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Europe Needs Hydro Pumped Storage:Five Recommendations--------------------------------------------------------------------------------------------------

A EURELECTRIC Briefing Paper

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Dépôt légal: D/2012/12.105/19

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Europe Needs Hydro Pumped Storage:Five Recommendations--------------------------------------------------------------------------------------------------

EURELECTRIC WG Hydro

ChairKarin SEELOS (NO)

Vice-ChairOtto PIRKER (AT)

Members of the groupIoannis Argyrakis (EL); Vladislav Babkin (RU); Milan Chudy (SK); Gilles Crosnier (FR); Niklas Dahlback (SE);Roberto Gianatti (IT); Patricia Gomez Martin (ES); Edvard G. Gudnason (IS); Kaj Hellsten (FI); Gabriela Kreiss(HU); Igor Nikolov (FYROM); Pia Oesch (FI); Brian o`Mahony (IE); Refik Pala (TUR); Luc Reinig (LU); DieterKreikenbaum (AT); Drago Polak (SI); Nicolaus Romer (DE); Zdenek Saturka (CZ); Vera Stanojevic (RS);Andreas Stettler (CH); Carmen Marin (RO); Jose Carlos Teixeira Freitas (PT); Janusz Lobacz (PL); GhislainWeisrock (FR); Emmanuel BRANCHE (FR); Jesko Jenko (BA); Mathias Timm (DE)

ContactPierre Schlosser - pschlosser@eurelectric.org

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Hydropower: A crucial back-up...

Hydropower is Europe’s major renewables source today. Hydro power is dispatchable, flexibleand cost-efficient. In addition, hydro pumped storage backs up variable generation and deliversimportant system services and acts as an enabler of renewables1.

In particular, conventional reservoir and pumped storage hydropower plants are enablingtechnologies for a well-functioning European electricity system. The additional advantage ofpumped storage plants lies in their dual regulation, since both positive capacity (turbineoperation) as well as negative capacity (pump operation) can be provided within a few minutes.Energy can hence be hydraulically buffered or stored and released as electricity demand rises.

Without hydro power and pumped storage, it would be impossible to meet the EU’s ambitiousRES targets, which imply some 35% of RES-electricity by 2020. This role is set to increasefurther in the future. And there is still available hydro potential to be developed in Europe,amounting to 276 TWh in the EU-27, or 336 TWh if we include Switzerland and Norway2.Investments in hydro- and pumped storage are therefore of vital importance for Europe’senergy transition.

...whose further development is hampered by five obstacles:

Double grid fees and excessive taxation for pumped storage, which is oftentreated both as a generator and as a final consumer;3

Distortion of the level playing field because of discriminatory support for otherstorage technologies;

Claims of pumped storage ownership by transmission system operators (TSOs)are not compatible with unbundling requirements and would imply areregulation of pumped storage;

Trade-offs between environmental legislation and the low-carbon agenda;

Delays in setting up the European Single Energy Market.

EURELECTRIC strongly urges policymakers to remove these five obstacles!

1 A more detailed analysis can be found in EURELECTRIC's extensive report on hydropower, “Hydro in Europe:Powering Renewables” (September 2011), available at www.eurelectric.org/RESAP

2 ibid3 when physically storing the electricity.

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5 recommendations to European and national policymakers

1. Remove double grid fees for pumped storage and consider a European scheme,in conformity with the Third Package

The concern:

Double grid fees hamper the economic operation and further expansion of pumped storage inmajor European countries with hydro potential (e.g. Germany, France, Germany, Austria).

In several EU countries, existing regulation treats pumped storage both as a generation asset(it is hence required to pay a grid fee for transmission grid access) and as a final consumer(requiring it to pay the grid access fee a second time). The map below indicates countrieswhere pumped storage operators have to pay grid fees twice (red) and countries in which gridfees are not borne by generators but by final customers (striped).

Both types of treatment are discriminatory. Pumped storage does not constitute finalelectricity consumption, and it should therefore not be treated as such when setting grid fees(and taxation). Instead, national regulation should exempt pumped storage from grid fees forfinal consumers.

In those countries the profitability of pumped storage assets is sometimes heavily affected,which has a negative impact on the availability of these assets for flexibility purposes. Evenworse, in certain member states these fees risk turning pumped storage assets into strandedassets.

Where is pumped storage subject to discriminatory grid fees?

Source: EURELECTRIC WG Hydro analysis

CY

No Data

No/almost no pumped storage

Pumped storage without double grid fees

Pumped storage with double grid fees

Pumped storage with simple but distortive gridfees

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In certain cases, excessive taxation may also hamper the use of pumped storage facilities.Certain assets in France are subject to more than 40% taxes.

Our proposal:

The Commission should address these issues to raise awareness on the damaging effects ofthe current discriminatory treatment of pumped storage in several member states. The 2012communications on RES strategy and on the internal energy market review provide a uniqueopportunity to do so.

As part of its task to provide an EU-wide harmonised regulatory framework, ACER (the Agencyfor the Cooperation of Energy Regulators) should address the discriminatory treatment ofpumped storage in its Framework Guidelines on balancing, grid connection and grid tariffs andensure that the principle of non-discrimination is properly reflected in the corresponding draftnetwork codes submitted to the Commission for comitology.

