Electricity market design:
fit for the low-carbon
transition
EURELECTRIC IN BRIEF
EURELECTRIC represents the common interests of the electricity industry at
pan-European level. Our current members represent the electricity industry in over 30
European countries. We also have affiliates and associates on several other continents.
Our well-defined structure of expertise ensures that input to our policy positions,
statements and in-depth reports comes from several hundred active experts working
for power generators, supply companies or distribution network operators (DSOs).
We have a permanent secretariat based in Brussels, which is responsible for the overall
organisation and coordination of EURELECTRIC’s activities.
EURELECTRIC pursues in all its activities the application
of the following sustainable development values:
economic development
growth, added-value, efficiency
environmental leadership
commitment, innovation, pro-activeness
social responsibility
transparency, ethics, accountability
Cover note
The European electricity industry is ful y committed to the European decarbonisation agenda and
wants to take active part in the upcoming discussions to ensure that the low-carbon transition is
done in the most cost-efficient and market-based way.
EURELECTRIC – the sector association representing the electricity industry at European level – is
pleased to share with you its views on how to make the electricity market design fit for the low-
carbon transition.
The European energy panorama is stil fragmented and our sector thus faces different underlying
fundamentals and regulatory frameworks across countries and regions. EURELECTRIC therefore
proposes in the enclosed report a number of overarching recommendations and principles to
underpin the paths towards a decarbonized power sector. We nevertheless believe that market
designs are not carved in stone and should evolve with the energy transition; this report should
therefore be considered as a living document.
EURELECTRIC believes that the upcoming European Commission’s new energy market design
initiative should ensure that consumers reap the benefits of linking wholesale and retail markets,
ensure that RES are fit for the market and improve the energy market to attract flexible resources
and achieve renewables integration.
A central element of the proposal is the introduction of a scheme of regional adequacy assessments,
which should be taken into account when introducing changes in market design such as the
introduction of market-based capacity mechanisms. Such a system of regional adequacy
assessments poses a number of challenges that are detailed in the report. This analysis could lead
some member states to introduce new elements in the market design, such as market-based
capacity mechanisms. Regions that do not consider that such developments are needed should
obviously not be forced to do so. On the other hand the existing initiatives for wel -designed capacity
markets with cross-border participation should be considered as building blocks for a efficient
regional/European approach.
To minimise the impact on the energy market, these mechanisms should be sufficiently harmonised
in their basic design criteria: they should be technology neutral, open to cross-border participation,
open to new and existing generation, storage and demand, and produce as outcome contracts with
the suppliers of capacity, with a lead time and duration that is consistent with the needs of
investment decisions. When such a mechanism has been introduced, it becomes a valuable tool for
future adequacy analysis, since it provides a market-based assessment of the need for new capacity.
Electricity market design:
fit for the low-carbon
transition
EURELECTRIC MARKETS COMMITTEE, ENERGY POLICY AND GENERATION COMMITTEE,
RETAIL CUSTOMERS COMMITTEE AND THEIR WORKING GROUPS
Contact:
Marion Labatut - xxxxxxxx@xxxxxxxxxxx.xxx
Charlotte Renaud - xxxxxxx@xxxxxxxxxxx.xxx
Niina Honkasalo - xxxxxxxxxx@xxxxxxxxxxx.xxx
Pavla Mandatova - xxxxxxxxxx@xxxxxxxxxxx.xxx
Koen Noyens - xxxxxxx@xxxxxxxxxxx.xxx
1
RECOMMENDATIONS
1 ENSURE THAT CONSUMERS REAP THE BENEFITS
P.6
OF LINKING WHOLESALE AND RETAIL MARKETS
“Free up the bill”: policymakers should explore how support for power sector-related
policies can be made more cost-efficient and less burdensome on the energy bill, thus
ensuring that electricity is competitive against other energy sources. Electrification will be
the fundamental way to decarbonise the European economy.
Allow for an efficient development of demand-side flexibility, storage and self-generation
to ensure a level playing field between all market players. Network access charges
should be progressively adjusted to better reflect the cost structure of networks and
excess energy injected in the network should be priced at its true value.
2 ENSURE THAT RENEWABLES ARE FIT FOR THE MARKET
P.8
AND THE MARKET FIT FOR RENEWABLES
Ensure that the EU ETS becomes the main driver for renewables investments:
strengthening it is a no-regret option. As it is an established, technology-neutral and
European-wide instrument, the EU ETS can boost the EU dimension of low-carbon
technologies’ development and investment. With a reinforced carbon price signal and
an accelerated cap reduction, additional measures to promote renewables can be
minimised within the ETS sectors.
Should member states choose to continue support for mature renewables after 2020,
it should be done in the most cost-efficient and market-based way, minimising distortions,
including those affecting the merit order.
Member states should address the barriers to regional support and take into account
the future electricity demand when deciding on supported volumes and on their
geographical scope.
Fully integrate renewables in the market: balancing responsibility should apply to all
technologies to foster a level playing field and to maximise cost-efficiency.
The member states and the Commission should guarantee consistency between the
2030 climate and energy targets. They should be required to assess the interlinkages
between the EU ETS and renewables support and consider ways to address them.
The impact of renewables support on the power market, security of supply and
competitiveness of electricity for end-consumers should also be evaluated, and the
resulting distortions minimised.
