How to define and implement an energy policy in light of new EU

guidelines for the year 2030?

Charlotte RENAUDMarket advisor – EURELECTRIC

23rd Forum – Energy Day in CroatiaZagreb, 28 November 2014

EURELECTRIC – a pan-European association with partners around the globe

EURELECTRIC represents the EU electricity industry –

all across the electricity value chain

ENERGY POLICY& GENERATION

ENVIRONMENT& SUSTAINABLEDEVELOPMENT

MARKETS RETAIL CUSTOMERS

DISTRIBUTIONNETWORKS

What our industry stands for – our 5 guiding principles

We believe in:

1) A European, integrated approach to the entire power system 2) An affordable energy transition thanks to competitiveness and

cost-efficiency oriented policies 3) Electricity as a major contribution to the decarbonisation of

Europe’s economy4) Active and empowered customers as the core of our business and

the centre of our innovation policies5) A market design and regulatory conditions that ensure sufficient

generation and infrastructure investments

ETS as the key driverStrong innovation policy

National RES and EE schemes National carbon price floors/taxes

National capacity mechanisms

MA

RK

ET

S A

RE

FR

AG

ME

NT

ED

AN

D

PO

LIC

IES

AR

E S

TAR

T/S

TO

P

EN

ER

GY

MA

RK

ET

INT

EG

RA

TIO

NA

ND

(M

OR

E)

PR

ED

ICTA

BLE

P

OLI

CIE

S

NL coal tax

UK carbon price

floor

Today: internal energy market or x28 chaos?

What ambition, when?Early, economy-wide, high ambition

• Climate is a lower political priority than before the economic crisis, BUT there is still some priority and therefore some policy ambition

• The power sector is always the first (easy) target for climate policy

• Therefore we face a choice:

No ambitionLow ambition

= few sectors (power)= stop/start policies

High ambition= whole-economy= stable policies

(Not a realistic option for the power sector)

Costs the power sector investment in low-carbon technologies and loss of market share from energy saving

Gains the power sector new market share through electrification of additional sectors; new markets via services

EU Council Decision on 2030 climate and energy policy framework

- 2020: 20/20/20: ETS / national binding / national

- 2030: 40/27/27: ETS / EU binding / indicative

- 2030: 43/45/27: for electricity sector

EURELECTRIC welcomed the adoption of this ambitious framework• Lessons learned from 2020 package• EU ETS as key driver to deliver this objective - clear proposal to

consolidate• EE and RES targets to be delivered through market-based and cost-

efficient policies

The road to a 2030 framework It’s not over until the lady sings…

Step 1: 22 Jan 2014: Commission proposals on goals These are only preliminary recommendations

Step 2: March 2014: European Council political decision on goalsPoliticians can ignore recommendations – postponed decision to

autumn

Step 3: 2015: Commission drafts legislation to implement goals, spread burdens

The devil is in the detailsAnd new Commissioners might have new ideas

Step 4: 2016-17: Parliament and Council Co-Decision on legislationThe EP definitely has its own ideasElections in Member States can mean changes of government

Step 5: 2018-19: National transposition where necessaryMore details

The growth of RES, which is necessary to pursue the European decarbonisation agenda, brings a new reality to power systems

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Decarbonisation targets Breakdown per sector

The necessary growth of RES to decarbonise the power sector implies market adaptations that have to meet two fundamental requirements of electricity customers across Europe:• To maximise customers’ value for their money, RES should be developed through

integrated electricity markets while keeping their costs down• Customers expect that their lights stay on – security of supply is key and should also be

guaranteed in a cost-effective way

EURELECTRIC’s proposals for a cost-efficient, market-based transition towards decarbonisation

• Enhancing market functioning as a “no regret” option

• Making RES fit for the market

• Making market fit for RES

Thanks for your attention!

Charlotte RenaudMarket Unit – Advisor

crenaud@eurelectric.org +32 2 515 10 55

Back-up slides

What does a 40% GHG target mean?

40% across the whole economy

ETS sectors= power and energy intensive industry

power sector decarbonisation signal

Effort-sharing sectors= transport, buildings… agriculture etc

electrification signal

43% compared to 2005 30% compared to 2005

?%

Linear factorEnergy

efficiency

Energy labelling

CO2 cars

Transport in ETS?c

Eco-designEPBD

Stability reserve

ETS reforms

Done:

• Back-loading (2014)

Proposed:

• Market stability reserve (2021)

• Linear factor increase (2021)

• Global aviation ETS (2016)

Under consideration:

• Include maritime transport, other transport fuels (tbc)

1. Short term: Surplus of 2bn-2.5bn allowancesSolution: Permanent set-aside

2. Medium term: Fixed supply and demand shocks result in price volatility

Solution: Supply adjustment mechanism

3. Long term: The ETS cap is not coherent with the EU 2050 goal

Solution: Revise the linear factor

Our view: ETS problems and reforms3 different problems, 3 different solutions

Market Stability reserve

Commission has identified the inflexible supply of allowances as the key item for the allowance surplus

Positive: - Can support the ETS market balance in case of future economic

shock- Slowly addresses the surplus - Built on simple, transparent, robust design

But:- Commences 2021- Too slow to address surplus

2030 ETS reforms are too little too late – we need action

sooner!

