Eurelectric boss: ‘Orchestrated’ power markets must end

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This article is part of our special report Electricity in transition.

If European Union leaders don’t believe markets can work, then there’s no point having a carbon price to encourage renewable energies. And the energy market will always be “orchestrated” by national governments keeping fossil fuels subsidised, says Hans Ten Berge.

Hans Ten Berge is secretary general of Eurelectric, the association of the electricity industry in Europe, including the likes of EDF and E.ON.

Ten Berge spoke to EURACTIV’s Publisher and Editor, Frédéric Simon.

The European Commission said it will put pro-active consumers and citizens at the heart of the electricity market in its upcoming “winter package” of energy legislation. Do you support this vision? And what do you think should be the main elements of the EU’s approach on this?

We very much subscribe to that. However, it’s not just a question of equipping consumers with a smart meter and so that they can adapt their behaviour when prices can fluctuate very strongly. It’s also a question of giving a ‘pure’ energy price.

If you look at energy bills in Germany, the wholesale energy price for instance, is 3 euro cents per kilowatt hour (Kw/h) when the total retail bill is 30 euro cents. So consumers have 27 euro cents on the bill that have nothing to do with energy as such: it is network charges and policy support charges. This means that when energy is saved, the burden of these costs is shifted from one customer to the other. These regulated charges can represent around 50% of charges in consumers’ electricity bills on average in Europe.

So before empowering the customer, I would plead for the Commission to make sure customers are empowered for their energy bill and not empowered to avoid taxes and policy charges.

The vision of a decentralised energy production system implies lots of small energy producers – typically citizens with solar panel on their roofs – who produce their own energy and sell it back to the grid at a guaranteed price. Are electricity producers ready for such a revolution?

The problem is that the guaranteed prices are always higher than the market price. And who would pay for that? The tax payer.

So yes, we are ready for full and fair competition. But I would say what the Commission is thinking about is more stimulation of decentralised generation at the expense of the majority of customers.

Are grid operators in your view adapting sufficiently fast to a more decentralised energy system? And related to this, are electricity markets adapted to deal with real-time price signals?

If you look at decentralised, it’s mainly solar power. Now, imagine you install solar panels in a certain area, they will all generate electricity at the same time, when the sun is shining. That’s roughly 15-20% of the time at best that they would generate power; the remaining 80% of the time, they would not generate much because the sun is not always shining.

When solar panels all generate at the same time, this represents so much electricity flowing into the grid that you have to get rid of the surplus. And when the power is actually needed, in the evening let’s say, it’s the other way round – solar panels don’t generate enough and you need to get your power from other sources.

So what do we do with the grids to deal with this? I think we first have to value decentralised power in the same way as centralised power. As long as that’s not done, you will get arbitrage between the two. And that means constant tensions on the grid so that’s my main criticism of the upcoming package.

Are we against decentralised generation? No. But you need fair economics to underpin it, which are not there at the moment.

At the moment the electricity system is very centralised, so if you want to encourage decentralisation, you probably need to put incentives in place, don’t you? And that means some kind of arbitrage.

Why would you want to encourage solar decentralised over wind centralised?

It’s a political objective.

If decentralisation is a political objective, it should also make sense for the consumer, it should not come at the expense of other forms of energy. For the moment, DG Competition says the volumes of power generated by decentralised solar are so small they don’t worry about it. But as soon as it reaches bigger volumes, they will have to look at it again.

Another element of the winter package is a new directive on renewable energies. There has been considerable speculation on whether renewable energies should continue receiving priority access to the grid. Should this stop or continue?

Most renewable energies nowadays – hydro, wind, solar – have a variable cost of zero so they would beat any fossil fuel anyway. Whether or not they have priority access to the grid, renewables would go first simply on economic grounds because they’re cheaper.

So why give priority access and do a lot of dispatching if renewables go first anyway on economic grounds? I understand the Winter Package goes in the direction of abolishing priority access, but not fully yet.

Does this mean you support priority grid access or not?

No, I wouldn’t support it if there is no reason for it. If you look at the newest wind farms which are built for 5 euro cents per kilowatt hour with a variable cost of close to zero, what is the sense of giving priority access to them? There is no gas plant, no coal plant, no nuclear plant that could ever beat that. And if something beats it, it would be solar or hydro with also zero cost.

