The hills are alive with the sound of wind turbines, as the push to decarbonize the EU power sector by 2050 starts to bite. The success of renewable electricity — a record €26 billion was invested in new wind power capacity alone in the EU in 2015 — is having profound impacts on the rest of the market.
Wind power is now the EU’s third-largest generation source by installed capacity, with 142 GW or a 15.6% share, overtaking hydropower for the first time, according to the latest figures from the European Wind Energy Association. Gas and coal still dominate for now with 192 GW and 159 GW respectively, but the growth is all in renewables.
The share of renewable energy, including for heat, grew in 24 of the 28 EU countries in 2014, according to the latest figures from Eurostat, the EU’s statistical office, and the EU is on track to meet its binding 2020 target to source 20% of its final energy demand from renewables. That’s likely to mean an estimated 35% share for renewables in electricity, rising to around 50% by 2030, when the EU wants to source at least 27% of its final energy demand from renewables.
This is a success story in that national governments chose to support renewables with national state aid to ensure they would — most of them — meet their binding 2020 national renewables targets. But it also creates a problem for the rest of the market rather more serious than how to handle a young, singing nun called Maria.
That’s because renewables have very low marginal costs to produce. And adding them to an already generally oversupplied European power market has helped push down average wholesale electricity prices to new lows, removing any price signal for long-term investment in any other generation technology.
This makes a lot of EU governments worry that there won’t be any back-up generation available when the sun doesn’t shine or the wind doesn’t blow, or simply to cover winter peak demand. Their solution? Setting up national capacity remuneration mechanisms — another form of state support — to make sure capacity is there when it’s needed. You can hear more on the rise in state aid to electricity markets in this Platts Gas & Power Watch video.
It’s safe to say that national capacity mechanisms are not one of the European Commission’s favorite things. After 18 years of pushing governments to break down national barriers and create a single EU electricity market — still a work in progress — yet another policy with national in the title does not go down well with the EU’s executive body.
But the commission has no plans to say so long, farewell, auf Wiedersehen or adieu yet to its hopes for an integrated EU electricity market. It is working on new market design legislation that it plans to unveil before the end of the year, which is expected to include changes to the EU’s directives on renewable energy and cross-border electricity trading, as well as new rules on electricity supply security.
A few of the commission’s favorite things here include promoting EU-wide intraday and balancing markets, demand side response and regional cooperation. It also plans to propose a European or regional framework for capacity mechanisms, so that they do not lock in higher carbon generation choices, or reinforce dominant incumbents, or exclusively reward national generation, ignoring cross-border options and demand side response.
EU legislation usually takes a couple of years to agree, and often a few more to implement, so it could be 2020 before any of this is in place officially. Meanwhile industry is working on several initiatives that cover similar ground — a much-delayed cross-border intraday market is due to go live finally next year, for example, while EU power grid operators committed late last year to increase their regional coordination to cope with the increasing share of variable renewables.
If the EU fails to make an electricity market dominated by decentralized, variable renewables work, it’s hard to see how it will meet its 2050 goal to decarbonize. New nuclear plants in Europe continue to struggle to be completed — or in the case of the UK’s Hinkley Point C project, even started. And fossil fuel generation can only be zero emission with carbon capture and storage technology — which shows no sign of being commercialized any time soon.
Given how keen the commission is on the EU being a leader on combating global climate change and championing the new UN Paris climate agreement, not to mention commission president Jean-Claude Juncker’s dream of the EU being a global leader in renewables, there’s a lot of pressure to come up with a new market design that works.