2 electricity market design: fit for the low-carbon transition
3 IMPROVE THE ENERGY MARKET TO ATTRACT FLEXIBLE RESOURCES P.11
AND ACHIEVE RENEWABLES INTEGRATION
Swiftly complete the internal energy market and end all regulated prices.
Fully integrate day-ahead, intraday and balancing markets, implementing shorter gate
closure to effectively make the market fit for renewables and ensure that wholesale
prices adequately reflect scarcity situations.
Make the best out of available cross-border capacity to enhance market integration.
Ensure that transmission tariffs do not distort the market and the merit order.
4 DEVELOP A REGIONAL APPROACH TO SYSTEM OPERATION P.14
AND SYSTEM ADEQUACY
Coordinate and ultimately integrate system operation and planning tasks relevant to
cross-border trade at regional level.
Ensure that member states and ultimately regions define system adequacy targets using
homogeneous metrics.
Implement regional adequacy assessments involving all relevant stakeholders and
jointly analyse potential solutions at regional level. Develop a transparent and
contestable methodology, taking into account the market perspectives and the economic
viability of existing assets.
Regional adequacy assessments should be taken into account when introducing
market-based capacity mechanisms. Where these exist, they are also a tool in
themselves for the regional adequacy assessment.
5 CAPACITY MARKETS SHOULD BE WELL-DESIGNED AND HAVE A REGIONAL P.17
PERSPECTIVE TO ENSURE SECURITY OF SUPPLY IN A COST-EFFICIENT WAY
Capacity markets should be technology-neutral, open to new and existing assets, and
provide capacity contracts with a time-horizon that is relevant for investments.
Cross-border participation in capacity markets is a must in order to avoid pure national
approaches.
3
INTRODUCTION
The economic environment of the electricity sector is driven by the low-carbon transition. Its
objective is to fully restructure the electricity system towards a more diverse mix of assets, with
an increasing share of renewable generation. In this context, the need for flexibility and firm
capacity will increase, as well as the need for other system services. Customers will also become
more active as many of them will be prosumers and provide flexibility with demand response
and storage.
This transition is unprecedented and its pace is difficult to foresee. It will bring about innovation
and exciting opportunities; as well as challenges. Lots of questions still remain open today:
how much flexibility will consumers provide? When will storage solutions be broadly implemented?
When will existing power plants close and new investments happen?
As Europe strives to decarbonise its economy and to promote renewable sources of energy,
and in the midst of these uncertainties, European citizens and businesses should have access
to the reliable and competitive electricity supplies they need.
EURELECTRIC is strongly committed to decarbonise the power system. The share of electricity
produced by fossil-fuelled power plants will continue to shrink, thus opening a brand new range
of opportunities to innovate, develop new services and invent new business models.
In the current environment where large amounts of subsidised generation together with other market
interventions distort price formation, the electricity system lacks signals both for short-term
operations and longer term system adequacy and decarbonisation. The market environment
has indeed become increasingly volatile and the risk exposure of investors has therefore
increased. In this context, the issues faced by market participants and investors are similar for
all assets, be it thermal or renewable generation, storage or demand response.
The EU has set a clear direction with the 2030 targets for carbon emissions reduction,
renewables and energy efficiency. In an energy-only electricity system with no support
schemes or capacity mechanisms, the amount of renewables and the system adequacy level
are the outcome of the market.
Given the binding EU objective to achieve at least 27% of renewables by 2030, some member
states may continue support schemes in the electricity sector after 2020. Many countries
are also complementing their energy markets with a patchwork of capacity mechanisms
to guarantee the desired level of security of supply. Unfortunately, non-market-based
interventions have flourished, such as forbidding plant closures or targeted subsidies to
certain technologies or categories of assets, as ill-designed and unsustainable ways of
managing security of supply.
4 electricity market design: fit for the low-carbon transition
For the sake of European consumers and the European economy, cost-efficiency should be a
leading principle when working towards the achievement of the 27% renewables target in the
EU and adequacy targets set by member states. System adequacy targets should thus be met
with market-based, non-discriminatory measures, and a regional approach to security of
supply should be ensured. Both the EU ETS and the non-ETS sectors should contribute in the
most cost-effective way to achieve the agreed EU-wide target for renewables.
Market designs are not carved in stone and should evolve with the energy transition. In the
short to medium term the critical challenges are to foster the competitiveness of low-carbon
technologies, to allow for the development of flexible solutions, to ensure that the market
provides price signals adequate for existing assets and investments, and to avoid structural
over or undercapacity thus ensuring security of supply in a cost-efficient way. EURELECTRIC
believes that non-market measures should be avoided and hence proposes its
recommendations for an electricity market design that is fit for a customer-centric and cost-
efficient low-carbon transition.
5
1ENSURE THAT CONSUMERS REAP
THE BENEFITS OF LINKING WHOLESALE
AND RETAIL MARKETS
Consumers expect a reliable, affordable and decarbonised
enable demand-side participation
electricity supply. Innovative solutions provide
them with better information than ever before and
To enhance the operation of retail markets in general as
open up new opportunities to play an active part in
well as demand response, a number of no-regret options
the market. Consumers are increasingly opting for
must be implemented:
distributed generation, driven by policy support and
rules that enable customers to participate in the
regulatory intervention in many countries. According to
market and ensure that competition between all
the International Energy Agency one third of the global
resources (generation, demand response, storage)
PV capacity was installed at residential level in 2014.1
takes place on a level playing field;
Consumers are also expected to increasingly invest in
clear roles and responsibilities for all market players,
technological solutions such as heat pumps, electric
including balancing responsibility;
vehicles, home management systems, home energy
phasing out regulated prices to enhance competition,
devices and connected objects. All these developments
allow retailers to develop more innovative products
will give them unprecedented control of their energy use
and customers to reap the benefits of liberalised
at the touch of a button – or, increasingly, the swipe of
markets with competitive pressure;
a screen.
and the timely roll-out of smart meters and smart grids.
