Energy Economist: Trying to get to a single European electricity market

In this month’s selection from Platts Energy Economist, Ross McCracken looks at why a single European electricity market has a lot of advantages, but why getting to it will be so difficult.

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The EU  in February launched its most ambitious market coupling project to date, through which almost 75% of European day-ahead electricity demand is priced using a common calculation. This, and potentially its extension to intraday trading later this year, are major steps forward in achieving a single EU market for electricity. An integrated market is the big goal, one in which cross-border transmission infrastructure and EU generating plant is efficiently used.

The European Commission also hopes that an integrated market will be better able to handle the build-out of renewables, which is the hallmark of the evolving European electricity system. Instead of depressing power prices nationally within Germany, for example, surplus, or ‘wrong-time’ renewable electricity will flow to other EU countries, better matching supply and demand across a much wider market. The Commission hopes that in this way the pressure building for capacity markets all across Europe will be alleviated.

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But there are problems — big ones. The first is that market coupling, while necessary for the creation of a single electricity market, is not sufficient. What should occur is price convergence between markets. In the Central-West Europe region market,coupling has been in place since November 2010. Initially it produced good results; prices converged 66% of the time in the first year, according to exchange data. But, in 2012, this figure had fallen to 46% and, in 2013, to just 15%. Market coupling has failed to overcome national supply/demand factors.

This may be temporary, as extent to which market coupling can work is limited by cross-border transmission capacity. German renewables output has grown much faster than the ability to transmit the power surges it produces. More cross-border transmission capacity would help.

But there are bigger problems with the EU’s strategy. First is that market integration dilutes the impact of renewables, which makes high levels of renewable penetration at the national level easier to manage, but it does not solve the underlying problem. As other national markets increase their renewable generating capacity, the problems associated with high levels of renewable penetration will resurface.

These are currently most manifest in the crisis in gas-fired generation in Europe, and it is no exaggeration to use the word crisis. Gas-generating plant is being mothballed across the EU and plants built only a few years ago are being sold for a song. When it comes to renewables, market coupling essentially takes advantage of the different speeds with which renewables have been built out across the EU by different member states.

Second, and just as fundamental, is that the EU has pursued the single EU electricity market for decades. It has been a slow juggernaut, glacially navigating the vested industry interests and national concerns of the EU’s member states. But while it has made its slow progress, environmental priorities have grown, so that the market to be made single no longer looks the way it once did.

The single market ideal is based around an EU-wide competitive wholesale market for conventional generation, but EU power markets have become a hybrid of social levies and Feed-in Tariffs for prioritized renewable electricity. The solution appears to be capacity markets — a solution that no one wants, but one that many believe has become necessary, despite that fact that it will further undermine the wholesale market.

The EU’s build out of renewable energy sources is the world’s most ambitious attempt to address climate change concerns. The problem is that its single market philosophy was dreamed up in another age. Almost every part of its emissions mitigation strategy has depended upon measures that undermine markets. That is perhaps inevitable because markets, even perfect ones, are insular and incapable of addressing externalities without intervention.

The big question now is whether renewables can be shoe-horned into the single market system as it was originally conceived, following their long gestation period of state support. Or, alternatively, whether the market has to change to something quite different, reflecting the fact that it was designed around fuel cost based thermal generation rather than competition between these and zero-fuel cost, variable sources of energy supply.

The evidence would suggest that the EU’s single market philosophy needs a radical re-think before it is completely overtaken by events. Market coupling is desirable, but all it does is buy a little time.


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Comments

  1. Ewa at March 5, 2014 7:42 am

    Great article. The first step must be transparency, at the moment energy trading fees are hidden and ofter 5% or more, buyers don’t know how to compare the prices or find an alternative to using consultants, which makes the process time consuming and it is likely to miss the best deal. The software company I am working with has actually taken steps to improve this by creating wholesale price comparison platform where energy companies are bidding to get a contract & no hidden fees. High time for opening up the market if you ask me. http://www.openenergymarket.com

     
  2. Peter Smith at February 28, 2014 1:23 pm

    Declining price convergence is not at all the problem as it is not the primary goal of coupling. Essential objective is to allocate cross-bordert capacities optimally, meaning a 100 per cent. This is achieved even if prices diverge. And if they diverge at 15% as you quote, this is still several 100 times more thant before market coupling, i.e. before November 2010.

     

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