A much more interconnected European energy market, ensuring regional cooperation and cutting out waste, makes so much sense for consumers, for security of supply and for decarbonisation. Philip Baker and Christos Kolokathis urge MEPs and member states to make it happen.
Philip Baker and Christos Kolokathis are members of the Regulatory Assistance Project.
When the European Commission first outlined its vision for a genuine Energy Union nearly three years ago, Vice-President for the Energy Union Maroš Šefčovič, painted in primary colours: “Building a single energy market will allow energy to flow freely across EU countries as a fifth European freedom.
“By removing technical and regulatory barriers of cross-border energy flows, consumers will enjoy the fruits of increased competition – lower prices and better service!”
The aim remains to complete the internal energy market and – in so doing – to reduce the costs of electricity to European consumers significantly while delivering the Energy Union’s other two “cornerstones”: energy security and decarbonisation.
But the vision faces hurdles as inter-institutional negotiations between the Commission, Council and MEPs are set to begin in spring this year.
This week (21 February), MEPs are expected to vote in committee on their response to the Commission’s proposals for the rules of the electricity market in Europe after 2020.
They have a chance to support key aspects of the Commission’s proposals to deliver the Energy Union. An important part of this is ensuring that the EU moves in the right direction toward the vision of energy as a fifth freedom, countering the Council’s general approach which, last December, adopted a stance that would actually turn the clock back from the legal status quo.
But why are market integration, regionalisation and interconnection so important for the future of EU energy policy anyway?
The reasons are threefold: 1) they allow consumers to access the cheapest sources of energy, reducing prices across the board, 2) they allow risks and resources to be pooled, further reducing costs by reducing the need for additional reserves and 3) they exploit geographic diversity, which is especially useful in integrating clean power onto grids as efficiently as possible.
In the latter sense, regionalisation will be a boon to the EU’s plans to decarbonise the power sector, as recent modelling by Artelys for the Energy Union Choices group has demonstrated.
We have written elsewhere on the specific reasons why the Council’s general approach moves us backwards from the legal status quo, threatening to legalise practices that are currently illegal under the EU’s Third Energy Package. However, in what remains of this article, we want to set out exactly why energy sector regionalisation makes so much sense.
Market integration saves money
The increase in social welfare of fully integrating Europe’s electricity markets has been estimated to be as much as €32 billion per year by 2030. But only a portion of this is currently realised. Ensuring that Europe’s electricity consumers have access to the full benefits of market integration will depend to a large extent on maximising the interconnector capacity that can economically be made available to the wholesale markets.
Even before considering the need for additional interconnection capacity, there is strong evidence that Europe’s existing interconnectors are significantly under-utilised. A recent analysis by the Agency for the Cooperation of Energy Regulators (ACER), for example, found that only around a third of the realistically available cross-border capacity is currently offered to the market in the majority of continental Europe. This simply doesn’t make sense.
Regional approach makes sense when planning “resource adequacy”
While domestic energy security will remain under the purview of the Member States, retaining a state-centric model focused on self-sufficiency will unnecessarily increase costs for European consumers without increasing their security of supply. What we need is a more comprehensive approach to resource adequacy assessments in order to make savings on investment costs, which could be around €8 billion per year in total.
When we look at the situation across the EU, we see that most Member States find themselves in regions with a healthy resource adequacy situation. And yet ACER figures show us that half of the Member States surveyed did not take any account of resource contribution from neighbouring systems.
And five of these Member States are implementing or planning to implement subsidy schemes for additional (often fossil-fuel-based) capacity. This doesn’t make sense. Failure to account properly for all of the energy resources available to consumers in a region will inevitably lead to payments for capacity that is surplus to requirements – adding unnecessarily to consumer bills.
Regional approaches help balance grids better
Finally, balancing power grids is becoming increasingly challenging in the face of higher levels of variable renewable energy. But spreading the balancing requirements over larger regions allows geographic and technical diversity to be harnessed, reducing balancing costs.
Balancing over wider areas also allows risk to be pooled and the cheapest resources to be utilised. The savings yet to be achieved by balancing across wider areas are still around €3 billion per year by 2030.
What European citizens and businesses need now is for MEPs and Member States to fully grasp these benefits and to ensure that they take the opportunity to complete the internal energy market. Now is the time to make this real, instead of endorsing current practices, that fall short of the legal status quo, and taking a significant step backwards.