On a single electricity market for Europe

In the second of Mainstream Renewable Power’s opinion pieces for 2015, Eddie O’Connor sets out the need for the European Union to move swiftly to the delivery of a single electricity market as the foundation of its 2030 climate and energy package.

On 2 April this year it was reported that EU state aid regulators will investigate whether Member States are acting unlawfully by creating national capacity markets for electricity. Interestingly, although the move appears to be supported by DGEnergy, it is the Competition Commissioner’s office which is directing this initiative.

David Newbery

In a research paper published in February, David Newbery (pictured right), the distinguished Cambridge University professor of economics reviewed the UK’s newly created capacity market, and argued that, “GB likely over-procured capacity, depressing future wholesale prices, adversely reducing its ability to finance renewables, and undermining the case for needed interconnection”.

One of the consequences of the EU’s 2020 laudable climate and energy package has been to tempt Member State governments to look to national capacity markets to “solve” a perceived flaw in that package. The rapid development of large amounts of new renewable electricity generation on a country by country basis, with very little interconnection, has pushed wholesale electricity prices below the marginal cost of supply, undermining the ability – or willingness – of incumbent utilities to invest. In the UK, and in other EU States, this has led to Ministers giving the go ahead to capacity markets, rather than pushing ahead with connection to their neighbours, to balance supply.

This flaw in the 2020 package – clearly a consequence of reaching targets for renewables penetration on a Member State by Member State basis, should be addressed and eliminated by the 2030 package, which has abandoned the Member State target-led approach, and will seek to deliver an EU-wide solution.

I should insert here that I am a big supporter of the 2020 programme. It has delivered very large amounts of new wind and solar energy across Europe. It has enabled the creation of very many independent power producers like Mainstream, and its predecessor, Airtricity. It has broken the hold of the dominant utilities and driven the more enlightened to reshape themselves to deliver renewables. It has, along with the US and China, driven production at scale, which has led to large falls in the cost of deployment, and ultimately the cost of energy from wind and solar PV. It has shown that bringing forward significant amounts of new electricity generation from variable sources, within electricity systems built for fossil fired generation, is entirely possible and hasn’t broken the grid. It has given encouragement to countries across the world, developed and developing, to embrace renewable energy generation.

However, there are limits and we are now pushing at them. In countries without significant interconnection, the highest penetration of variable generation has paused somewhere between 25% and 30%. The country by country approach has delivered perverse outcomes.

Much of Germany’s 40GW of solar PV should really have been built in Italy or Spain where the capacity factors are higher. The ambition for offshore wind in the UK and Germany, two countries with huge demand and vast offshore potential, has fallen back as the two nations struggle to bring new capacity into constrained marketplaces.

No more electricity islands

Simply put, right now there are too many non despatchable renewable energy systems attached to individual national grids.

In an uncontrolled way, on a blustery day in northern Germany, when it is sunny in the south, there could be 75,000MW of renewable generation being delivered to a grid system where demand is just 60,000MW. So Germany has to splash electricity out across the central and northern European grid systems, in an uncontrolled manner. If they weren’t able to do this then they would have to curtail that renewable generation by at least 15,000MW. This assumes that all nuclear and fossil plant had already been switched out.

This may all seem an academic issue, but it is not. It is having direct consequences on investment in new power generation, and constraining the huge advantages that could be delivered to European consumers through the greater deployment of renewable energy.

One of these consequences is that the “electricity-island” approach of national governments has led to abrupt and in some cases retroactive changes to investment regimes. The focus on reaching 2020 targets means that there is little or no incentive for governments to construct a pathway to the delivery of renewables beyond that date. Even in the UK, with its commitment to 80% emissions reductions by 2050 enshrined in statute, the lack of a 2030 decarbonisation target has severely constrained that country’s short and medium term ambitions. The 2014 UK forward delivery plan halved its 2020 growth trajectory for offshore wind from 20GW to 10GW, and made only fleeting reference to a market beyond the end of the decade.

In electricity planning terms, 2020 is like today, and 2030 tomorrow.

The move to auctions has brought the UK’s offshore companies to a position where they have invested millions of pounds in development with now no guarantee of a return on that investment. The same is true in Germany where the government has reduced its ambitions from 10GW to 6.5GW, and announced its intention to move to auctions as well, effectively sterilising over half that country’s developed offshore projects.

This is unsafe territory. Mishandled, it could severely constrain investment in offshore wind in both countries. Instead of combining to build a global supply of offshore and marine renewables, the two countries could by default deliver relatively small and relatively expensive capacity and surrender the global race to China and the USA.

This may seem like hyperbole, and it overlooks the immediate impact of the 2030 climate and energy package which is already being felt. It also ignores the clear progress in cost reduction and industry collaboration. But, if it is hyperbole, it is based on an essential truth. Even with auction prices of £114/MWhr in the UK and £75/MWhr in Denmark for new offshore wind, we need volume to really deliver the benefits from this generation technology. That is where the 2030 package could have the greatest impact, as it impels Member States to open their electricity markets to regional competition. In those circumstances, and with a realistic carbon price, offshore wind cannot help but be the low carbon technology of choice for markets across Northern Europe through the 2020s.

Forward to 2030

Let us imagine what a 2030 European energy market might look like.

