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Page added on February 27, 2014

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Trying to get to a single European electricity market

Alternative Energy

The EU  in February launched its most ambitious market coupling project to date, through which almost 75% of European day-ahead electricity demand is priced using a common calculation. This, and potentially its extension to intraday trading later this year, are major steps forward in achieving a single EU market for electricity. An integrated market is the big goal, one in which cross-border transmission infrastructure and EU generating plant is efficiently used.

The European Commission also hopes that an integrated market will be better able to handle the build-out of renewables, which is the hallmark of the evolving European electricity system. Instead of depressing power prices nationally within Germany, for example, surplus, or ‘wrong-time’ renewable electricity will flow to other EU countries, better matching supply and demand across a much wider market. The Commission hopes that in this way the pressure building for capacity markets all across Europe will be alleviated.

But there are problems — big ones. The first is that market coupling, while necessary for the creation of a single electricity market, is not sufficient. What should occur is price convergence between markets. In the Central-West Europe region market,coupling has been in place since November 2010. Initially it produced good results; prices converged 66% of the time in the first year, according to exchange data. But, in 2012, this figure had fallen to 46% and, in 2013, to just 15%. Market coupling has failed to overcome national supply/demand factors.

This may be temporary, as extent to which market coupling can work is limited by cross-border transmission capacity. German renewables output has grown much faster than the ability to transmit the power surges it produces. More cross-border transmission capacity would help.

But there are bigger problems with the EU’s strategy. First is that market integration dilutes the impact of renewables, which makes high levels of renewable penetration at the national level easier to manage, but it does not solve the underlying problem. As other national markets increase their renewable generating capacity, the problems associated with high levels of renewable penetration will resurface.

These are currently most manifest in the crisis in gas-fired generation in Europe, and it is no exaggeration to use the word crisis. Gas-generating plant is being mothballed across the EU and plants built only a few years ago are being sold for a song. When it comes to renewables, market coupling essentially takes advantage of the different speeds with which renewables have been built out across the EU by different member states.

Second, and just as fundamental, is that the EU has pursued the single EU electricity market for decades. It has been a slow juggernaut, glacially navigating the vested industry interests and national concerns of the EU’s member states. But while it has made its slow progress, environmental priorities have grown, so that the market to be made single no longer looks the way it once did.

The single market ideal is based around an EU-wide competitive wholesale market for conventional generation, but EU power markets have become a hybrid of social levies and Feed-in Tariffs for prioritized renewable electricity. The solution appears to be capacity markets — a solution that no one wants, but one that many believe has become necessary, despite that fact that it will further undermine the wholesale market.

The EU’s build out of renewable energy sources is the world’s most ambitious attempt to address climate change concerns. The problem is that its single market philosophy was dreamed up in another age. Almost every part of its emissions mitigation strategy has depended upon measures that undermine markets. That is perhaps inevitable because markets, even perfect ones, are insular and incapable of addressing externalities without intervention.

The big question now is whether renewables can be shoe-horned into the single market system as it was originally conceived, following their long gestation period of state support. Or, alternatively, whether the market has to change to something quite different, reflecting the fact that it was designed around fuel cost based thermal generation rather than competition between these and zero-fuel cost, variable sources of energy supply.

The evidence would suggest that the EU’s single market philosophy needs a radical re-think before it is completely overtaken by events. Market coupling is desirable, but all it does is buy a little time.


4 Comments on "Trying to get to a single European electricity market"

  1. MSN on Thu, 27th Feb 2014 10:29 pm 

    With renewable tech this shall only worsen 😉 with costs increasing.
    I for one am starting to really like renewable tech, may end up prematurely crashing society when we try to run everything constantly from intermittent resources.
    I’m also going to laugh when renewable prices start increasing (assuming they are subjected to the market) from their feedstock coal oil and gas being part of their production. 🙂

    Lets not mention Germany burning more coal than 1990, figures hurt… don’t they Arthur 🙂

  2. Makati1 on Fri, 28th Feb 2014 1:35 am 

    Another attempt at the impossible. The EU is already breaking apart and the fault lines are beginning to show. Only a matter of time. Like trying to get 27 different species of fish to swim in one school in unison through the oceans … lol.

  3. Jerry L on Fri, 28th Feb 2014 9:35 am 

    Why does no one want a capacity market? Perhaps it is only the big utility companies that don’t want them? Perhaps users of electricity would like the use of capacity markets if they knew that they cold lower their electricity bills? Can someone explain what problems are associated with with capacity markets?

  4. bobinget on Fri, 28th Feb 2014 3:21 pm 

    The earliest ‘renewables’ were built in America’s West. The initial cost for those dams was enormous, it’s true. Because President Roosevelt was able to jam projects through under the guise of Federal Work Projects, (WPA) we in the West seventy years later, enjoy lowest electricity rates in the nation.

    Daily I hear folks say “did you see that beautiful day, outside’? Yes, during droughts we have beautiful full sun days. Sunshine as it turns out is more reliable then
    precipitation. Wait I’ll look to see what April sunshine futures are selling for on Bloomberg… I see seven different quotes for crude oil, spot prices for NG,
    Sugar, Coffee, Lumber, gold, silver and platinum but nothing for sunshine… Just a sec, I know that quote must be with feed stock for wind power turbines…
    I’ll get back to you. Like never.

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