Analyst: ‘Member states can strong-arm Brussels on energy policy’

The EU's electricity sector cut its emissions by 0.9% between 2014 and 2015. [John Horton / Flickr]

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

From nuclear plants in the UK and Hungary to coal-fired power stations in Germany, member states always manage to forge ahead with their energy projects, according to Georg Zachmann, who calls on EU leaders to sit down and seriously discuss the Energy Union’s governance.

Georg Zachmann is a senior fellow at Bruegel, an economic policy think tank based in Brussels.

Zachmann spoke to euractiv.com’s Publisher and Editor, Frédéric Simon.

Renewables won’t be offered priority grid access anymore under leaked versions of the revised renewable energy directive that will be presented as part of the European Commission’s upcoming Winter Package of legislation. What’s the logic for doing that?

Renewables have come from a niche technology to the mainstream. More than half of the capacity additions in Europe have been renewable technologies. So the idea is that they start playing by the same rules as everybody else.

It might make sense to expose renewables to signals from the electricity market, not to discriminate against renewables, but to make sure investors are incentivised to place new installations in the right place – and run them at the most suitable time when they provide the highest value.

Just to give you one example, adding more wind capacity on Germany’s northern coast provides less and less value because the turbines all run at the same time when the wind is blowing. And it would be extremely costly to build a transmission system that can bring all this electricity to the south where it might be needed.  So it would be good to have a market signal for building wind turbines also in the Black Forest for example.

So you’re saying that ending priority grid access would make a more efficient allocation of renewable energy production?

Yes. But obviously, it comes at a cost for the renewables industry. They would have to start thinking about things they didn’t have to worry about much before. Technology has also improved, wind turbines can now work at lower wind speeds in an efficient way so you’re not forced to place them always in the same regions where the wind is strongest. Remote control systems now allow you to use wind turbines to stabilise the electricity system. So for some technology providers, it might actually be interesting that the wind sector is a bit more responsive to the needs of the network than before.

You’re saying stopping priority grid access is recognition that renewables have reached a sufficient level of maturity. Still, environmentalists cry foul about it, so you think they are not justified?

I think it’s a package deal. On the one hand, you’re putting more responsibility on renewable producers, which might have a cost. On the other hand, they should be compensated somewhat for achieving the EU’s renewable targets.

One interesting statistic from my country, Germany, is the “Marktwertfaktor” or Market Value Factor for electricity. Beforehand, when the sun was shining in Germany, it usually coincided with high demand times. So the megawatt-hour (MWh) of solar electricity was typically worth more than the average power exchange price. And now this Marktwertfaktor has started to decline because when the sun is shining, there is so much electricity coming into the system that prices start decreasing. So the price at the power exchange also goes down.

And there starts to be a cycle of self-cannibalisation, where more solar is added to the grid but actually comes at a time when prices are already low. And here again, it would make sense to have a less concentrated production of solar. Spreading it out over a wider area would help reduce the cost of system integration quite substantially.

And in the end, it’s not in the interest of green lobby groups to push all the cost of system integration on the network. Because in the end, it’s the population who is going to pay for that. And people don’t actually care whether they pay more for the renewables subsidies or for network integration.

So in the end, exposing renewables to the same grid access rules won’t make such a big difference?

No, I don’t think it will be significant. On the other hand, for conventional energy producers at the other end of the network, there might be a benefit. Because priority dispatch for renewables meant you had to stop nuclear power plants when the wind was blowing for some hours. And that is a technically difficult and costly exercise.

Isn’t that reversing the hierarchy? It used to be renewables first and then nuclear, coal and gas to make up for the difference. Now, it’s the opposite?

There might be situations where something like that might happen, yes. But renewables nowadays are typically being produced at zero marginal cost so they will be called in first. So from a pure market perspective, if you’re pretty sure there is going to be a lot of wind tomorrow, you offer it at the power exchange. Other plants then become more expensive so they will choose to save fuel a bit and decrease production while renewables take over.

So the market will do the balancing on its own?

Initially, yes. In the very the short term, grid balance can be maintained by curtailing wind generation, in order to prevent overproduction from overwhelming the grid. But they get compensated for that so it’s unlikely they will lose much money.

Another contentious issue in the Winter Package is capacity mechanisms, which are often portrayed as a subsidy to fossil fuels. DG Competition has approved a good number of them, but at the same time, DG Energy seems to want to curtail them. How do you see this taking shape? What can the Winter Package achieve to put the situation straight?

I think the Winter Package has limited room for improvement here. It’s more to do with the member states and the types of projects they want to push through – which types of plants they want to build, etc.