Empowered customers are expected to have a crucial
role to play in addressing the challenges of the power
better link wholesale and retail
system transition. The need to integrate increasing shares
markets: end distorted price signals
of variable renewable energy sources (RES) into the
system makes demand response more and more relevant.
Whilst setting rules for the development of these
Final consumers – households or businesses – could
resources and their access to markets is important,
increasingly provide flexibility to the electricity system
it is not sufficient to ensure a better link between
by voluntarily changing their usual electricity consumption
wholesale and retail markets because other factors
in reaction to price signals or to specific requests, while
have major detrimental impacts.
at the same time benefiting from doing so.
As highlighted by the European Commission in its New Deal
Nevertheless customers’ flexibility potential has still
for Energy Customers communication, “a key enabler of
not been fully unlocked. Retailers2, service providers and
demand response is consumers’ access to price signals
start-ups are developing new products and services
that reward flexible consumption.”3 But today, the link
but their uptake has been rather sporadic to date.
between wholesale and retail prices is weak due to a high
“wedge” of policy costs and taxes in the bill, holding
customers back from actively participating. In 2014,
rising taxes and policy support charges represented as
much as the energy element on the average European
1 Residential Prosumers – Drivers and Policy Options (Re-prosumers), IEA-RETD (2014).
2 Visit http://www.eurelectric.org/innovation/
3 Delivering a New Deal for Energy Customers, COM(2015)339 final.
6 electricity market design: fit for the low-carbon transition
household customer bill4. This energy element keeps
costs are today recovered from those customers that
on decreasing due to falling wholesale prices (Figure
are either not interested or not able to invest in similar
1)5 while the total bill keeps on increasing.
solutions. Although policy support costs form a large
share of the final consumers’ bills and tend
The benefits that well-functioning retail markets can
to be fixed costs, they are billed as volumetric charges.
bring to consumers are therefore dramatically reduced.
The same holds for network costs. As prosumers consume
Retailers are competing on an ever smaller part of the bill
less electricity, the costs they avoid are shifted to other
to deliver electricity at the lowest cost and in the most
customers, thus creating a “consumer divide”.
innovative ways. The development of products based
on more dynamic pricing to trigger demand response
It is necessary to develop a supply chain that improves
is also slowed down. Electricity’s competitiveness as a
price incentives to facilitate active consumer behaviour
key energy carrier that will allow for decarbonisation of
in the market and reveal the true value of local power
the economy against other fuels is hampered. Finally,
generation and storage:
this evolution deters transparency and is a source of
Policymakers should explore how support for power
confusion for end consumers.
sector-related policies can be minimised to be less
burdensome on the energy bill.
At the time when customers did not have realistic
In order to ensure that the retail price is the appropriate
alternatives to the electricity system, policy makers
reference for investment and behavioural decisions,
decided to use electricity bills to bolster public budgets
the different elements of the final bill (commodity,
and finance other – sometimes unrelated – policy
network, taxes/levies) have to be designed cost-
decisions. But in the context of the energy transition,
reflectively in terms of volumetric/capacity-related
with options like distributed generation, storage,
and standing charges. An evolution towards more
electro-mobility, micro-grids or CHP, customers can
capacity-based network tariffs could help to ensure
choose a tailor-made energy supply system that suits
that customers pay for the grid services they actually
their individual needs, bring down their consumption
use and avoid the creation of a “consumer divide”.
from the grid and potentially leave the electricity supply
On a level playing field, prosumers sell the excess
system altogether.
electricity at a price that reflects its value in the
market. Indirect subsidies, such as non-market-based
One should however be mindful that (i) such options
net-metering schemes and socialising of prosumers
often seem more competitive than they really are in
balancing costs should be avoided. Possible RES
comparison to the real costs of the electricity system
support should be cost-efficient, transparent and
and that (ii) some taxes, policy costs and often network
minimise distortions.
FIGURE 1 − EVOLUTION OF HOUSEHOLDS BILL COMPONENTS 2008-2014
€cent/kWh
Breakdown of taxes
8.5
and policy costs
8.1
8.0
7.7
in 2014
-7 %
7.5
7.5
+47%
7.0
6.7
6.5
3.4
4.1
€cent
€cent
6.0
/kWh
/kWh
5.5
5.1
+18%
5.0
5.4
5.1
4.5
4.6
4.0
16.6%
19.9%
2008
2009
2010
2011
2012
2013
2014
policy
taxes
costs
energy
network
tax & policy costs
Source: EURELECTRIC infographic “Making sense of your electricity bill”, February 2016
4 EU28+Norway.
5 Making sense of your electricity bill, EURELECTRIC 2016.
7
2ENSURE THAT RENEWABLES ARE
FIT FOR THE MARKET AND THE MARKET
FIT FOR RENEWABLES
The European power generation mix is becoming
will become competitive with other power generation
increasingly low-carbon with a growing share of
technologies. Onshore wind, and in some cases solar
renewables. In 2014, 56% of the electricity generated in
PV, are now considered as commercially competitive in
the EU came from low-carbon sources and 28% from
terms of LCOE7 in a number of markets. This will require
renewable energy sources.
that future renewables deployment is sustainable,
cost-efficient and based on market fundamentals.
