EU Electricity Market Integration- A Work In Progress

The EU has many obstacles to overcome before it can create a fully integrated European electricity market. Here are a few of the issues the region faces.
Published: Wed 27 Feb 2013

The EU must work on issues such as funding, transmission infrastructure for physical interconnectivity, and the integration of renewable energy into the grid this year before it can meet the EU’s ambitious market integration 2014 deadline. Market uncertainty and a lack of coherence between national and European policy could be blocking access to capital in Europe, say analysts.

Thomas Dalsgaard, Executive Vice President of DONG Energy and member of the POWER-GEN Europe advisory board, describes investment in the power sector as “complex.” He explains that there are many national initiatives and subsidies promoting renewables but market-based power production (combined cycle plant, coal-fired plant, and traditional thermal capacity) is not being incentivized and is therefore not receiving investment. In addition to this, the carbon scheme has collapsed which has done nothing for investment either. According to Dalsgaard, the EU currently does not have an internal market for power as an open, interconnected, and integrated European electricity market does not exist. There has been progress in terms of market design, with coupling mechanisms connecting Southern and Northern Europe that are working well and there are some regional initiatives to establish appropriate design rules.

Physical Interconnectivity

Dalsgaard believes that the biggest obstacle that the EU faces is the lack of transmission infrastructure for physical interconnectivity. He says that interconnectivity will create a more efficient market and better investment signals. Without the necessary interconnects, the faster build out of intermittent sources in some countries will not be sustainable in the future. A more proactive and decision-oriented approach is suggested to boost investments in interconnectors and related infrastructure.

Too much political emphasis has been placed on renewables development and targets, with much-needed infrastructure taking a back seat.

As more intermittent power is introduced, the situation becomes more critical as there is no control over when to dispatch it. Also, traditional thermal plants are closing down as they are not competitive. As a result, there will be more renewables but less thermal capacity as backup. This is a pressing challenge for TSOs and policy makers.

A larger physical interconnection system may attract more political focus on aligning the fragmented subsidy schemes and systems within Europe. Dalsgaard suggests: “If you want a cost-efficient transformation, you need better interconnectivity so that there are the right price signals. You also need to have a common CO2 system that works, and a single market for power.”                                                                                                                 

Analysts at ICIS predict the following trends for this year:

Affordability of Renewables

Many countries will question the affordability of additional renewable energy, especially since demand is sluggish across the region.

Capacity Loss

There will be a loss of capacity under the EU large combustion plant directive (LCPD) as three UK coal-fired power plants (total of 4.2GW) will be closing by April this year. In addition, British transmission system operator National Grid's latest transmission entry capacity register shows that a combined 6.2GW of plants have applied to remove transmission connections from 1 April. Most of these fall under the LCPD, while the others are closing due to poor generation economics.

New Pricing System

Details surrounding electricity market reform, including essential strike prices, will emerge throughout 2013. Strike prices will determine the economic viability of low-carbon power generation assets going forwards around, as long-term feed-in tariffs with contracts for difference (FiT CfDs) will depend on these levels.

The new system is designed to boost investment in renewables, nuclear, and further down the line, carbon capture and storage. However, analysts have advised that the mechanism could undermine wholesale power market liquidity because more electricity volumes will be sold via bilateral power purchase agreements. This year will be key to developing a robust Day-ahead price against which FiT CfDs will be settled. The UK's two power exchanges, APX-ENDEX and N2EX, will launch a single Day-ahead UK hub price under the northwest Europe market coupling project. It is hoped that the liquid Day-ahead reference price will boost trade on the forward curve.

The EU continues to work on its third energy package in 2013. Six electricity network codes out of nine are expected to be entering the comitology process or already finalized by the end of this year. Meanwhile, the Commission is expected to give to the European network of transmission system operators for electricity (ENTSO-E) the mandate to start drafting the HVDC and the electricity balancing network codes, which will be the last to be finalized by the end of 2014, together with the forward capacity allocation network code.

In February the European Parliament is expected to vote in favor of a regulation to cut the time taken to grant permits to build cross-border gas and electricity infrastructure. The regulation aims to tighten procedures and boost private infrastructure investments, prioritizing 12 strategic trans-European energy corridors and areas, and providing criteria to identify projects of common interest necessary to implement them. The first list of projects of common interests (PCIs) is expected to be ready by mid-2013, and made public by the end of 2013. New infrastructure is seen as the main way to help manage unplanned flows in Europe.

Energy companies face widespread changes with increased transparency regulation coming into effect over this year. The Regulation for Energy Market Integrity and Transparency (REMIT) requires energy companies to publish information that could affect energy prices

Other legislation aimed at curbing risk in European energy trading is also taking shape over this year, including the Markets in Financial Instruments Directive (MiFID II), which could come into effect by 2014 and its correlated regulation, the Market Abuse Directive.

Engerati Analysis

The transition to a fully integrated electricity market is well on its way to becoming a reality, with policies already taking shape. Once in place, the EU can look forward to better energy security as resources are shared and the consumer will benefit from competitive rates.

Sources                                            

ICS-Electricity market outlook:European markets in 2013-working together?

Metering.com-Reaching European market integration by 2014 is a feasible objective

 

Power Gen Europe-Why interconnectivity is key for Europe’s power market