So priority grid access is simply not needed?

It’s not needed. And if it is needed, it is probably for those with a higher variable cost, such as biomass. There it would be needed if you want to promote biomass at the expense of gas plants.

The Magritte Group of energy CEOs have asked for an end to renewable energy subsidies, saying they add too much power to an already depressed market struggling with overcapacity. Do you support these calls or do you believe some subsidies should be kept for renewables?

The reason for buying renewable energies is the value they have for decarbonisation and limiting fossil fuels. So I think there should be no subsidies for fossil fuels and that CO2 prices should be increased to further the decarbonisation agenda. That will ensure that renewables have the right value on the market and justify cutting subsidies for them.

And because the CO2 price is so low, this means the subsidy for renewables should be kept?

Yes, but let’s not take that for a target. The target should be to decarbonise and prevent CO2 prices from staying low. That, in turn, will stimulate renewables.

A the same time, the Magritte Group is also pushing for “capacity mechanisms” to subsidise coal, gas and nuclear power, claiming they’re necessary for security of supply reasons. Is this not a case of double standards – asking subsidies for fossil fuels and nuclear but none for renewables?

I don’t think so. I think the flexibility to make sure electricity is there at the moment you need it has a value. And that is irrespective of whether the energy comes from coal, wind, solar, nuclear or hydro.

So my question is, how do you value availability? For renewables, you do that by covering part of their investment cost and capacity payment upfront. And if you do it for one type of energy generation, should do it for all.

This, however, should be done on the condition that there is a decent CO2 price. I am not in favour of sponsoring gas plants or other types of energy sources specifically. The capacity can be done with a hydro-wind combination, a gas-solar combination or a nuclear-biomass combination. These could all deliver decent capacity availability. And I think they should be valued for that if they are on stand-by and available tomorrow.

But capacity is not only provided by the generation side alone, it’s also on the demand side. If you reduce your demand when there is limited volume of electricity on the market, you should be rewarded with exactly the same capacity fee as a coal or gas plant.

If the capacity is delivered from abroad through an interconnector, you should give the same capacity value to these plants or demand response from abroad as you would give to a gas plant within your borders.

Future systems will be completely in tune with this valuation of capacity. And at the end of the day, one of the best capacity providers might come from household batteries. A battery might give you the capacity needed when the sun is out or the wind not blowing. That also has to be valued somewhere in the system, just like generation capacity. That would be an alternative or complement for gas or hydro plants.

So having a capacity price is not necessarily a subsidy for fossil fuel plants, this is nonsense. It can also be done by reducing your demand or with renewables, foreign capacity, storage – whatever you have. France by the way has a decentralized capacity market on the retail level, which I like very much.

Can you give examples of capacity mechanisms that you believe should be approved and others that should not?

You have a capacity mechanism in the UK for example where demand-side response and cross-border participation are included, which I support. There is also the capacity mechanism in France which is decentralised and involves retailers, which I told you about.

I would not however support tenders to build new electricity generation for a strategic reserve and administrative capacity payments, as it is happening in several EU countries at the moment. As far as I know, there are more than 28 capacity mechanisms in 11 EU member states at the moment – it’s time that we harmonise that.

Or, if you don’t like it, accept that scarcity pricing is done to the full extent and accept the level of security of supply that comes from the energy-only market, which implies accepting temporary extreme price rises – that’s also a possibility.

Nowadays, I see our member states are not willing to do that. As soon as they are short of power, they immediately throw money to build extra capacity.

Can you be a bit more specific about capacity mechanisms you don’t support?

I do not support administrative capacity payments, where the price is not defined by the market and the payment is allocated to everyone. This is not a solution for the future!

We have to be careful with strategic reserves that get oversized and used to build new capacity. In Germany, they have all kinds of reserves which have a significant size and can impact the market. In some Nordic countries they also have strategic reserves.

These reserves can be a solution to address short-term adequacy issues: they should be used exceptionally and their size has to be limited. They also cannot be used to contract new capacities into the system because then the distortion is clear.

So that’s not the way to go?

These are conflicting national systems. If you want to value capacity in a correct way, there should be a competitive European market for capacity or at least common features and cross-border participation. Or if you go to the extreme, you should say it’s all in kw/h price and nowhere is a capacity market allowed. But as you’re aware, DG Competition and DG energy have allowed capacity mechanisms, it’s already the second package.