Nine out of the eleven biggest investors in variable
renewables are European utilities with over 40 GW of
As we progress towards an integrated European
installed capacity6. Based on this broad experience, recent
electricity market, renewables must be increasingly
technological developments and market experiences,
exposed to competition and be placed on a level
the power industry is confident that renewables
playing field with other technologies.
FIGURE 2 − EU GENERATION MIX IN 2014
5% 2%
3%
25%
8%
coal
gas
oil
12%
nuclear
hydro
15%
wind
solar
bioenergy and other res
2%
27%
other spurces
Source: EURELECTRIC report “Power statistics and trends: the five dimensions of the Energy Union”, December 2015
6 Bloomberg New Energy Finance, 15 February 2016 (1. Iberdrola SA, 3. Enel SpA, 5. E.ON SE, 6. Engie SA, 7. RWE AG, 8 EDP – Energias de Portugal
SA, 9. EDF SA, 10. Vattenfall SA, 11. SSE PLC.
7 LCOE (levelized cost of energy) is one of the utility industry’s primary metrics for the cost of electricity produced by a generator. It is calculated by
accounting for all of a system’s expected lifetime costs (including construction, financing, fuel, maintenance, taxes, insurance and incentives),
which are then divided by the system’s lifetime expected power output (kWh).
8 electricity market design: fit for the low-carbon transition
strengthen the eu ets
provider, including balancing responsibility. It is also
key to enable commercial parties to offer balancing
The post-2020 framework for renewables must ensure
and commercialisation services to RES generators.
a coherent approach that takes into account the
contribution of all sectors – heating, cooling, electricity
As for existing generation, it should be left to the
and transport. In the transition phase towards a fully
discretion of member states to decide whether balancing
decarbonised system, the EU ETS should be the main
responsibility should be applied on a voluntary basis
driver for RES investments in the electricity sector. It is
or made mandatory, subject to adequate compensation,
indeed an established, technology-neutral instrument
taking into account the costs derived from these
that can bring an increasingly EU-wide approach to
obligations as well as the possible revenues of RES in
low-carbon technologies. Strengthening the EU ETS is
the balancing market. Either way, full market integration
therefore a no-regret option to increase the competiti-
should be ensured as soon as possible.
veness of renewable energy technologies and encourage
future fuel-switching to low-carbon sources. Additional
Further alignment of support schemes’ key characte-
measures to promote RES can be minimised within the
ristics through common EU rules should take place.
ETS sectors by a reinforced carbon price signal and an
Partial opening across borders and regional support
accelerated cap reduction in the number of emission
programmes also increase cost-efficiency. Member
allowances.
states should address the barriers to regional support
(taxes, levies, permitting etc) and take into account
the future electricity demand when deciding on the
redirect energy policies towards
geographical scope of the schemes. Experience shows
greater market integration,
that it is challenging to find the political will to establish
competitiveness and affordability
common schemes, and that their execution involves
challenges as well.
If member states choose to maintain support for mature
technologies after 2020, it should be done in the most
cost-efficient and market-based way to maximise market
design effective and cost-efficient
integration and minimise distortions. Beyond research,
support schemes
demonstration and early deployment, policy measures
should not seek to promote specific technologies or
Member states have adopted a variety of national RES
projects, but rather support RES development in the
support schemes which will continue to apply to new
most cost-efficient way. When deciding to support
investments at least until 2020. The plants which
certain volumes, it is important to take into consideration
entered in operation before 2020 will be supported in
system costs as well as the evolution of demand for
some cases even until 2040. Recently, some schemes
electricity to further avoid energy oversupply. Distortions
have evolved from FiTs (feed-in tariffs) to FiPs (feed-in
of the merit order should especially be reduced as
premiums) or CfD (contracts for difference) and elements
they lead to inefficiencies and increased costs that are
of tendering are also being introduced for larger units,
ultimately borne by consumers through policy support
in line with the state aid guidelines.
charges. They also distort investment signals provided
by wholesale market prices which become lower than
If implemented, support schemes should be cost-efficient,
they would be without such distortions.
minimise distortions in the wholesale market and be
technology-neutral. Feed-in tariffs should be phased out,
EURELECTRIC does not see any obstacles to ful operational
because they do not allow market integration. These
integration of all renewable electricity generators into the
principles should apply to all RES support, including
market as of today. It is for instance necessary to move
for prosumers. However, retroactively changing support
towards putting operational market responsibilities on all
schemes should be avoided as they deteriorate the
participants, either directly or indirectly through a service
investment climate.
9
Auctioning mechanisms improve competition between
This is particularly relevant for technologies with high
projects and set the levels of support in a competitive
investment costs and low operating costs (e.g. wind and
way, which is also the case for green certificates market
solar). Capacity-based support as such does not directly
schemes. The projects selected through an auction can
incentivise the development of sites with the largest
be granted energy-based support or capacity-based
generation potential nor does it incentivise generators to
3
support, including investment aid8.
maximise the output. For this purpose, specific market
mechanisms need to be developed. However, logically,
On the one hand, energy-based support incentivises
RES producers would strive in any case to maximise their
investors to maximise assets’ generation output and
revenues from the wholesale market. Finally, capacity-
develop the sites with the largest generation potential,
based support can be inadequate for technologies
but on the other hand it distorts the merit order.
with relatively high variable costs, such as biomass.
