Author: Tronserve admin
Saturday 24th July 2021 10:35 PM
Preparing for the EU’s Power Provisions
By any measure, the European Union’s programs for a completely integrated electrical energy market are ambitious: a single, deregulated electricity market across 28 EU member states and 500 million energy consumers, which meets stringent environmental targets while covering electricity users from supply issues.
It’s been a fairly slow and steady process: Since 1996, many directives have chipped away at monopolistic utilities, providing new business models and new players to challenge incumbents. As most energy suppliers, including fossil fuel, nuclear and renewable, can attest, the electricity market is now all but unrecognizable. To take just one example, industrial and commercial tariffs are practically fully deregulated with feedstock procurement now a market-based activity.
EU initiatives to promote competition, effective price formation and, therefore, more efficient use of electricity itself have largely paid off. Having said that, the market is not without its technical problems. Regulators separated the EU electricity market into bidding zones that assume limitless intra-zone trading opportunities. That has not proved to be the case, and the zonal design is recognized — in any case by academics — as a hurdle to more efficient use of resources.
This system is frequently problematic, as the EU’s decarbonization agenda picks up the pace. More periodic renewables along with the expectation that transport, heating, and industry will all experience greater electrification, needing substantial new infrastructure. Considering how best to direct investment toward storage, demand response, more interconnection and distributed energy resources, exposes the cracks in the current scheme.
A Proposal for Change
Market redesign has therefore moved from academia and onto the political agenda in the form of the lately approved Electricity Regulation and Directives. These new power market provisions establish how the EU plans to make energy markets more consumer-focused and reiterate their engagement to a well-functioning, competitive and undistorted market which is compliment for purpose.
The new directive contains legal principles for price formation and for trading electricity on balancing, intraday, day-ahead, and forward markets. Specific measures allow at least 70 percent of trade capacity to cross borders, making it simpler to trade renewable energy.
There are also measures designed to convince more “prosumers”—energy users who also produce their own supply, which has implications for high energy users who have developed their own generation capacity. They additionally establish the means to phase out subsidies of fossil fuel-powered power stations that are kept on standby.
If all these measures get their goals, then the market will be transformed once more: not just for utilities and energy suppliers, but for their domestic, commercial and industrial customers, at the same time.
Caps, Carbon, and Capacity
However, success is not even close to guaranteed. Market players, commentators, analysts and policymakers have weighed in, generating more heat than light. Partial excretion of price caps, treatment of renewables under “priority dispatch” mechanisms, and TSO’s role in cross-border provision are all subject of debate. Though, it is capacity markets and strategic reserves that are proving particularly contentious.
Europe’s market, in essence, is recently energy only (an EoM). Absent regulatory or political interference, an EoM allows wholesale energy prices to elevate when resources are scarce — reflecting the value society places on uninterrupted supply.
However, a number of EU member states do currently not trust the market to keep the lights on. They like capacity mechanisms and strategic reserves to control their political and technical issues. The schemes fluctuate, but the principle is identical: paying for standby supply — just in case.
For every expert that indicates that capacity markets protect wholesale energy buyers from exposure to the true marginal cost of power, another cites the distorting effect on price signals and the negative impact on cross-border trade.
In these debates, experts oftentimes cite Texas’s ERCOT model as evidence of an EoM that can make sure dependable supply without exposing customers to intolerable levels of volatility and risk. In Texas, suppliers enter into bilateral contracting to manage market risks and create a cushion between buyers and the market. Those consumers can then choose how and whether to manage their exposure to energy price volatility — including the use of CTRM systems.
However, the two instances may not be directly comparable. The EU is attempting to integrate 28 disparate systems that depend on diverse energy sources and were already at different stages of deregulation and differing societal expectations.
In other words, it’s a political problem as much as anything else. Experts on the Nordic States, like for example, advise that balancing demand and supply without capacity markets is perfectly possible because those countries have accepted that they are dependent on each other. The rest of the EU is not quite there.
You’re in the Market Now
All this ensures that anticipating the final outcome of the current regulatory upheaval is closer to spinning a roulette wheel than many would like to acknowledge — mainly as the European Parliament goes to the polls in May and European Commission personnel will change from November. Nor is it obvious whether “pure” energy pricing is yet politically and socially viable.
This is maybe the most helpful strategy to view next-generation energy trading and risk management (ETRM) systems: as navigation tools that provide position visibility, risk management, controls, regulatory compliance and clarity when buying, selling, producing, using and accounting for electricity. Putting transparency, digitalization, data and advanced analytics in the hands of energy market participants enables relevant, compliant and informed decision making when it is needed most: as the EU energy market transforms itself once more. That’s the real power of next-generation ETRM systems.
This article is originally posted on manufacturing.net