by Christian Zinglersen*
In order for the EU to become more energy independent, member states will need to become more inter-dependent, argues Christian Zinglersen.
Today, the EU Agency for the Cooperation of Energy Regulators (ACER) publishes its assessment of the EU’s wholesale electricity market design.
Tasked by the European Commission back in October to provide views on whether EU electricity markets are fit for purpose, circumstances since have changed dramatically. European energy policy has turned upside down, escalated by Russia’s invasion of Ukraine.
Record-high energy prices are severely impacting households, businesses and the economic recovery. The situation has revealed levels of energy vulnerability that one would have thought unacceptable.
In turn, EU-wide energy independence has become an aspiration for many government leaders.
Whilst the energy transition is heralded as the great accelerator, it takes time. Hence, EU policymakers have entered a more immediate era of near-term issues and trade-offs.
Some governments are looking to restart mothballed coal-fired power plants. Others are revisiting gas infrastructure needs. A few have even suggested to cap wholesale electricity prices, an extreme intervention in most market economies.
Whilst this is the current backdrop against which the ACER report is likely to be read, true to the original tasking, our report looks a decade ahead asking if EU electricity markets remain fit to deliver on the decarbonisation ambitions or whether they should be adjusted or possibly even scrapped.
The EU electricity model matters because electricity markets to a large extent will become the ‘work horse’ of the EU’s clean energy transition. Simply put, more and more sectors will look to electricity to reduce their emissions; relying on increasingly low-carbon generation being deployed.
In our report, we find that electricity trade across EU Member States, facilitated by conscious integration choices made over many years, delivers approx. €34 billion of benefits per year.
We find that in an era of rapidly expanding renewables, the value of market integration across vast geographical areas will increase. Similarly, we find that price volatility is likely also to increase, meaning EU electricity markets going forward will need to cope.
Overall, ACER finds that the current EU electricity market design is fit to deliver on the massive changes up ahead provided, however, that a number of steps are taken.
What needs to be done to improve the EU wholesale market design? Our ACER report points to 13 measures for the consideration of policymakers.
For starters, enhanced longer-term electricity market signals are needed. This would make it easier to hedge electricity production or consumption over a longer time period. Much new investment will have higher upfront costs and lower running costs. Hence, to finance it, there are benefits in stable cash flows over a longer period.
Second, the flexibility of the electricity system also needs to be improved, ranging from minute-by-minute balancing to meeting season-wide demand swings; the latter provided to a significant extent by gas today.
For the electricity system to pick up some of this slack, there needs to be price incentives for longer-term flexibility providers, some of whom are currently not cost-competitive with gas but might become so as technology scales up.
Third, member states need to deliver what we in the EU have already agreed. There are significant delays today impacting electricity market integration, e.g. in not making spare capacity on interconnections available for trade or in delaying further integration steps (known as market coupling) that were decided years ago.
Transmission lines are also notoriously slow to be built in many parts of the EU, impeding enhanced power trade.
As regards the current emergency situation in Europe, we as ACER are not convinced that capping electricity prices will solve near-term issues. Rather, it may risk exacerbating them.
As we regard current market strains as primarily the result of an unprecedented gas supply and price shock (rather than an electricity market malfunction), we suggest in our report to target efforts putting downward pressure on gas prices.
And we point to possible ‘insurance’ mechanisms against possible future periods of high energy prices that have limited downsides for market functioning.
The EU, unlike others, has a massive opportunity to leverage our unique integrated energy market model, keeping it fit for purpose as the system changes.
Whether it is increased resilience by relying on each other in times of duress (like when unplanned power plant outages turn a country from being a massive electricity exporter to a huge importer over-night) or scaling up renewables at speed, not hindered by the fact these may be placed in a different country’s jurisdiction, the EU’s integrated energy market model provides advantages.
This also plays out in the near term for gas; e.g. ‘sharing’ LNG terminal access or the benefits of gas storage irrespective of one’s own geography.
In return, the political investment required of Member States will lie in dealing with enhanced reliance on one’s neighbours. Importantly, such mutual reliance may constrain domestic choices by virtue of their impact on others.
This raises important questions. Can domestic policy constraints, at times perhaps over-emphasising the virtue of national self-sufficiency, national supply chains or national target-setting, be overcome? Can domestic policy, at times under-acknowledging the benefits of continental-wide energy flows and trade, be tuned more to the value of ‘being in it together’?
The upshot of this approach will be a more energy-resilient block, plus in all likelihood an accelerated clean energy transition delivered at lower cost.
For Europe to become more energy independent, greater inter-dependence amongst member states will be needed.
Russia’s invasion of Ukraine has made clearer that the EU’s decarbonisation trajectory, and with it, an increasingly energy independent Europe, is likely to rely on enhanced mutual reliance within Europe, i.e. on enhanced energy inter-dependence.
The EU’s integrated energy market project, built up over two decades, is the clearest manifestation of this. Given the scale of the energy transition challenge, the political investment by member states in what fundamentally underpins EU energy market integration, will need to grow as well.
*director of the EU Agency for the Cooperation of Energy Regulators (ACER)
**first published in: www.euractiv.com
By: N. Peter Kramer