EU RES 2013 – approx. 21%

EU RES 2030 – approx. 45%

The RES increase challenge21% of electricity mix today to 45% by 2030

7% biomass 7% hydro 7% intermittent

7% biomass 7% hydro 31% intermittent

a x4.5 increase in intermittent generation ?

Europe is on track to reach the 20% RES target, BUT is facing two important challenges on the road

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Source: Eurostat

Costs Competitivene

ss

Different non-coherent purely national answers from MS to these challenges risk further fragmenting the market, endangering the construction of the internal energy market

Intermittency Security of

Supply

How to strike back the balance between the 3 objectives of the EU Climate and Energy policy?

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1. A strong ETS as key driver for RES investments

2. Operational integration of RES into the market

3. Cost-effective RES support schemes that maximize market orientation and minimize market distortion

4. Further Europeanisation and cooperation on RES development

Opportunity with 2030 Framework

Environment & Energy State Aid Guidelines 2014 - 2020

Opportunity with 2030 Framework

Operational integration of RES is necessary, both in the market and grid aspects

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• Responsibility of generators for:- Selling in the market (directly or via

aggregators)- Nominating / Scheduling (towards

TSO)- Balancing (costs of imbalances)

• Same obligation for all generators for:

- Grid connection / usage (fees)- Dispatch / Grid access (no priority)

• For existing plants there will have to be a transition depending on national circumstances and incentives/ compensation in Member States

State Aid GuidelinesEURELECTRIC

• Aid granted as premium on top of market price (selling in the market)

• Standard balancing responsibilities, unless no liquid intra-day markets exist

• Not Applicable

• No retroactive measures: only obligations for projects under schemes notified as from 1 July 2014

RES support: Increase cost-efficiency and avoid market distortions

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A. Increase cost-efficiency by avoiding overcompensation

– Tenders for investment or operating aid, with multiannual planning of volumes for investor visibility

– Technology-neutral tenders for technologies that are mature

– When no tender, apply degression rates if transparent to investors

B. Avoid market distortions– In operating aid schemes, eliminate

payments that distort operational/dispatch decisions

– Limit remunerated hours for operating aid

– Introduction of investment aid (€/MW) minimizes distortion, can be technology-neutral and facilitates transition towards full market integration of RES

C. Link support schemes with their stage in the maturity value chain

EURELECTRIC State Aid Guidelines• Competitive bidding process, but

• Not for small scale RES (solar<1MW, wind<6MW)

• Not if demonstrated less successful

• Not necessarily technology neutral

• When no tender, premium, but• Not necessary for solar < 500kW, wind <3MW

• Premium + “measures to ensure that generators have no incentive to generate under negative prices”

• Investment aid mentioned (but not explicitly favoured)

• Differentiation on the basis of capacity not on maturity (apart from demonstration projects)

Before 2020, RES remuneration should thus undergo an evolutionary process

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FIP / Green

Certificates

FIT

Investment aid

• Balancing obligations• Technology neutrality• Reducing market

distortions• Tendering of support

The Environment & Energy State Aid Guidelines provide a solid basis and set direction for a market based approach of RES technology development, but allow potential harmful exemptions

Energy, flexibility and capacity are all needed and should be properly valued in a future-proof wholesale market design

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Energy Flexibility Capacity

Efficient dispatch Short term system adequacy

Long term system adequacy

Delivers energy in the most cost-efficient way by having the market define the system’s merit order

Enables the system to respond to short-term variations in the supply/demand balance

Ensures long-term system adequacy e.g., in the case of extreme load peaks or backup intermittent renewable generation

Forward, day-ahead and intraday markets

Day ahead, intraday and balancing markets, ancillary services

Market-based capacity remuneration mechanisms

Ongoing energy market integration with market coupling and cross border intra-day markets (although taking too long)

Energy market integration and cross-border balancing ongoing, grid related services to be developed

Rather separate CRM national initiatives, with an increasing discussion on cross-border participation

Goal

What it does

Market instruments

Where we are today

To maximise cost-efficiency and market orientation, any capacity market should follow a set of fundamental design

features

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Description

• Overarching goal must be generation adequacy (i.e., firm capacity without any other political targets)

• Remunerate plant availability/firm capacity

• Market-based• Technology neutral• Open to new/existing plants• Open to generation/demand response/storage • Open to cross-border participation, while not distorting the

energy market

Goal

Product

The completion of the IEM and coordination of the key elements of market design are crucial for EU energy policy

Geography

Design features

Summary of recommendations

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Enhance market functioning as a

“no regrets” option

• Fully implement a European energy market through integrated forward, intraday, day-ahead and balancing markets to ensure incentives for flexibility, including demand response

• Set up more interconnections between national markets• Remove wholesale price caps and regulated end-user tariffs and other distortions in

wholesale and retail electricity markets

Make RES fit for the market

• Introduce a universal balancing requirement as a first step• Use market procedures such as auctions to make new investments cost-efficient• Adapt existing support schemes and introduce new mechanisms to minimise market

distortion• Post-2020, the ETS should be the main driver for RES investments

Make the market fit for RES

• Capacity markets, where necessary, should be market-based, technology-neutral, open to existing plants and new investments, and equally open to generation, demand and storage

• Decentralised capacity certificates or centralised auctions for capacity are the preferred types of capacity markets

• Adopt a regional instead of national approach to capacity markets• All capacity markets must be open to cross-border participation• Evolve towards a market design that delivers a level playing field for all market

participants and properly values energy, flexibility and capacity