Flexibility Will Be Key To The Power Market Of The Future

Short-term markets will offer traders more opportunities in the future.
Published: Tue 04 Nov 2014

The elements of the EU’s target model for electricity, which should facilitate market integration, and their operationalization through network codes and appropriate regulations need to make the electricity market fit for future developments. This is according to Christian Redl, Senior Associate, Agora Energiewende. Redl will be one of the panelists at an EMART Energy keynote sessions, “Provoking the debate – A new dawn for energy traders?” He adds that it is about cross border coupling of short term markets (day-ahead, intraday and balancing markets), but also long-term cross border markets for transmission rights.

He adds that flexibility will be key to the future power market. “The internal market needs to transmit correct price signals reflecting the actual value of matching supply and demand for electricity. Intraday and balancing markets and their increased integration are therefore key, as well as aligning demand and supply more closely with transmission and distribution infrastructure developments.”

The move from feed-in-tariffs

The move from feed-in-tariffs (FiTs) to feed-in premiums is triggered by the new guidelines on state aid for environmental protection and energy, explains Redl. A feed-in premium (FiP) is a payment renewable generators receive on top of the electricity (wholesale) market price. It can be the outcome of a competitive bidding process, but can also be administratively set. In any case, a FiP is the more market orientated version of a feed-in tariff.

“With increasing shares of (especially variable) renewables, market and system integration becomes key. These will eventually represent a key pillar in European power markets.”

For high shares of renewables, Redl says it is important that the support mechanism does not distort spot market prices. This is especially relevant when a large number of new market actors such as distributed generation enter the market. For instance, this can be achieved by moving from sliding feed-in premia to capacity based premia. “The power market design must facilitate a level playing field for demand side response. Current markets reflect, to a large extent, characteristics of conventional generation thus largely excluding demand side response.

Capacity mechanisms

It is important to note that any new power market design, whether it includes Capacity Renumeration Schemes or mechanisms(CRM) or not, must deliver investment incentives – either for the demand-side, supply-side or storage – to help cope with the technology requirements of the power system, explains Redl.

Wind and solar power’s greater role post-2020 will pose technical issues with regards to flexibility, and a potential mechanism which remunerates capacity should incentivize those technologies best suited to cope with these challenges.

“Treating generation adequacy as a cross-border topic will be of utmost importance – again irrespective whether a CRM is implemented, whereas implications of cross-border participation in CRMs are not fully understood yet,” says Redl.

Future role for traders in Europe

In the power sector, energy-only markets will continue to play a crucial role – even if capacity remuneration mechanisms are potentially implemented in an increasing number of EU Member States, says Redl.

Price signals of energy-only markets are key for coordinating supply and demand. With the further decarbonisation of the European power sector and associated increased flexibility needs, the number of market actors will increase. As a result, short-term markets (day-ahead, intraday and balancing markets) will become more important where traders might find increased opportunities. The relevance of weather forecasts will also gain momentum.

Finally, traders might also assess and incorporate the implications of demand side response in their strategies.