And they will make those plans happen irrespective of what Brussels says. This is the experience of the last ten years. There is a common electricity market but member states – almost all of them – do what they want, unfortunately. Just look at the UK with Hinkley Point C, Hungary with the Paks nuclear plant, Germany with its lignite power plants, and France with its gas plant tender in Brittany. All the member states have their projects in mind and manage to play Brussels to get above-market returns for them approved.

And that is recognition of the fact that member states can strong-arm Brussels on energy policy, whether based on the EU treaty or for other reasons. In the end, the internal energy market will not work, even if Brussels manages to have a nice compromise wording on capacity mechanisms that stipulates strict conditions for approving them.

I think we are in a different game, the heads of states and government need to come together at the highest level to discuss the Energy Union setting. They need to discuss whether they really want a European coordination of the power plant park, either through a market or through inter-governmental coordination and how this should be institutionalised. I think that is the question we’re facing at the moment. And then playing around with capacity mechanisms or state aid rules is like window-dressing on the fringes of it.

The initial intention was to build a European wholesale electricity market and carbon price, but member states can easily undermine that with their national rules. Brussels can always try to put the genie back into the bottle, but it’s like a Sisyphean task.

It’s frustrating because, in political terms, Brussels is always portrayed as the bad guy for blocking a particular project in a member state, based on some principled decision. That’s not a role that Brussels can sustain politically for a very long time.

So instead of trying to regulate capacity mechanisms, the way forward to put the electricity market back on its feet is to reform the EU’s Emissions Trading Scheme? That would have the advantage of further incentivising renewables and pricing out fossil fuels.

Carbon markets are a European tool, but member states decided they don’t like it and overruled the market outcome with their national instruments. And that’s the way it is.

The only way out of that would be to have an agreement between the member states. Brussels can always come up with new state aid rules or instruments to regulate capacity mechanisms but this is unlikely to make a big difference at this stage.

Targets for renewables have been set at 27% for 2030, which represents a considerable slowdown compared to the 2020 target of 20%. Is Europe taking a step back on its leadership on renewables?

For 2030, the compromise was indeed to go essentially for business as usual.

What do you make of the Commission’s intention to promote decentralised energy, with solar panels on the rooftops of households, etc? How do you see this taking shape?

For me, the most interesting question in the decentralisation debate is who is in charge of managing the system. There is a big struggle happening at the moment between very unlikely players – the telecoms industry, IT companies like Google, the DSOs, and TSOs, as well as technology providers, who are all fighting to get in there.

There needs to be some coordination, which is currently unthinkable without some kind of entity in the middle of it. And that entity can be a lot of different players, including those I just mentioned. Essentially it’s an entity that gets all the information it needs to make the market. And that role would obviously be a very powerful one in the future electricity system.

Interestingly, it’s not only about decentralisation, it’s also about convergence. We see electricity services and IT services converging, we see transportation and electricity converging (with electric vehicles), heat and electricity converging (with heat pumps). So there needs to be some sort of arbitrage point at which the optimal use and investment decisions are incentivised, potentially through price signals. But somebody needs to be the spider at the centre of this.

Are you talking about a strengthened regulator?

No, I’m talking more about a market entity – the market maker, or the London Stock Exchange of this electricity-gas-heating and cooling-transport nexus that is going to evolve into very small local areas.

Because you have different prices for electricity or heating from city to city, different infrastructure for storage, etc. And everybody at the consumer end is potentially becoming a storer of electricity and heat. Lobbyists are now struggling to make sure their sector or their company is taking this central role but this big game is not over and we don’t know in which direction it will develop.

So you see a kind of ‘Google of energy’ emerging?

Yes, exactly. And such a central player could optimise the system, making considerable efficiency gains to the whole electricity system.

But whether it will be Google, Deutsche Telekom, Schneider Electric or your local electricity provider doing that is not set in stone at this stage.

The alternative would be trying to design a market first but this would be very complex to do in such a dynamic environment where everyone is competing against each another.  So as a regulator, you wouldn’t really know what it is that you’re actually trying to optimise. Which is why I don’t think the Commission will go into that.

You’re saying regulators can’t put the cart before the horse: design a market first, and then hope players will thrive in it. It happens the other way round.

At least that’s how network businesses have evolved in the past. Just look at railways in the 19th century, or electricity for that matter or gas. It was typically private companies that did vertically-integrated businesses and put the whole thing together. And then later on the state took over to regulate what had become a natural monopoly.

Now, what will happen with the convergence of electricity, transport and ICT remains to be seen. It’s a super exciting field but there are more questions than answers at this stage.