The EU Power Market Design: planning for success, without discrimination

The European Commission’s upcoming proposal for a new design of the electricity market will aim to set the bloc on track for lowering emissions and better integrate more variable renewables. To be sustainable and limit the cost on Europe’s consumers, this proposal will have to be well thought-through. Among the essential consideration, policy makers should recognize that using existing flexibility offered by both gas fired power plant and gas infrastructure combined with renewables can form the core of the electricity system. Also, to achieve a truly integrated power market, they should ensure that subsidies are removed and that all the participants in the electricity market can compete on a level playing field.

Indeed, subsidies for mature technologies should be phased out.  Costs that are currently socialised should instead be targeted at those causing them. This can be done through pricing of carbon emissions as well as charging full value for the provision of flexible plants to balance electricity production and also charging full value for transmission. However, this is only one half of the story.

Another important element is non-discriminatory access to the market for all: no-one should be given priority. Along with the responsibility of bearing their costs, all market participants should also be offered the opportunity to generate revenue by providing services, for example in the balancing markets. Similarly, renewables should not be the only ones to be given priority when curtailments are required – the two go hand-in-hand.

The opening up of the UK gas market in the 1990s is a good example. Initially, new companies entering the market to sell their gas had no responsibility for balancing the system, with the incumbent having to retain responsibility for this. As the market share of the new entrants grew, this position became untenable and they had to take on responsibility of balancing their own portfolios. Crucially, they were also given an equal opportunity to generate revenue from the newly-created balancing market by bidding in flexibility available to them (both on the demand and supply side).

In today’s electricity market, it will be important to put in place incentives on both suppliers and consumers to balance demand and supply by ensuring that the prices emerging when the two don’t match do reflect the real-time cost of the electricity produced to re-balance that relationship. But, given that flexibility will become increasingly crucial, it will be equally important to open balancing markets to all types of electricity sources, with no discrimination.

A few other, more technical things need to be done as soon as possible: the introduction of a reference intraday market price before 2020; the shortening of the gate closure time and making full use of interconnection capacity.  Additionally, a European based approach to system adequacy should be adopted with a consistent approach being taken towards assessing the need for and if necessary the implementation of capacity remuneration mechanisms.

“Achieving a level playing field” is an abused expression – including in Brussels. It is however key here: we need to avoid any misallocation of costs and also any discrimination in terms of market access, if we are serious about ensuring that the power sector is able to further reduce carbon emissions, cost-effectively and without distorting the workings of the EU’s internal market. For the power market reforms to be a success, market participants must wholeheartedly embrace this principle rather than argue for exemptions.

By Malcolm Rice-Jones, Chairman of GasNaturally's Power Generation Task Force