Solutions to minimise these distortions should be
implemented, such as introducing partly capacity-
Member states and the Commission should guarantee
based support, capping the annual or monthly amount of
consistency between the 2030 climate and energy
electricity that gets support or limiting the support to
targets, and should be required to take into account
those hours when wholesale prices are above variable
the interlinkages between the EU ETS and support to
costs9, as required by the state aid guidelines.
renewables, while considering ways to address them.
The impacts of RES support on the power market,
Capacity-based support ensures that dispatching
security of supply and competitiveness should be
decisions are independent from the support scheme,
evaluated and potential distortions minimised.
therefore minimising distortions of the merit order
EURELECTRIC supports the development of a holistic
and wholesale price signals. This type of support
Energy Union governance system that contributes to
contributes to reducing the cost of capital and the LCOE.
ensuring consistency between policy targets.
8 In the energy based support investors’ revenue takes the form of premiums that are paid as €/MWh on top of the wholesale energy price
(there can be a cap for the supported volume per project and/or per year) or as a strike price based support that sets the total €/MWh income.
With capacity based support the investor’s revenue takes the form of e.g. annual/monthly capacity based compensation in €/MW or investment
aid. ”Investment aid” usually represents a one-off compensation that is granted to the investor when the generation unit is built. In addition
to this investors sell their production at market price.
9 The distortion of the merit order is not only related to negative prices as stated in the State Aid Guidelines, but to the fact that generators
are encouraged to produce when market prices are below their variable costs.
10 electricity market design: fit for the low-carbon transition
3IMPROVE THE ENERGY MARKET TO ATTRACT
FLEXIBLE RESOURCES AND ACHIEVE
RENEWABLES INTEGRATION
The internal electricity market (IEM) must be completed.
An efficient use and a cost-efficient expansion of
The third energy package and the integration of European
interconnections and networks is indispensable to
wholesale markets across all timeframes through network
complete the internal market with a growing share of
codes is the cornerstone of the electricity market design.
RES. The projects of common interest (PCIs) selection
process, relying on the ten year network development
Significant progress has been achieved with day-ahead
plan (TYNDP), is a good approach for a consistent
market coupling, but a fully integrated internal electricity
development of new infrastructures.
market is yet to be reached. Further progress is needed
to develop cross-border intraday and balancing markets.
FIGURE 3 − PROGRESS IN MARKET COUPLING IN 2014 AND 2015
Multi-Regional Coupling: day-ahead market coupling
February 2014
May 2014
February 2015
Day-ahead market coupling of Czech Republic,
Slovakia, Hungary and Romania – November 2014
Source: ACER and ENTSOe; see EURELECTRIC report “Power statistics and trends: the five dimensions of the Energy Union”, December 2015
11
make the best out of available
(CACM) guideline as well as the step-wise extension
cross-border capacity to
of flow- based market coupling across Europe is necessary.
enhance market integration
In particular, cross-border capacity should not be unduly
curtailed or limited and internal congestion should not
There is significant scope for electricity transmission
be moved to borders. In general, market-based solutions
networks to be used in a more efficient way and hence
for curtailment should be implemented.
make more cross-zonal tradable capacities available to
the market in different time frames. ACER’s market
EURELECTRIC welcomes the progress reached so
monitoring report 2015 indeed shows that in nearly
far regarding the performance of the day-ahead
70% of all assessed borders, the physical capacities
market coupling algorithm. To solve the remaining
are at least twice as high as the tradable capacity.
issues, we believe that before implementing
inefficient changes to the design of the algorithm,
In order to update the available grid capacity for trade,
we should rather harmonise existing market design
efficient capacity calculation methods coordinated
rules (e.g. switch to portfolio bidding in day-ahead
among TSOs should be implemented, including in the
markets, harmonise products, abandon other inter-
intraday timeframe. To this end, the implementation of
ventions preventing free bidding and freedom of
the capacity allocation and congestion management
dispatch, etc).
FIGURE 4 − PHYSICAL CAPACITY IS MUCH HIGHER THAN THE TRADABLE CAPACITY ON MOST BORDERS (2014)
100 600 530 1,275 730 2,000
90
1,000
1,000
80
1,014
2,200
745
70
1,266
2,020
690
60
400
660
50
452
500
y, Thermal capacity (%, MW)
3,200
1,350
2,000
5,236
40
6,204
2,771
2,166
5,876
6,653
4,486
4,104
1,225
2,837
11,809
2,120
2,843
30
8,635
10,358
8,734
4,013
4,446
2,078
5,131
9,676
6,325
20
3,199
3,571
3,634
4,525
2,451
10
NTC/Thermal capacit
5,236
0
IE->GB
EE->FI
GR->IT
AT->IT
HR->SI
FR->IT
IT->SI
FI->SE-3
FR->UK
NL->UK
EE->LV
FI->SE-1
DE->FR
HU->SK
CZ->SK
BE->FR
CZ->DE
BG->GR
AT->SI
DE->NL
LT->LV
CH->IT
ES->FR
PL->SK
CH->DE
HR->HU
ES->PT
BE->NL
AT->CH
CH->FR
AT->HU
CZ->PL
AT->CZ
HU->RO
BG->RO
DE->DK_E
NL->NO-2
DE->SE-4
PL->SE-4
NO-1->SE-3
DE->DK_W
DK_W->SE-3
DK_W->NO-2
DK_E->SE-4
NO-4->SE-2
NO-4->SE-1
NO-3->SE-2
CZ+DE+SK->PL
indicated direction
opposite direction
Source: Data provided by NRAs through the ERI (2015), EMOS, ENTSP-e (2015) and ACER calculations. See ACER “Market monitoring report 2015”,
p. 154 (paragraph 384).