Plants withdrawing electricity from the grid with the aim of electrical, chemical, mechanical orthermal storage and re-feeding it with a delay into the transmission or distribution systems arenot final consumers and should be exempted from the obligation to pay grid charges for finalconsumers.

If ACER does not come up with a solution in the near term, the Commission should propose aCommission Guideline on Network Tariffs.

Moreover, it is important that national fiscal frameworks do not hamper pumped storagedevelopment.

2. Establish a level playing field between pumped storage and other storagetechnologies

The concern

There is currently a de facto discrimination in favour of certain storage technologies at theexpense of pumped storage. As an example, the Infrastructure Package includes storagetechnologies, which are eligible for support. Pumped storage is mentioned, but excluded fromsupport.

Our position:

We want storage technologies to compete on a level playing field, with no support given toany storage technology, other than in the form of R&D funds. If other technologies thanpumped storage receive support, the level playing field is distorted.

We would like to recall that pumped storage power plants represent the only large-scaleelectrical energy storage technology available today, which has moreover proved its worth for

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decades. Although this storage technology is the most cost-effective with the highestefficiency, investments in new pumped storage power plants are currently at risk.

Pumped hydro projects do not require financial incentives from national regulatoryauthorities. Instead investments should be driven by well-functioning and undistorted marketsignals for all storage technologies. The introduction of new incentives (as currently foreseenby Article 15 of the proposed regulation on guidelines for trans-European energyinfrastructure) would result in a market distortion.

3. Reaffirm that pumped storage is a competitive, not a regulated business

The concern:The long-established principle that storage assets are generation assets and hence arepart of the liberalised part of the energy sector is increasingly being called into questionby European system operators. In some European countries such as Italy and Spain, transmission system operators(TSOs) have shown an interest in acquiring ownership/operating rights of pumpedstorage. The recently published Annex of the ENTSO-E TYNDP refers to pumped storage as apotentially regulated business that could be run by TSOs.4Our position:Pumped storage plants are electricity generation assets. As such they have to operate in acompetitive and unbundled market environment. Pumped storage ownership claims byTSOs are unjustified and incompatible with the unbundling provisions of the ThirdEnergy Package. While EURELECTRIC recognises TSOs’ increasing needs for balancingand system services to maintain grid stability, we believe that these services should beprovided through market mechanisms and be remunerated on the basis of marketdynamics.

We do not see any evidence as to why pumped storage should be treated as anatural monopoly. The European Commission should support this approach.Pumped storage can and will compete in a market environment, provided a level playingfield with other storage technologies exists (see point 2 above). Policymakers shouldtherefore refrain from introducing discriminatory taxes, fees or regulated costs onpumped storage which distort the level playing field and result in a suboptimal use of andin underinvestment in pumped storage. The basket of services offered by pumped storageshould be remunerated under well-functioning market conditions.

4 It states that “in terms of regulatory issues, open questions are related to which players (private market operatorscontributing to system optimization or regulated operators) shall own and manage storage facilities.” ENTSO-E 10-Year Network Development Plan 2012 Project for Consultation, March 2012 (page 146).

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We call for the removal of all market distortions to pumped storage to make sure thatit can compete on a level playing field with other flexibility/storage solutions. Pumpedhydro storage plant projects have long lead times and require high capital upfront. It istherefore essential that the European Commission and policymakers send appropriatesignals to investors through a stable and consistent long-term regulatory framework.4. Address the trade-offs between environmental legislation and the low-carbon

agenda

The concern:The 2009 Renewables Energy Directive stipulates the need to support “the use of energystorage systems for integrated intermittent production of energy from renewable sources.”Yet regulatory obstacles such as disproportionate implementation and too broadinterpretation of environmental legislation are impeding the further development ofhydropower in Europe.Our position

Policymakers must address the conflicting objectives of the low-carbon agenda andthe environmental agenda.EURELECTRIC acknowledges the important achievements of environmental legislation,from Natura 2000 to the Water Framework Directive (WFD). To nevertheless ensure asustainable perspective on water-use management, the WFD should be applied based on athorough socio-economic cost-benefit analysis that covers the full range of water servicesprovided by hydropower. Since hydropower is a site-specific technology, arbitrationshould take place on a case-by-case basis.We would hence welcome the setting up of a joint DG Energy – DG Environment workinggroup responsible for a harmonised implementation of WFD and RES Directive. We wouldalso be keen to see the Commission improve the socio-economic cost-benefitassessments.

5. Set up the European Single Energy Market without delay

The concern:The establishment of a single energy market in all its dimensions (day-ahead, intra-day,balancing, ancillary services) will contribute to rewarding the flexibility which pumpedstorage assets provide to the power system. A single energy market clearly increasestrading and balancing opportunities for all market players, including pumped storage, andis a precondition for using dispatchable hydro- and pumped storage on a pan-regional andEuropean scale.

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Our positionWe call on the European Commission to speed up the integration of the European internalenergy market and to deliver on a fully-fledged market integration by 2014.

In order to have a sound infrastructure that will underpin a truly European internal energymarket, additional interconnectors will be needed across Europe.This will allow Europe to harness the full potential of pumped storage and to advance itsenergy transition.

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