Empowering the Energy Union
Dr. Chicco Testa President Assoelettrica
The Energy Union Package, released at the end of February 2015 by the European Commission, has been the Trojan horse to “launch the most ambitious European energy project since the Coal and Steel Community” (quoting Mr. Maroš Šefčovič, the Vice-President of the Commission and the responsible for the Energy Union).
In less than one year the Energy Union strategy has recorded several steps forward, which ease our aim to briefly debate about it. Conversely, we refer to a future article to deepen the comparison between the 64-year old agreement and the actual “fifth freedom” strategy. To take advantage of a similar time perspective, the said article will be published around February 2080. Please stay tuned. Indeed, after the Energy Union Package, a Summer Package has been released in July and in the late November a new series of proposals and decisions have been enacted, both by the EuropeanCommission and the Consilium.
The holistic strategy developed in the last months browses from power to gas, from markets design to regulatory systems, from infrastructures development to sources enhancement and consummation patterns, from energy to climate, from policy assessment to governance and reporting requirements.
Referring to the power industry and markets, it is useful to skip the detailed analysis of the legislative and regulatory process with the aim to provide us with insights into the effective possibility of the aimed evolution of the European power industry to become reality.
To this extent there are three development pathways of our industry, that is:
- An increased penetration of the electricity in the energy system, which is able to bring to energy customers a cleaner energy carrier;
- A stronger and complete market design, which is able to provide the requested quantity of power at a fair price;
- A consistent evolution of the production structure of the power industry, which is able to enhance both efficient and renewable sources.
As a matter of fact, electricity today can be produced in very efficient power plants fueled with fossil fuels such as natural gas or coal, whose pollution emissions are strictly regulated. On the other hand, production both from thermal and non-thermal renewables have recently widespread all over Europe, directly helping in achieving EU climate objectives.
Such a development has been until now strongly based on supporting schemes, very expensive in most of the cases. If we take the example of Italy, in the period 2009-2014, power production from RES have increased from 69 to 121 TWh (real annual data), but in the same period more than 42 bilion euro have been charged on power prices to promote the RES deployment, especially from PV source. As a result, levies charged on consumption to finance the said evolution have boosted. For instance, the levies paid by the (hypothetical) Italian household customer consuming about 2,7 MWh/year have increased from 4,29 euro/MWh to 31,45 euro/MWh.
Anyway the evolution towards an efficient and RES-based power system is still under way and can be clearly even more strengthened, but keeping in mind the necessity to avoid excessive costs for the EU electricity system.
The way forward is to exploit the existing potential at European Level, by avoiding both the actual lack of alignment between Member States – which have in the last years developed very different schemes – and the inability to internalize the reduction of RES investment costs, due to relative rigidity of the premium price (clearly downward).
In few words, we need more RES at lower costs in a power system which is fit for them.
Such an evolution requires a new market design.
Indeed, the actual market rules are, more or less, rooted on the revolution introduced even in Europe when it became clear the necessity to open up the power markets together with the availability of new sources and technologies. Natural gas fueled CCGT came out in the late 80s and the market revolution started.
Today the new step forward is offered by RES penetration into the energy system, which is especially challenging for V-RES, i.e. those sources whose availability can be forecasted only in statistical terms.
Hence an evolution of the actual market design is requested to allow both RES to participate in all the power markets (from day-ahead one to balancing or capacity markets) and the productive structure to cope with the request for long-lasting capacity availability and flexibility, that is system adequacy.
This development is twofold.
On the one hand, the short-term market must be adapted to the necessities (or limits) of RES powerplant, to completely exploit the benefits that RES can offer to the energy system.
Markets must be fit for RES, i.e. they must efficiently use the available flexibility and assign the right value to it. RES should be able to compete on an equal footing with conventional sources and should be exposed to prices from markets that would give adequate signals to produce electricity when needed or to install/use storage technologies. All generators (conventional and renewable) should be equally balancing responsible.
To this extent, for instance, adequate intraday markets must be developed, where trading is continuous and gate closure time is harmonized and near to real time, imbalance settlement periods are set out accordingly, clear rules for curtailing power generation are defined, balancing markets allow the efficient use of balancing resources and enable RES participation.
At the same time, until the conditions enabling fair competition among all sources are not in place some measures should be envisaged in order to guarantee a smooth transition. Furthermore, recommendations on balancing responsibilities have to consider market maturity as well as the penetration level of non-programmable renewable generation (V-RES) in the system. So, for instance, the participation of V-RES to the balancing markets for all services should occur only on a voluntary basis. At the same time, Market design should also allow Aggregators to dispatch distributed resources and to facilitate the participation of plants which do not intend to participate directly in the market.
On the other hand the power market must go over the short-term and energy-only concepts, recognizing the necessity to offer, more than energy, repeated-over-time security of being supplied. Capacity markets must be introduced, clearly in line with state-aid regulation, which are able to promote future market-based investments, in a competitive environment.
Now, the most asked question is why to abandon an energy-only power market which is able to give investment signals until being competitive.
The issue here is the price.
RES supporting schemes have been financed via premium prices charged on power consumption. Such taxes and levies charged on electricity have introduced a gap between the market value of the electricity, as perceived by participants both on the supply and the demand side, and its price. The rising role of the “non-market-based” components (again, taxes and levies) have hindered the role of the price in the energy markets.
As prices in the energy-only model have lost part of their representativeness, they are no more sufficient to give correct signal for new investments or consumption behaviors.