12 electricity market design: fit for the low-carbon transition
future-proof intraday and
The approach to European balancing markets must be
balancing markets to integrate
ambitious with a clear end-goal, in particular regarding
a growing share of renewables
TSOs’ balancing philosophy. The current approach based
on various pilot projects (see Figure 5) allowing the
The development of robust cross-border intraday
co-existence of different balancing models in terms of
and balancing markets will be crucial to ensure that
products, pricing, settlement, etc. will not lead to ultimate
the system remains balanced as the share of
integration. The balancing guideline, and especially the
renewables continues to grow.
future legislative proposals on coordinated sizing and
cross-border sharing of reserve capacity to be presented
It is therefore necessary to promote a liquid conti-
by the European Commission, should ensure the future
nuous implicit cross-border intraday market with
convergence of the coordinated balancing areas and
harmonised products in all member states, while
progress towards a limited number of standard products.
capacity pricing shall not drain liquidity nor reduce
In addition, balancing should be a fully market-based
the speed of market processes. The market shall be
process and the code should not require mandatory
enabled to determine the most economic dispatch
participation in balancing markets.
until a gate closure set as close to real-time as possible
(e.g. 15 minutes). TSOs shall only perform the residual
Finally, markets, or when this is not possible market-
balancing of the system.
based solutions, should be developed for the provision
of other system services, which are critical to provide
flexibility and stability to the grid, such as reactive
power balance.
FIGURE 5 − OVERVIEW OF REGIONAL BALANCING PILOT PROJECTS
Common Merit Order (CMO) for
1 mFRR and aFRR with real time flow
based congestion management
Cross-border market for FCR
2
5
based on TSO-TSO model
3 E-GCC (project on hold)
TERRE: Trans-European Replacement
4 Reserves Exchange
5 Development of the Nordic RPM
5
Design and evaluation of a harmonised
8
7 reactive balancing market with XB
5
optimisation of Frequency Restoration
5
5
BritNed / TenneT / National Grid
8 Balancing Services (project on hold)
4
5
8
IGCC Imbalance Netting,
1
9 aFRR-Assistance and Flow-Based
7 9
4
8
9
Congestion Management
3
2
9
3
TSOs involved
4
2
TSO possible future involvement
4
4
4
4
4
mFRR: manual Frequency Restoration Reserves – aFRR: automatic Frequency Restoration Reserves
– RPM: Regulating Power Market – IGCC: International Grid Control Cooperation –
E-GCC: Grid Control Cooperation in CZ, SK and HU
Source: ENTSO-e website
13
4DEVELOP A REGIONAL APPROACH
TO SYSTEM OPERATION
AND SYSTEM ADEQUACY
coordinate and ultimately
(e.g. TSOs should act as “one”). This will require a high
integrate system operation
degree of cooperation between system operators and
functions at regional level
harmonisation of system operation rules. In this context,
the European Commission’s recent call for more system
The transition towards a truly integrated internal electricity
operation integration, and in particular its proposal to
market will be more efficient if the electricity system is
establish regional operational centers (ROCs), is a good
optimised on a regional and ultim
Aatlely
l- TEur
S ope
O an
s cba
o si
ns tra s
c tar
t ting point.
to define pan-European
coverage in 2015
FIGURE 6 − REGIONAL NETWORK SECURITY COOPERATION INITIATIVES
All-TSOs contract
to define pan-European
coverage in 2015
Coreso
TSC
TSC + Coreso
TSC + SSC
Nordic
Nordic + TSC
MIBEL
Source: ENTSO-e “Future TSO coordination for Europe policy paper”, November 2014
Coreso
TSC
TSC + Coreso
TSC + SSC
Nordic
Nordic + TSC
MIBEL
14 electricity market design: fit for the low-carbon transition
Current TSO coordination initiatives are steps in the right
They should aim at ensuring at least:
direction. The harmonisation and integration requirements
an integrated congestion management based on a
developed in the system operation guideline are nevertheless
regional capacity calculation methodology allowing
not ambitious enough. Indeed, these approaches remain
for frequent updates of available grid capacity;
mostly national with the aim of protecting the autonomy
an integrated balancing market with common rules
of individual system operators.
and market solutions for operational tools such as
ancillary services;
A step-wise regional integration of system operation and
regional system adequacy assessments;
planning tasks relevant to cross-border trade therefore
regional network investment planning and coordination
needs to happen. Such process should build upon the
of network investment decisions.
ongoing establishment of regional security coordination
initiatives (RSCI) service providers (see Figure 6), which
Such transition will require legislative changes and
are executing a certain number of system operation
should ensure a clear delineation of responsibilities
tasks on behalf of national TSOs and could be a step
between national TSOs and the regional integrated
towards gradually allocating the responsibility for
system operators.
these tasks to regional entities.
Regarding transmission tariffs applied to generators,
A truly regional system operation can however only be
their structure and methodologies to compute the costs
based on a regional decision-making structure and
need to be harmonised. Furthermore, their levels
a single operational framework. Establishing regional
should be set as low as possible, in particular the
integrated system operators performing system operation
power based charges (€/MW) which act as a fixed cost
and planning tasks in all regions should therefore be
for generation and therefore distort investment
the end goal to allow for more operational coordination
decisions.
of TSOs.
