MARKET DESIGN AT A CROSSROADS5 April 2016
Stephen Woodhouse
DECARBONISATION IS TRANSFORMING ELECTRICITY MARKETS
Decarbonisation of the electricity sector is central to Europe’s plans to reduce carbon emissions, and this is set to be achieved through wind and solar
· Intermittent and less predictable generating patterns
· Reduced access to dispatchable generation
· Utilisation of existing flexibility➢ Demand side➢ Cross-border trading
· Investibility of electricity assets➢ Stabilise electricity pricing (relation to ETS)➢ Access to hedging markets
· European target model Mark II➢ Reduced time lag from bidding to execution➢ Utilisation of transmission grid➢ Mobilisation of flexibility➢ Improved investibility
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EUROPE IS DEALING WITH INTERLINKED ISSUES, BUT LACK OF POLITICAL COMMITMENT IMPEDES INVESTMENTLack of firm political commitment prevents solutions with investments based on a proper market framework undistorted by renewables and/or capacity support
2030Climate &
Energy Package
Renewables support
GHG emissions:– Binding overall target– Insufficient tightening of the allowance
marketRenewable energy:– Based on supportEnergy efficiency:– 30% reduction in energy use
● General capacity support bites its own tail: Softens electricity prices and increases investment risk
● Targeted capacity support is difficult to design in a reasonable way:
● Restrictions on use of resources?
Capacity support
● Renewables support distorts ETS and electricity market balance
● Sub-optimal operation of renewables adds to the need of flexibility
• Surplus and low prices in both electricity and allowance markets
• Support distorts the market, whether it is harmonised or not
• No investments without support
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‘INTERMITTENCY’ WILL BE A MAJOR CHALLENGE
Wind generation is naturally intermittent, with high pressure, low wind areas covering large areas of Europe at the same time
Weather patterns for 25 December 2006
Generation 22-30 Dec (2030)
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CONVENTIONAL CAPACITY FACES NEW RISKS
Increasing levels of intermittent generation across Europe give rise to both price and volume risk for conventional thermal capacity
Can I invest based on the
spark spread?
• Scarcity pricing politically unacceptable (even if it is economically sound)
• No near-baseload operation• Volume risks• Reliance on scarcity pricing
• Market interventions to protect consumers may seriously distort the market
Is infrequent scarcity pricing a credible basis for investment?
Do traded contracts allow both price and volume risk to be hedged?
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REGULATORY intervention CREATES ‘MISSING MONEY’
Regulatory intervention and other market-impacting measures (e.g. reserve) impact the price formation and/or the volumes traded in the different timeframes
‘Missing money’
Other limits that ‘block’
the arbitrage between market
timeframes and reduce
liquidity
Indirect impact on
prices from upfront
reservation fees
Price caps and other bidding
restrictions
LARGE EUROPEAN UTILITIES ARE SPLITTING
0
40
20
60
100
80
Inde
x va
lue
(reb
ased
to
100)
STOXX Europe Utilities 600
NewCo
Source: Thomson Reuters
The unfavourable market conditions for traditional production capacity has led some utilities companies to split renewables from other energy production
STOXX Europe Utilities 600 development versus benchmarks2014
140Dow Jones Utilities Average
STOXX Europe 600120
2015
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ARE NATIONAL CAPACITY MARKETS THE ANSWER?The response is the development of nationally based CRMs which can (further) distort markets and threaten the coherence of the Internal Market for Electricity
Capacity auctions
Centralised ROs
Centralised ROs
• National CRMs are being introduced, targeting greater investor certainty and generation adequacy
• However, each CRM developed or proposed in Europe is different in design, and there are no workable arrangements yet in place for cross-border participation
• Uncoordinated CRMs risk distorting spot electricity prices, and may harm demand side response, cross-border trading and distort investment decisions
Will national CRMs undermine the goal of the Internal Market for Electricity?
Which of the CRM designs will be accepted by the EC?
What will the EC’s forthcoming market design legislation – scheduled for end 2016 – bring forward?
Capacityobligations
“Scarcitypricing''?
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THE LONGER TERM VISION MUST SHAPE THE MARKETS IN THE SHORTER TERM
Evolution of electricity markets
Short- term
vision
• How to defend cashflows in the short-term?
Medium- term
vision
• Can we invest in generation capacity in the face of market volatility?
Longer- term
vision
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• What is the future of the European electricity system: a market or a centrally planned economy?
ENERGY MARKETS AT A CROSSROADS….
Will the future energy sector be based on
market principles or are we returning to regulated
investments?
How will EU and national policy objectives be
balanced in the future framework? How will
emissions targets and renewables targets be
balanced?
How will we ensure that investment is made in a
timely and efficient manner?
Re-regulation or liberalisation? Rely on European markets and a strong CO2 regime,or build national solutions with government-channelled investment?
What are the consequences for future electricity market design?
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CREATING THE ELECTRICITY TARGET MODEL 2.0Adapting the European electricity target model to fit a world of flexibility
Target model 1.0
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Full cost imbalance pricing to cover
LRMC not just SRMC
Co-optimisation of energy and
reserve/ system services
Recognition of energy options in the
market arrangements
Market based allocation of
network capacity across timeframes
Regional coordination of network planning
and resource adequacy
Coordinated security standards
Regional allocation of congestion revenue
and re-dispatch costs
Coordinated and transparent TSO
protocols in emergency situations
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STATUS OF CAPACITY MARKETS IN EUROPE
GBCapacity auctionsSEM
Ongoing price-based capacity mechanism,
Centralised ROs being developed
FranceCPM rules adopted
Jan 2015; First delivery expected
2017; currently investigated by EC
under state aid rules
Portugal Price-based capacity mechanism for new
units
Spain Current price based capacity mechanism being re-developed
Italy Proposals to replace current mechanism with centralised ROs
GreeceTransitional price based;
enduring capacity obligations; Flexibility
market being discussed (targeted cap payment)
Germany Discussions about
introduction of national capacity mechanisms;
Grid stability reserves in south since 2011
Poland Proposals for new market with capacity mechanism
Sweden & Finland Strategic reserve
supplements energy only market
BelgiumMarket wide CPM auction being discussed; Targeted tender cancelled by EC;Strategic reserve since
2014
5 APRIL 2016