The European Commission’s energy Market Design Communication must ensure the EU presses ahead with the transition to a future-oriented electricity system, writes Mike Hogan.
Mike Hogan, a senior advisor to Regulatory Assistance Project (RAP), has over 25 years’ experience developing, financing and operating large energy projects on four continents, including at GE and InterGen.
Established energy companies have been crying wolf about the security of Europe’s electricity supply. They seek to scare EU officials into turning back the clock on the design of the European electricity market – in ways that will circumvent market outcomes that threaten their business models, force citizens to pay for outmoded, high-carbon generation for years to come, and block the growth of new industries.
For the sake of competitiveness, sustainability and citizen empowerment, the European Commission must resist these efforts and ensure that next week’s Market Design communication presses ahead with the transition to a future-oriented electricity system.
The future of European energy lies in creating innovative products and services, the early signs of which are already in evidence. Enterprises across the spectrum, from well-known companies like Bosch, GE and France Telecom to promising start-ups like PassivSystems, Tesla and Younicos are already building the digital future. They offer customers new energy services and simple options for managing their consumption – and for reaping the value of doing so. They work with consumers to create the flexibility the system needs to operate reliably and affordably with a growing share of renewable resources.
But the success of these new business models will rely on access to dynamic, transparent price signals from energy markets. The EU’s efforts to complete an internal energy market for electricity have already led to impressive levels of progress in this area, but important barriers to implementation remain. The Commission’s Market Design Initiative, starting next week, therefore needs to focus on overcoming the barriers to full implementation.
In well-regulated markets, prices respond dynamically to supply, with prices going down in periods of surplus and up when supply is scarce. This in turn drives buyers and sellers into short-term contractual arrangements that ensure the security of supply for consumers at the lowest possible cost while providing capital for new investments. This is the basic idea also behind the EU’s Internal Energy Market design, and a concept that has been the main engine for sustaining investment for years in energy markets in North America, Scandinavia and Australia.
Those who argue that this approach is failing in Europe and that new interventions by government are urgently needed, quite simply ignore the facts. They mount a flurry of dubious claims to push for government-mandated support for their current assets, including various “capacity remuneration” schemes. Proponents of these schemes overlook the fact that it is the persistence of a large surplus of existing, inflexible generation that is weighing down wholesale market prices. Instead, they blame the design of the market and the low production costs of renewables.
Until the issue of over-capacity is resolved, arguing about market design is pointless. It is like trying to run a marathon with an anvil tied to your waist. There is an urgent need to retire surplus capacity, particularly capacity that limits supply-side flexibility and is inconsistent with environmental policies.
The corrosive effect this is having on both the wholesale market and progress toward climate targets has been highlighted by recent proposals in Germany to tackle the overhang of surplus, high-carbon generation resources. Even in the UK, where the big generators successfully duped nearly everyone into believing there was an supply crisis, last December’s capacity auction confirmed there are more than enough available resources.
A low-carbon power system needs greater flexibility, not more capacity. Yet, investments in flexibility have no value as long as wholesale prices are comatose – an inevitable consequence of overcapacity. This is detrimental to the investment case for new customer-focused businesses that will empower and engage consumers and ultimately make the Energy Union vision a reality.
So what next? The Commission needs to emphasise four things: First, establish rigorous regional assessments of resource needs (incorporating ambitious efficiency goals) and target surplus resources for retirement; second, root out barriers to customers participating in markets; third, eliminate artificial price caps and hidden price distortions; and finally, promote time-varying retail pricing options and minimize fixed charges on customer bills. Behind each of these headline imperatives lie dozens of concrete actions to improve the way the market does its job.
Building the dynamic European economy of the future and empowering and enriching the lives of European citizens is no easy task. We shouldn’t make it harder by panicking in the face of baseless scaremongering and committing citizens to bankrolling yesterday’s resources for decades to come. We need an energy market that can evolve with the changing resource portfolio, adapt to ever more efficient and responsive energy demand, and underpin the customer-centered business models of the energy industries of the future.
The Commission faces an historic opportunity. They can push forward and build on the work already begun. Or they can accommodate a turn back to a recycled version of the balkanised, state-dominated power system. The right answer – for competitiveness, for security, for sustainability and for the citizens of Europe – is to push forward.