15
develop regional adequacy
a thorough analysis of the firm capacity provided by
assessments
all assets on the supply side and on the demand
side, including renewables, demand response and
A regional approach to security of supply should be
storage;
developed to supplement national assessments,
an analysis of the economic situation of existing
5
involving all relevant stakeholders (TSOs, regulators,
assets in the short and long term: if some assets do
market participants, etc.) and including the coordinated
not cover their fixed costs, the adequacy assessment
analysis of solutions.
should anticipate the corresponding closures.
Adequacy targets for security of supply are usually
Member states should decide how to ensure regional
defined using different metrics (LOLE, energy not served,
security of supply in cooperation with their neighbours,
etc.). These metrics should be:
while ensuring the availability of contracted cross-
harmonised at regional level, indeed, using the same
border capacity. In case of common scarcity events,
metrics will allow for a straightforward comparison of
TSOs’ actions should be clarified and factored in the
targets in different countries;
adequacy assessment.
homogeneous and transparent to let the market
understand the outcome.
Additional grid development to address a system
adequacy issue should also be considered, subject
While the choice of adequacy metrics should be
to a positive cost benefit analysis and taking into
harmonised, each country should be free to set its
account the time needed to reinforce the network or
desired level of adequacy. However, in integrated
interconnections.
markets, these target values should naturally converge
to prevent the side-effects of significantly different
The deployment of well-designed market-based capacity
target levels across member states, such as free-riding.
mechanisms should take into account the outcome of
these regional adequacy assessments and provide a
A clear methodology should be defined for regional
sustainable solution to ensure that adequacy targets
system adequacy assessments. This methodology
are met.
should inform member states on whether their chosen
adequacy target can be met. It should be followed by
Where
well-designed
market-based
capacity
a joint analysis of the potential solutions necessary
mechanisms are in place, they are also a tool in
to achieve security of supply in the region. This
themselves for the regional adequacy assessment.
methodology should be transparent and contestable.
Indeed, they contribute to revealing the adequacy
It should be developed by expert groups involving
situation by explicitly valuing the available capacity
all relevant stakeholders, including market parties.
that is needed to ensure the adequacy target and by
EURELECTRIC calls on the European Commission to
identifying the available capacity that is not needed.
engage in an open consultation with stakeholders on
the methodology and the results.
Well-designed market-based capacity mechanisms
should ensure that the most competitive generation,
These assessments require:
demand response and storage assets are selected
an integrated approach among involved TSOs, NRAs
and properly valued. Conversely, such market-based
and governments;
mechanisms will help identifying the excess of generation
an analysis of the location of “firm capacity”, because
capacity, demand response and storage.
grid capacity across Europe, and in particular
transmission capacities, are finite;
16 electricity market design: fit for the low-carbon transition
5CAPACITY MARKETS SHOULD BE
WELL-DESIGNED AND HAVE A REGIONAL
PERSPECTIVE TO ENSURE SECURITY
OF SUPPLY IN A COST-EFFICIENT WAY
Capacity markets should be well-designed to ensure
subsidising specific types of assets. As a matter of
security of supply in a cost-efficient and sustainable
fact, many member states have moved ahead with a
way, hence becoming an integral part of a future-proof
range of capacity mechanisms. EURELECTRIC believes
market design.
that a regional approach to system adequacy would
secure a coordination of efforts that would bring
Governments tend to consider security of supply as a
significant benefits in terms of effectiveness and
public good. They hence set clear system adequacy
optimisation of resources. The current piecemeal
standards and implement mechanisms to achieve
approach should therefore evolve into a more regional
them. Governments should avoid non market-based
approach, which can be obtained through cross-border
measures, such as not allowing plants closure or
participation.
FIGURE 7 − CAPACITY MECHANISMS IN EUROPE – STATUS IN JANUARY 2016
capacity payments
fi: strategic reserve
contracts for the
energy-only market
se: the government
period 2015-2017
capacity market
has proposed to
strategic reserve
prolong the strategic
reserve until 2025
under analysis
dk: possibly one-off
tender strategic reserve
for eastern denmark
be: strategic reserves
gb: centralised
capacity auction
ie & nl: capacity
payments since 2007
lt: capacity payments
since 2011 until
end 2015
fr: decentralised
capacity obligations
pl: operational
es: capacity payments
and strategic
for existing units
reserves
(level of support
reduced in 2012)
hu: considering
reserve
pt: capacity payments
de: improved energy-only
for new units
market and strategic reserves
(reduced in 2013)
gr: centralised capacity
it: centralised capacity
auction for capacity/
market with reliability
flexible capacity under
options (to be implemented)
consideration
Source: EURELECTRIC, 2016
17
Capacity markets deliver system adequacy in a
Open to new and existing assets – Market access
sustainable way by valuing reliable and firm capacity
should be based on a level playing field between
and thereby providing signals for competitive existing
both new and existing firm capacity providers;
capacity to stay online or new capacity to be developed
Cross-border participation – Capacity mechanisms
in order to reach system adequacy targets.
must be open to cross-border participation to drive
regional cooperation and take into account regional
The overarching goal of any capacity market must be
interdependencies;
to ensure system adequacy, i.e. firm capacity provided
Open to generation, demand response and storage
by conventional and renewable generation, demand
– All forms of capacity throughout the value chain
response and storage assets. Other political objectives
should be able to participate in the market;
such as decarbonisation should be met through
Contracts – the outcome of capacity mechanisms should be
instruments like the EU ETS and should therefore be left
capacity contracts and not only a regulatory commitment.
out of the capacity market debate. Consequently, the
capacity market should only value the assets’ availability
There are two critical time variables for capacity
based on their firm contribution to system adequacy.
mechanisms: the lead time and the contract duration.