Do you expect the Winter Package to provide solutions on capacity mechanisms?

Something I like very much in draft versions of the Winter Package – and I hope it will survive – are regional markets for capacity through cross-border participation. In Germany and the Netherlands for example, you would procure capacity in order to cover for a shortage in Belgium, so it’s not national anymore.

And it also implies having interconnectors in place, which is not always the case currently.

That’s right. This is a constraint that you have to take into account when assessing capacity on a regional basis.

Talking about markets, Marie Donnelly, a senior Commission official, admitted recently that EU electricity markets were “broken” because of continued subsidies to coal, gas and nuclear power. In her view, the energy union is chiefly policy-driven, not market-driven. Do you agree with that statement?

It’s correct. About 50% of our revenue is going through the market and 50% is going around the market, but the list of technologies mentioned by Marie is not accurate.

How does that make you feel?

Sad. You go to your government and ask for a capacity fee, a balancing fee, a renewables fee, a nuclear fee, and tell your government ‘If you don’t give it to me, the lights will go out’.

And if you look at all the subsidies – for renewables, capacity, re-dispatch and priority access – I think close to 50% of the money is going around the market.

Europe is slowing down the pace of renewable energy roll-out for 2030 compared to the current decade where capacity is expected to double. This is happening at a time when most renewable energy capacity is being installed outside of Europe, notably in China. Are you concerned at all that Europe might be losing the global race on renewables?

No. We have to go to 40% decarbonisation, up from 20% currently. The most economical way to go there is to go over 50% decarbonised, including high shares of renewables – with or without subsidies. So if we stick to the decarbonisation targets, we will build the renewables, there is no way out. Nuclear plants can contribute too although I’m not so sure nuclear plants would be competitive with wind and solar at this moment.

There is no way out of renewables. And that’s why we at Eurelectric are pushing very much to get the ETS market back in balance, and get the surplus CO2 allocations out of the market so we can get a decent carbon price. As soon as you have a decent carbon price, you don’t need incentives for renewables anymore – they are clearly more competitive than gas or coal.

The ETS has been up for more than a decade now and the price of carbon has only gone down…

It’s reduced carbon emissions by 20%.

Well, the economic crisis might have played a bigger part.

Yes, but there is no way back. I agree, the crisis has resulted in a surplus of carbon allocations. So let’s take them out of the market as quickly as possible. It makes no sense to keep this system in a surplus situation. This is why we support the ETS reform currently going through the European Parliament and the report drafted by Ian Duncan MEP.

To conclude, E.ON took a bold decision last year by splitting its fossil fuel assets into a separate company called Uniper and now plans to divest entirely from coal. Do you see coal divestment as a growing trend now in the power sector?

Yes. At the moment, we’re losing roughly 6% per year of the fossil fuel plants – not only coal by the way, but gas also. And the reason is purely economic – they do not cover their fixed costs.

The coal industry keeps saying coal is cheap and abundant. Is this not the case?

Why are we closing then?

Because of political reasons, maybe…?

No, this is purely economic.

So you fossil fuel divestment is now irreversible in your view?

You can have a long debate about this. Just look at the numbers: At the moment the German government is trying to keep coal alive instead of stopping it, via its strategic reserves. Why would the German government do that? Because they’re afraid of going out of balance. So they keep the coal on stand-by. And if they didn’t do that, the investment climate for decarbonised capacity would be much better.

How is Eurelectric helping in the transition away from coal and fossil fuels?

There are three things we do: Ensure the markets are working, decarbonise, and use clean power for transport, heating and cooling. Functioning markets implies no subsidies, no interference – just straightforward competition.

But that cannot happen in such a politicised environment where everything is subsidised. It sounds rather idealistic.

True, but if you don’t believe markets can work, then there’s no point having a carbon price to encourage renewables. And you will never get an energy market, you will always have a market orchestrated by the governments.

I am hopeful that there will be a day when carbon prices will be so high that fossil fuels will be too expensive. And you will have to choose between decarbonised assets and there will be competition between biomass, solar, tidal, wind, nuclear you call it. That would be a good environment in my opinion.

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