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Security of Supply in the EU Energy Markets
A practicioner’s perspective
David Haverbeke
Member of the Brussels Bar
University of Tartu
21 September 2013
AGENDA
I.
Some facts and figures
II.
Security of Supply – Capacity Mechanisms
III. Trends in Demand Side Management
IV. Impact of Renewable Energy Development
V. Conclusive remarks
I.
Electricity price complexity – some drivers
French power
CRUDE
COMPLEX
GAS
German power
CO2
Nordpool
COAL
Hydro / Wind
Energy
Reservoir levels
Weather
I.
Wholesale Electricity prices in Europe
I.
Commodity prices influence offer on market
• German utility E.ON presented a list of plants under consideration
for closure due to unprofitable generation margins, with some 11
TW affected…….
• UK and Germany are expected to take 12 and 15 GW of power
from the grid by 2015 respectively
• Power stations currently make profits from burning coal, while gasfired plants run at a loss.
I.
Electricity Generation costs
II.
Security of Supply - the bigger picture (1)
• Objective of any state or regulator’s energy policy includes ensuring
security of supply – today we are talking about resource adequacy –
the availability of sufficient capacity to meet demand.
• Resource adequacy can be addressed through:
• Demand response – consumers reducing their consumption (e.g. interruptible
tariff and smart meters).
• However, demand for electricity is largely inelastic (in terms of response to prices).
• Reliability of demand response addressing security of supply is uncertain.
• Rely on interconnectors and have a more integrated market.
• This requires cooperation between government.
• There may be geographical issues that make this difficult
• Uncertain.
• Build new generators.
• Requires investors.
• Gives certainty that lights won’t be turned off.
II.
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Security of Supply - the bigger picture (2)
Security of supply requires new build
decisions.
Investors must feel they are making a
return on investment.
A well functioning market should deliver
enough generation capacity and
investment to meet demand.
Imperfections in the market may lead to
under-investment in generation capacity.
Sometimes current arrangements may
not deliver enough investment leading to
a risk of blackout or brownout.
National governments have an incentive
to deal with security of supply issues –
adverse political consequences of power
failures.
II.
Market imperfections
• Missing money in the wholesale
electricity market in the sense that
average prices are not high
enough to sustain new investment.
• Electricity wholesale market sets
prices broadly on marginal
cost/operating cost
•
Wind and solar has low/zero marginal
cost – with wind and solar playing a
larger part in the wholesale market we
see it driving the wholesale market
prices down.
• Other barriers – technological,
political, regulatory and operational
II.
The problem
• £75 billion investment in generation needed in UK only with 20% of its
generation capacity by 2020, much of it by 2016.
• Ageing plants to be replaced with more intermittent or less flexible
generation.
II. Current EU Regulatory Status - summary
• Directive 2005/89 concerning measures to safeguard security of electricy supply
• - art. 3.1: « Member States shall ensure a high-level of security of electricity
supply by taking the necessary measures to facilitate a stable investment climate
and by defining roles and responsibilities of competent authorities (…) »
- reporting to EC
- still appropriate today?
• Since 2007: article 193 TFUE (Lisbon Treaty): policy is some cross-roads…
• Since 2009: Third Energy Package
•
2009/28 on RES: what about security of supply?
•
2009/73 on functioning of internal market: main features related to security supply
• Principles on free circulation of goods (art. 28 TFEU, ECJ case law Preussen
Elektra and RWE/Essent
• State Aid rules
II.
Options of capacity mechanism considered
II. EC Consultation Paper
 Boundaries and lessons to be learnt from currently ongoing EC
Consultation Paper on generation adequacy, capacity
mechanisms and the internal market in electricity.
 Extracts from the Eurelectric Response:
 The introduction of support schemes – to any type of generation technology – distorts
price formation and leads to a situation where investment decisions are primarily
based on the level of support, rather than on market price signals;
 Customers should have the option to offer their flexibility and benefit from the market
value;
 The call on the Commission to publish harmonised general principles and a
benchmark of existing discretionary measures taken by authorities impacting the
sector (discretionary taxation, retroactive changes to support schemes,…).
II.
EC Consultation Paper
 Extracts from the Europex Response:
 The integration of the electricity market and the further improvements to
come (e.g. harmonised capacity calculator, flow-based, better integration of
implicit continuous intraday market and real-time balancing) might suffice to
ensure security of supply over the coming years;
 Strategic reserves should aim at reducing load curtailment, not at acting on
market prices;
 Interconnections are key: efficient allocation can only be guaranteed through
the implicit allocation of the cross-border capacities based on market price
signals;
 Public authorities should support enablement of consumers to actively
participate, directly or via third parties (e.g. suppliers, portfolio
managers/aggregators) to the wholesale and retail markets.
III. Trends in Demand Side Management and
Demand Response
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DEMAND SIDE MANAGEMENT= optimisation of consumption (typically for
one consumer)
DEMAND RESPONSE specific pooling/collection of consumption (behaviour)
as part of optimisation of consumption for a group of consumers
Demand Response “is a process to manage consumer consumption (demand)
of electricity in response to supply conditions.“
No binding definition today in EU law (market concept)
Production
Transmission
Distribution
Supplier
DRA
Consumer
ARP
Trader
Meter
III. Current EU Regulatory Status: summary
• In Directive 2009/72: « Member States shall ensure the
implementation of intelligent metering systems that shall
assist the active participation of consumers in the electricity
supply market ».
• New Energy Efficiency Directive 2012/17 (25 October 2012)
• Duties on network operators for demand-response measures (art. 15.4)
• Annex XI: Energy efficiency criteria for energy newtork regulation and for
electricity network tariffs
• Continued EC reflection (lobby ESMIG, Eurelectric Task force on Smart
Grids, …)
III.
Demand Response Aggregator
Aggregator = Collector
Source: Entelios AG,
2012
III.
Demand Response: Contracts
Source: Entelios AG, 2012
IV. Impact of RES development: how green will be
our power production be….?
IV.
End user Electricity costs – impact of green
policy
IV. Trends in RES Development: EU regulatory
status
• Third Energy Directive on RES 2009/28/EC (based on merits of 2001/77/EC):
main features
• National targets expected to be questioned (2014-2015 considering lifetime of
RES investment)
• In various Member States, subsidy schemes reassessed or under reassessment
• From ECJ: current case Essent with AG opinion of 8 May 2013
- guarantees of origin and green certificates are distinct legal instruments but both subject
to article 28 TFUE (and art. 11 EEE)
- refusal to quota of GoO and GC constitute quantitative restriction to free circulation of
goods
- « local environmental protection » (as alledged by EC) is not proper justification for
restriction to free circulation
- environmental protection (at EU level) must be clarified in TFUE if to be considered as
justification for restriction
- according to AG, external security of supply is not (yet) at stake (see al.106 of opinion)
V.
Conclusive remarks
 Continuing industry attention and lobbying efforts towards public
authorities (only remedy to litigation /arbitration)
 Absence of certainty/predictability, therefore:
• Depending on energy profile, development of strategy towards energy autonomy
(e.g. DSM)
• Hedging to anticipate likely scenarios of interruptions and related liabilities.
 Development of new forms of contractual arrangements
• Increased decentralised off-take and generation
• Demand side management and demand response agreements (scale down of
capacity off-take at peak moments)
• Forward contracts (including reserve contracts and option contracts)
Q&A