a big risk for investors to put money in assets, which some years will not be used at all, just because of the weather,” he said. The capacity market in France addresses that risk by providing a more stable stream of revenue to owners of power plants or demand-response capacity – even when they are not in use.

Conflicting or complementary assessments?

But while national bodies like RTE do their own assessments, their figures can come in conflict with a Europe-wide adequacy forecast, performed by the European association of transmission system operators (ENTSO-E).

“In the European adequacy assessment, we also had problems but to a lesser extent,” Chabanne admitted, saying this led the European Commission to inquire about “the consistency between those results” before giving its green light to the French capacity mechanism.

In fact, the national and European assessments can reveal different things, Chabanne explained, saying the discrepancy between the two is not necessarily an issue. “They are not to be opposed. If you want a robust assessment, you need to confront points of views” in order to decide whether public intervention is required to ensure supply security, he argued.

Asked whether the European or national adequacy assessment should prevail in case of conflict, Chabanne replied: “I believe [the European Commission’s] DG Competition did quite a good job in that regard for the French capacity market.”

Why France believes capacity mechanisms are necessary

Capacity mechanisms are crucial to secure the finances of power plants that ensure France’s security of electricity supply. They are also essential to attract investments in new necessary capacity by providing visibility to the market thanks to a long-term price signal, writes Virginie Schwarz.

The European Commission does not dispute this, accepting that the European and national adequacy assessments are complementary.

“But what we have today is that it relies almost exclusively on a national assessment,” said Christof Schoser, a senior official at the Commission’s competition directorate in charge of state aid controls in the energy sector.

“The European assessment is still very much under-developed,” Schoser stressed, saying ENTSO-E has “tried” but failed to develop a real European assessment. At worse, “the data may simply not be available,” Schoser pointed out, calling for some harmonisation in the way grid usage is calculated across the EU in order to generate comparable data.

“We need to make a big step towards a European assessment,” the EU official insisted, saying this will ultimately also benefit national authorities and TSOs who “don’t really know what’s happening across the border because they use different methodologies” to calculate grid availability.

Getting timely and reliable data on grid usage has in fact become a priority in the electricity market reform.

According to the European Agency for the Cooperation of Energy Regulators (ACER), cross-border electricity infrastructure is currently used at only around 30-35% of capacity.

“And that’s a scandal,” said Klaus-Dieter Borchardt, the senior Commission official. The main reason, he said, is that TSOs are still looking at capacity chiefly form a national perspective. “Even worse,” he continued, “structural congestion in one member state is pushed to the border and makes it impossible to use cross-border capacities for cross-border trade.”

The Commission has proposed addressing the issue of cross-border grid availability as part of its electricity market reform. “And we have to overcome this in one way or another,” Borchardt insisted, saying it is the only way of making sure capacity mechanisms are used as a last resort option to address market failures.

Marcellesi, the Spanish MEP, agrees that a pan-European approach is desperately needed on adequacy assessments. But the discussions in trilogue have not yet touched on this sensitive topic, he said, with member states keeping their cards close to their chest.

“I don’t even know the position of my country. I asked my minister, the permanent representation of my country, and they don’t tell me,” Marcellesi said. What the Spanish MEP does insist on is that all adequacy assessments in Europe – whether at national or EU level – are “fully transparent” and based on comparable figures and methodologies.

Capacity markets: How much ‘flexibility’ for EU countries?

Mostly out of pragmatism, the European Commission has adopted a rather tolerant approach to “capacity mechanisms” – national schemes that remunerate back-up power plants – accepting that EU countries face different challenges in the energy transition.

Demand response

Transparency – and data exchanges – is also necessary to manage the grid in real-time. With growing shares of electricity coming from decentralised sources like wind and solar, and the expected surge in electric vehicles, the need for real-time data flows is becoming essential to keep the grid stable – and avoid blackouts.

Demand-side management technologies – often branded “negawatts” because they enable consumers to get paid for switching off their equipment – plays a central part in providing this kind of flexibility, Borchardt said.

But demand-response won’t happen if energy companies don’t charge “dynamic prices” to their customers, he warned, suggesting transparency there was needed too. “Here, we are not yet on the same page because there is still some reluctance” to make dynamic pricing an obligation across the EU, Borchardt said.

Worse, he said some EU countries have insisted that energy suppliers give their prior consent before applying dynamic prices to their clients, warning that the Commission was “very clear and firm” in rejecting this proposal. Enabling demand-response is a key objective of the EU’s electricity market reform and “a lowest common denominator solution won’t do,” the official stressed.

The Commission’s stance on demand-response is “fully shared” in Paris, replied Pierre Jeremie, head of electricity markets at the French ecology ministry. “If we have a mandatory agreement by the supplier, we will not have demand-response,” he concurred.

As a matter of fact, demand-response technology is one of the chief beneficiaries of the French capacity mechanism, and one of its perceived strengths among clean energy advocates.

In France, 50% of the revenues for demand-response are supplied by the capacity market, Chabanne pointed out, with “only 10%” coming from the energy market or other related services. And it is payable in euros per megawatts, not in euros per megawatt-hour, which means “it can also prove really difficult to develop demand-response without a capacity market,” Chabanne argued.

“Capacity has value,” Chabanne summarised, saying the extra investor confidence provided by the French scheme had translated into cheaper electricity bills for consumers and an increased overall “social welfare” evaluated at €400 million per year.

But it also takes time: in France, it took six years to put a capacity market in place, Chabanne said, calling on EU legislators to avoid creating instability by mandating a regular review of existing capacity markets. “We cannot review it every year because otherwise we run the risk of not having it when we need it,” he warned.

Capacity mechanisms reform – key issues to watch

The European Commission wants to limit state aid for power plants that EU countries remunerate to remain on stand-by in case of demand peak. As negotiations on the EU’s new electricity market enter the home straight, EURACTIV lists the main issues to watch out for in the debate.

Ultimately, it will be up to EU legislators to weigh the costs and benefits of capacity mechanisms as part of the wider reform of electricity markets.

And Marcellesi suggested that transparency could well be a deal-breaker for the European Parliament when entering the last series of trilogue talks, which are expected to conclude in November or December.

“What we’ve asked at the European Parliament is to have full transparency on the bill,” the Spanish MEP said. “Do you know where your money is going? In my country, I don’t know at all. I know how much money goes to renewables. But I don’t know how much money goes to coal, gas, or nuclear.

“We’ve made some proposals and discussed about that in trilogue already, but I don’t see any good feelings from the Council and the Commission on that point. And we will continue to put pressure on that, because as citizens and as consumers, we need to know where our money is going.”

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