In order to maximise cost-efficiency and market
Lead time: capacity mechanisms should coordinate
orientation, any capacity market should follow a set of
system capacity needs in the medium and long term.
fundamental design features. Having a market-based
To optimise existing capacity and manage possible
capacity mechanism that is open to all technologies
oversupply, a lead time of 3 to 4 years should be
throughout the whole value chain and that does not
sufficient. This amount of time also makes it feasible
discriminate between new and existing plants is the most
for most new capacity providers to be available at
cost-efficient way to reveal which capacity providers
the start of the capacity contract, as it is consistent
should be remunerated to ensure system adequacy.
with the time associated with investment decisions.
Contract duration: investment decisions would
Well-designed market-based capacity mechanisms should
benefit from price signals through the capacity
have the following features10:
market taking into account the assets’ useful lifetime.
Market-based – Capacity should always be valued in a
So far, energy markets have failed to develop
competitive market. Capacity prices should be allowed
contracts in the time horizon relevant for investments;
to move freely without distortive price regulation;
a capacity market can complement this. Indeed,
Technology-neutral – All technologies that provide
investments in new generation capacity with a
firm capacity should be able to participate in the
lifetime of several decades would benefit from long-
market without discrimination;
term and stable investment signals.
FIGURE 8 − KEY FEATURES OF WELL-DESIGNED CAPACITY MECHANISMS
Objective
Product
How?
Geography
Security of supply
Availability
Market-based
Open to cross-border
Technology neutral:
participation, and
generation, demand
ideally common
response, storage
sourcing at regional
level
Open to new and
existing plants
Source: EURELECTRIC, 2016
10 A reference model for European capacity markets, EURELECTRIC, 2015.
18 electricity market design: fit for the low-carbon transition
ANNEX 1: METHODOLOGY
TO PERFORM REGIONAL
ADEQUACY ASSESSMENTS
In order to proceed with regional adequacy assessments, commonly agreed
assumptions on situations in every area are needed to set up a number of
scenarios. They should be discussed and agreed with the relevant stakeholders
(regulators, TSOs, market participants, etc.):
peak demand and simultaneity of peaks (e.g.: do
import/export assumptions and interconnection
winter peaks fall together or are there some seasonal
capacity to neighboring regions. Should the process
differences? Are both bidding zones in the same
be built on an EU scale, the uncertainty on this
time zone or not?);
would be reduced;
demand-side participation in the market (volumes,
system balancing rules and the amount of contracted
prices);
ancillary reserves (FCR, FRR; RR to the extent that it
is contracted);
existing and planned installed capacity and availa-
bility of conventional generation;
etc.
existing and future intermittent generation capacity
The involved stakeholders should agree on a range of
(wind, PV) based on targets set by the member
relevant scenarios, including worst-case or stress
states/ European Commission;
scenarios for security of supply. The scenarios are set
existing and future embedded generation and
up by combining the various risk factors according to
self-consumption;
the scenario storylines.
availability of natural gas and other fuels;
Based on this shared set of assumptions and
weather scenarios, including rare winter/summer
scenarios for the medium to long term, the optimal
events;
dispatching of the power system should be simulated
in a stochastic way on an “hourly” basis, using the
weather assumptions to derive wind, solar, hydro
above-mentioned assumptions across scenarios, and
generation, including hydro assumptions;
including operational constraints.
storage capacity (both centralized/decentralized);
likelihood of “overhaul” and “forced outages”;
Additional simulations are then necessary to take
into account the anticipated plant closures, possibly
fuel prices, CO prices (determining conventional
2
also taking into account the impact on other markets
dispatch with given plant efficiencies);
of the same region and on other regions. It should be
transmission grid in the region (internal and cross-
noted that plant closures would also affect the cross-
border lines), including new developments;
border capacity available during scarcity events.
19
ANNEX 1: METHODOLOGY TO PERFORM REGIONAL ADEQUACY ASSESSMENTS
A detailed economic assessment, including price
The study on generation adequacy from the
forecasts to analyse the likelihood of existing plants
Pentalateral Energy Forum (2015) is a good example
remaining operational should thus be performed.
of a regional initiative and how it could work in
practice, though some shortcomings in the
The frequency and location of customer curtailments
methodology used in this study should certainly be
(i.e. member state or the zone in a member state)
relieved.
should be checked for each scenario against the
chosen metrics (LOLE, energy non-served, etc.). The
The ENTSO-E report on system outlook and adequacy
simulation could also reveal i) “local” domestic
forecast should progressively leverage on this kind of
(intra-national) congestions leading to congestions
regional initiatives to provide the relevant information
between zones and ii) locations where the
on system adequacy over the medium to long term.
curtailments could possibly happen.
This regional adequacy assessment process could
also allow defining detailed “de-rating” factors that
estimate the cross-border contribution that member
states can expect during a scarcity situation. This
would result in a more efficient assessment than the
current existing methodologies (mainly based on
national assessments).
20 electricity market design: fit for the low-carbon transition
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