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EU energy market design – what you need to know

IN DEPTH | The European Commission's energy package could transform the continent's power markets and help more wind and solar onto the grid, writes Leigh Collins

Buried among the 1,000-plus pages of the European Commission energy package released yesterday is a host of measures that, if agreed by member states, will change the way the continent’s power markets operate — and, ultimately, enable far more wind and solar onto the grid.

The keenly anticipated energy market design has been drawn up after almost two years of consultation with member states, companies, trade associations and others, but it will now be up to the various national governments as to whether the proposals will be accepted or amended, in a process that may take years.

Importantly, the directive will be subject to qualified majority voting, meaning that only 55% of member states representing at least 65% of the total EU population need to approve it to ensure its adoption — preventing coal-friendly nations such as Poland from vetoing the proposals.

The measures in the new market design can be broken down into several overlapping areas — new balancing and intra-day markets; increased interconnection between countries; new “regional operational centres” for cross-border transmission and grid stability; new regulations to encourage distributed power, self-consumption, storage and demand response; and new rules to discourage capacity mechanisms.

Balancing and intra-day markets

The way that energy is bought and sold inside the EU will change, most notably through the introduction of balancing markets.

To balance their networks, grid operators currently rely on a range of back-up solutions to ensure they can access last-minute injections of energy when needed, such as pumped-hydro and gas-fired capacity.

But the European Commission sees these bilateral deals as inefficient, anti-competitive and overly reliant on fossil fuels.

Introducing a balancing market removes these problems and ensures that grid operators buy their last-minute energy boosts on the open market at a price that “reflects the real time value of energy”.

Significantly, such a system allows the participation of wind and solar generators, industrial storage providers, and even businesses and consumers through storage and demand response.

The new internal market proposal specifies that balancing markets will “be organised in such a way as to ensure effective non-discrimination between market participants, taking account of the different technical capability of generation from variable renewable sources and demand side response and storage.”

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Intraday and day-ahead markets will also be organised along similar lines, with “minimum bid sizes of 1MW or less to allow for the effective participation of demand-side response, energy storage and small-scale renewables”.

Increased interconnection

One of the keys to redesigning the energy markets is increasing the capacity and availability of interconnections — grid links between countries. This would improve the ability to transport renewable energy, help balance grids and increase competition, thus lowering costs.

The EC says that existing interconnectors are currently being underused due to the focus on national markets, so capacity and energy available on one side of a border is not being transferred to where it might be needed.

“Barriers to cross-border electricity flows and cross-border transactions on electricity markets and related services markets shall be avoided,” states the new directive. “Market rules shall provide for regional cooperation where effective.”

The EC is also calling on all member states to have interconnection in place that allows 15% of their total electricity output to be exported to neighbouring countries.

“Efficient decarbonisation of the electricity system via market integration requires systematically abolishing barriers to cross-border trade to overcome market fragmentation and to allow Union energy customers to fully benefit from the advantages of integrated electricity markets and competition,” the document says.

Regional operational centres

As part of the move to improve cross-border efficiency, “regional operational centres” (ROCs) will be set up to ensure “optimal utilisation of the grid and better grid stability”.

So rather than a single EU entity overseeing all the national transmission networks, the bloc will be split into an as-yet-unspecified number of cross-border regional bodies — the number and location of which will be determined by the European Network of Transmission System Operators (Entso-E).

These ROCs would ultimately be responsible for matters such as network planning, reserve capacity and energy forecasting across their respective regions.

Such a focus should allow greater interconnection and increase cross-border competition over the medium to long term.

Increased power to the consumer

Perhaps the most significant line in the new energy directive is this one: “All generation, storage and demand resources shall participate on equal footing in the market.”

It goes on to explain: “To provide for a level playing field between all market participants, network tariffs should be applied in a way which does not discriminate between production connected at the distribution-level with regard to the production connected at the transmission level, either positively or negatively. They should not discriminate against energy storage, and should not create disincentives for participation in demand response…”

And as we have already seen, consumers will also be able to participate in the new balancing and intra-day markets.

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Significantly, there will be additional financial incentives for such participation through the removal of price caps on wholesale energy in these markets. This will create “scarcity pricing” — high market prices in times when utilities are struggling to find enough energy to meet demand.

“Effective scarcity pricing will encourage market participants to be available when the market most needs it and ensures that they can recover their costs in the wholesale market.”

Additionally, to help consumers take part in these markets (and improve their own energy efficiency), member states will have to provide smart meters to those who want them.

Furthermore, the European Commission wants to enable “collective self-consumption” for people living in apartments — and for communities to be able to build their own and build their own renewables projects. This will require additional, as-yet-undefined rules to allow small communities to compete in tenders with large corporations (although there is no further detail about what such rules might entail).

And to further support distributed generation, storage and demand response — and to ensure that distribution networks are operating optimally and competitively — a new EU-wide oversight organisation for distribution system operators will be created.

Capacity mechanisms

In many EU countries, there are regional and national capacity mechanisms in place in which utilities are paid to keep underutilised generation capacity on line, to be used in times of need. This capacity generally consists of fossil-fuel-fired power plants — mainly gas, but also coal and oil.

The European Commission does not like such mechanisms, viewing them as inefficient in terms of energy use and costs, and effectively subsidising the use of polluting fossil fuels.

In its energy directive, the commission suggests that “regulatory distortions” are often behind the decision to introduce capacity mechanisms, which can largely be solved by importing electricity from neighbouring countries.

“The most efficient remedies to national generation deficits are often regional solutions, allowing Member States to benefit from generation surpluses in other countries,” the directive states. “A coordinated European adequacy assessment should therefore be introduced, following a jointly agreed methodology, in order to obtain a realistic picture of possible generation needs, taking into account the integration of electricity markets and potential flows from other countries.”

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Demand response should also be put to “maximum use”, with capacity mechanisms only being introduced as a last resort, and “designed so as to minimise distortions to the internal market”.

Furthermore, new power plants will only be eligible to participate in capacity mechanisms if their emissions are below 550 grams of CO2 per kWh. Dirtier power plants currently being utilised in such schemes will be removed from capacity mechanisms within five years of the directive coming into force (which is scheduled for 1 January 2020).

In the medium to long term, all capacity mechanisms will be eliminated.

“When fully embedded in the market structure, short-term markets and scarcity pricing will contribute to the removal of other measures, such as capacity mechanisms, to ensure security of supply.”

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