On the latter, the issue is that prices are no fairer, because they do not reflect the value of the electricity consumed by the customer but include indeed a value which is linked to the electricity produced in the power system. Hence, the customer is paying a quota of the public objectives taken at EU and national level, without being (normally) aware of that and being informed on the trade-off.
About the former, while the overall price have been increasing, the energy component of the price -which is the one more related to the investment cycle at least in a marked-based system – havestrongly decreased.
Hence it appear necessary that the future market design is based not only on prices which reflect actual scarcity, but also on prices which reflect the actual relation between demand and supply of capacity, energy and flexibility, now and tomorrow.
These challenges can be addressed by defining well-structured capacity remuneration mechanisms as instruments to provide long term signals to the market. Hence, well-designed and technology neutral capacity mechanisms (such as Italian reliability options) are necessary to give the market those right long term and stable signals for investing in new capacity/upgrading existing one or for deciding to disinvest in existing plants.
It would be in any case unfinished any project which is unable to rethink also the design of the retail market, starting from a (perceived) evolution of a market fundamental. Indeed, one of the aftermaths of the evolution towards a RES-based power system is the decline of the value of making electricity available.
Power per se has lost and will lost added-value [By the way it can be noted that this is the implicit meaning of the transition towards a twofold power market, where also system adequacy is correctly priced].
As it happens in all the mature markets, even in the power industry the service (indeed in Europe, not likely in most neighboring countries) is acquiring more and more weight. Hence the new challenge is to guarantee an evolution where the customer is offered the needed or desirable services by a multitude of suppliers ensuring a level playing field.
And here it comes the customer and the Commission’s “Fifth freedom”. In the Energy Union concept the new role of the prosumer is pivotal, since it is seen as a picklock for opening up the energy markets. But this freedom to produce and to actively take part to the market has to be rooted, again, on equal responsibilities, between costumers this time.
That is to say, for instance, that all consumers including self-generators should participate on an equal footing to cover network and system costs, as the growth in self-generation does not decrease distribution costs. Neither it does with system costs, especially when they include price components tailored to finance public policies.
Therefore the energy markets rethinking process, to really start from the citizens, should be able to avoid any “consumer divide” process, creating speculative bubbles in the regulatory assessment simply for being unable to socialize those costs which come from public objectives.
Hence, in the new overall power market, the price must be able to allow competition to grow up while offering a signal for actual and future scarcity, at the same time being as neat as possible from other components which do not allow the right perception of the trade-off between consuming power or not.
In this predictable future market environment, electricity can be made available to satisfy increased needs of energy. Electricity produced exploiting the RES potential or very efficient fossil fuels plants is able to internalize the search for a cleaner form of energy.
Polluting emissions can be released far away from town centers while being strictly controlled in terms of both average concentration and overall quantity. Lack of ability of the public authority to introduce and keep measures to abate inner town pollution levels can be answered, in the longer term, only by cleaning the energy carrier, not by renouncing to energy.
Other objectives (less perceived by the multitude despite years of advocacy campaigns) can be better or more easily achieved. Overall GHG emissions from the energy sector can be strongly reduced and – turning to efficiency – the decline of fossil fuels consumption can be offset by the increased availability of renewable sources, without renouncing to the service.
As a matter of fact, an increased penetration of power in heating and cooling and, most of all, in collective and private transport is the turnaround for a stronger and farsighted strategy against the pollution-based morbidity and mortality and the climate change.
Hence, the distribution system must evolve in a smart way, being able to take power where it is needed, while the DSOs should be able, and made able, to carry out their new role of neutral market facilitator. But this is another story. Stay tuned.
To conclude, briefly, a new Energy Union can be enforced in the view of allowing European citizens to a better choice for the energy they need. To this extent, power must be smartly available, offered by a number of different suppliers, in the requested quantity, being produced from efficient and renewable sources and valorized at a fair price, which reflect actual and future availability.
There is no other farsighted way than abandoning a “hunc et nunc” approach and start thinking (even) to the future, as Aesop teaches us.
 “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy” – COM/2015/080 final – Annex I: “Roadmap for the Energy Union”.
 “Proposal for a Directive of the European Parliament and of the Council amending Directive (EC) 2003/87 to enhance cost-effective emission reductions and low-carbon investments” – COM(2015) 337 final. Ordinary legislative procedure (ex-codecision procedure) European Parliament: ENVI/8/03972 – Rapporteur Ian Duncan (ECR) – Awaiting Committee decision – Council of the European Union: 2001/0245 (COD) “Proposal for a Regulation of the European Parliament and of the Council setting a framework for energy efficiency labelling and repealing Directive (EU) 2010/30” – COM (2015) 341 final. The proposed Regulation is accompanied by a short report, a detailed impact assessment (SWD(2015) 139 final), and an evaluation of the existing Energy Labelling and Ecodesign Directives (SWD(2015) 143 final), Ordinary legislative procedure (ex-codecision procedure) European Parliament: ITRE/8/03966 – Rapporteur Dario Tamburrano (EFDD) – Awaiting Committee decision –Voted scheduled in Committee, 1st reading, 24/05/2016; Council of the European Union: 2015/0149 (COD) “Delivering a New Deal for Energy Consumers” – COM(2015) 339 final “Launching the public consultation process on a new energy market design” – COM(2015) 340 final (closed in October the 9th).
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