The climate clock is ticking and the energy transition is moving forward in the European Union. On this journey, the 2020 goals for renewable energy shares have already been met by 11 Member States, and 15 of them have achieved their goal for energy efficiency. Nonetheless, one of the biggest challenges still remains: giving the sufficient legislative means to countries in order to implement further development of this transition. This challenge faces the EU institutions and is to be addressed by the Clean Energy for All Europeans (CEfAE) package, proposed by the EU commission in November 2016. This set of eight legislative texts covers a large range of topics, including energy efficiency, renewable energy sources, the governance of the Energy Union and the European electricity market. Regarding this last topic, two texts are currently in advanced stages of negotiation and could directly impact EU citizens and companies:
- The Directive on common rules for the internal market in electricity – For the curious readers out there, the code name is: COM(2016) 0864
- The Regulation on the internal market for electricity – Code name is COM(2016) 0861
These two texts reveal the main elements of the future European electricity trade system that will be discussed by the Council of the European Union and the European Parliament during the upcoming co-decision procedure (as explained in our previous white paper about the Winter Energy Package). In December 2017, the Council adopted its position for the negotiations, and in February 2018, the European Parliament agreed upon a common standpoint regarding the future of the European Electricity Market.
It is now time for the three European institutions to sit at the negotiation table with a serious task at hand. They will debate and discuss an agreement regarding the adoption of the legislative text that will shape the way electricity is produced, transported and used throughout Europe for the next two decades. Through this article, Greenfish will clarify the points that are going to be discussed in the coming months through the European Parliament’s ambitious point of view. We will mainly focus on two points: regulatory changes to the electricity market and the role of the energy consumers.
Dissecting the future electricity market changes
On February 21, 2018, the European Parliament voted on its position by approving most of the content in the internal electricity market report provided by the rapporteur. This report contained a series of propositions aimed towards helping the EU reach its energy and environmental goals for 2030. Essentially, decisions were made on three key aspects: deregulation of the energy market, bidding zones and capacity mechanisms.
The Parliament’s original point of view promoted further deregulation by removing some of the direct and indirect subsidies that were already in place. Direct subsidies consist of economic policies, often at a national level, promoting a type of producer or a specific source of electricity. In 2012, about 64% of the energy subsidies in Europe were directed towards renewable energy, principally through feed-in tariffs and investment grants. While these subsidies are capital to develop renewables and to reflect fossil fuel externalities, they distort the electricity market and may – in the long term – cause electricity shortages if the renewable electricity output cannot match the demand. In line with the open market philosophy, it was first suggested that the priority dispatch scheme, a form of indirect subsidies that promoted renewable electricity over other sources, should be removed from the market as well. But different groups that disagreed managed to later reintroduce the scheme in the final version of the Parliament’s position. It is now set to be phased out by 2020 and replaced by new renewable installations. However, in case of grid congestion after 2020, renewable energy providers will be the last to be shut down and will receive proper compensation. Additionally, to balance their market advantages, renewable energy providers will gradually have to pay the Transmission System Operator for the deviation in their projected generation. Other deregulations have been proposed as well, such as shortening the trading time frame to improve market reactivity, and removing the price cap on electricity in order to increase the consumer response in times of shortage.
The Parliament’s position additionally supports the creation of large bidding zones that remain stable over time. These zones, drawn on geographical areas with a strong infrastructure, would allow electricity to be traded freely, at a uniform price and without capacity allocation. By contrast, trade between different bidding zones would be restrained in an effort to avoid transmission congestion. The EU Council also favours the establishment of bidding zones, and is considering a capacity standard in order to define them, in accordance with the European Commission.
One of the principal topics of the upcoming negotiations will be the capacity mechanisms that have already been introduced by several European countries to encourage investment in flexible power plants, such as hydroelectric, gas or coal. The goal behind such mechanisms is to ensure supply, in a context where intermittent electricity sources – photovoltaics and wind turbines – gain market share (and push stable generation plants out of the market). Capacity mechanisms remunerate electricity suppliers for the generation capacity they provide to the grid, in addition to the electricity they produce. Most of the time, this supply is ensured by gas or coal power stations. In a capacity market, regular power plants remain economically viable and can be kept as backup units to meet the peak demand, while in an energy-only market they would be shut down. After an in-depth analysis of various conditions, the European Parliament voted in favour of stricter rules on the capacity mechanisms, making them a last resort solution for countries. It suggests that new power stations would not be eligible for subsidies after 2020 and that capacity subsidies already in place would have to disappear by 2025 for energy sources emitting above 550g of CO2 per kWh. Last but not least, the members of the Parliament voted in favour of European monitoring of the electricity supply’s security. Therefore, the necessity of any capacity mechanism will have to be based on European, and not national, capacity.
The role of electricity consumers
The texts on the internal electricity market provide a central place for EU-citizens in the production, distribution and consumption of electricity. The objective of the Commission is to give more rights to electricity consumers, notably regarding energy provider contracts, self-production and storage, and electricity affordability in order to address energy poverty.
Opening the market of electricity distribution can only be achieved if consumers can easily change suppliers. To do so, the Parliament has adopted measures to give the customers more rights, such as the development of certified tools that facilitate comparison between suppliers’ prices, the clarification of bills, the removal of contract cancellation fees, and the ability to switch suppliers within 24 hours. The Parliament also backs the consumers’ right to produce, consume and individually store electricity without any discrimination from the operator, promoting the “prosumer” (proactive consumer) concept in line with the decentralisation of electricity production. Nonetheless, the position of the Council of the European Union points out that energy communities would have to adequately contribute to the overall cost of the system.
Between 50 million and 125 million Europeans are at risk of energy poverty today. The set of rules voted in by the Parliament fails to concretely address the issue and only sets definitions and guidelines, leaving the burden to the Member States. One foreseeable option to address energy poverty and stabilise energy demand is Demand Side Management. Through dynamic pricing and the installation of smart meters, it would allow consumers to adapt their consumption to the real-time electricity supply and eventually save money on their bills. In the end, their electricity price would be linked to the actual or anticipated price in the wholesale market. With the cap on prices being removed, consumers subscribing to such contracts would be more exposed to price fluctuations, but on the other hand they would have greater opportunities to save money by consuming when the supply is high and the demand is low. The system provides the customer with easy access to price fluctuation so that they may adapt their energy consumption to the market.
Conclusion: what to expect from the trilogue?
In a nutshell, the Parliament has validated an ambitious strategy regarding the electricity market (deregulation, bidding zones and capacity mechanisms). Similarly, interesting developments are being proposed to give more power to the consumer (through contract flexibility and self-production).
A trilogue between the Council of the European Union, the European Parliament and the European Commission is expected to start at the end of March 2018. This negotiation period will meticulously dissect and analyse every institution’s opinion by delving into each text and scrutinising every last detail. The art of reaching a compromise and consensus can take time, as one to two years could unfold before a final decision is made and the legislative proposal is adopted. As ambitious as it is with its position, the Parliament will be put to the test by the continental institutions and will have to convince its two counterparts.
Greenfish will help you to monitor progress on the on-going discussions, especially as they are subject to the influence of multiple lobbies protecting diverging interests in the energy sector, that are not always in favour of the consumers’ rights or the environment. Let’s reconvene later on once specific progress has been made on these texts, or other texts such as the Renewable Energy Directive, that should define the next European objectives in terms of renewable energy goals for each Member State.
Nassim Daoudi – Managing Director at Greenfish
Quentin Lancrenon – Project Analyst, Green Solutions at Greenfish
Jean Jacobs – Project Assistant, Green Solutions at Greenfish
Florian Remy – Consultant at Greenfish
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