Imagine if Germany were interconnected with the UK, Spain, France and Italy, and to these large population centres would be attached the smaller economies of Denmark, Sweden, Poland, Ireland, Portugal, the Netherlands, and Belgium. In all, a market of some 415 million people.

Potential future EU interconnection through 2020, courtesy of DGEnergy

Potential future EU interconnection through 2020, courtesy of DGEnergy

SolarPV could be built across the south, where it would have twice the output for the same investment as it has in northern Europe.

Electricity would flow freely according to market rules, where the demand was the greatest, and where the quarter hour price was the highest.

The North Sea could be fully exploited for wind energy. Some 200GW could be installed there at average capacity factors of over 50%. As an interesting additional benefit, the construction of this new generation would create large artificial reefs, significantly boosting marine life across those heavily over-fished seas.  Scale effects would be profound at these high levels of offshore wind penetration. The expected price of €100/MWhr in 2020 could be further reduced to €70 by 2030. We are already seeing the price impact of larger turbines, more suitable and larger vessels, and redesigned harbours. This is a huge economic opportunity for Europe’s supply chain.

In this scenario, Poland could even continue to supply balancing coal fired power until 2030, thereby allowing that economy to wean itself off economic dependence on fossil fuels.

In the short term the UK would not have to offer capacity contracts to fossil fired generation. It could rely on gas plant in Germany which currently is being closed because of low utilisation there. How sub-optimal is it for the UK to be offering capacity payments to new generating sets within its borders, when it could build a grid to Germany and access the surplus plant there? The UK customer would be a huge beneficiary of this, as indeed would be the likes of Eon, and RWE which have plants in both jurisdictions.

The variability of wind would be reduced. The weather fronts which arrive, first at Ireland, and then track over the UK, Holland, Belgium and northern Germany, would yield a much firmer supply of power. Imagine all those countries linked in a meshed grid. Under the present regime wind farm output in Germany would be lower before the front arrives. Also under the present, island-only, setup the Irish system rarely has more than 25% of its electricity generated from wind. Now it could have 100%, or indeed any multiple of this. Any surplus would be exported to linked markets. Instead of a peak of weather driven power progressing across Europe, and limited by the island nature of each market, under the big grid scenario a much greater proportion of the energy could be captured. With it, the cost of supplying backup power would be reduced.

Down with risk

A new industry in European wide electricity trading would be introduced. The only selling point would be the cost of the electricity. The genius of the private sector would be unleashed on a sector of the industry not formerly accustomed to it. In the transition to full renewable generation, capacity utilisation would be enhanced as the cheapest fossil fired generators would always be dispatched first, not just on a national basis, but on a continental basis. In addition to the normal legacy generating and grid companies, there could be hundreds of trading entities. They could own no assets, but have a strong impact on for instance, load balancing, optimum dispatching, and in particular planning the best next location for renewable construction.

With European wide access to renewables, external political constraints on access to primary energy sources will be a thing of the past. The overall riskiness of the energy sector will reduce in proportion to the amount of renewable electricity on the system. Lower risk will also lower the average cost over time. This occurs by virtue of the risk premium that attaches to capital investments. The lower the risk, the more debt can be utilised in any project finance. It is axiomatic that most new electrical investments will be delivered using project finance. The more debt the less equity, which costs a multiple of debt. In addition, the coupon paid on the higher percentage of debt will be lowered.

The electricity industry will change dramatically with this kind of grid. There will be literally millions of generators, supplying hundreds of millions of customers. The marginal cost of wind and solar is zero, so a big grid means that all the electricity made from these sources will be used to the full. Grid induced constraints will be a thing of the past.   This is the transition from a one-to-many grid of the present, to a many-to-many grid of the immediate future.

I welcome the noises coming from the EU Commission. We need rapid action to deliver the framework for the 2030 package. I look to next year’s Dutch Presidency to put that framework in place.

Ultimately, Governments are the cause of most risk in the electricity generation business; and, high risk translates into higher prices for the customer. Without a commitment from member state governments to a single electricity market, investors in new generation will continue to add a significant premium for political risk. We have successfully built a single market in a whole range of products and services across the EU. Why should electricity be left out?

No transition without transmission

Going forward, all member state energy scenarios must be irrelevant without Supergrid.

Courtesy of Friends of the Supergrid

Courtesy of Friends of the Supergrid

With the Supergrid we can achieve the second phase of the transition to renewables. This entails moving from 25% to over 50% penetration. While the first phase could be accomplished by piggybacking onto what already existed, in terms of grid and capacity reserve, the second phase requires a revolution in thought. A new master plan, continental in scope, needs to be put in place.

The new master plan will involve political decisions. It is presumed that they can be made, given Europe’s commitment to decarbonisation. In the power area, European politicians have to include two other strategic variables: security of primary energy supply and cost of electricity. It is trite to say it, but all wind and solar belongs to Europe and are secure, and primary wind and solar energy are free. The political decisions for many will centre around two questions: “can I trust my neighbours in the EU” and “can I deal with the vested interests who want to drag their heels and sleep happily behind their national monopolistic boundaries?”

Perhaps this can be done in the context of a new Energy Treaty, but it may not need one. There needs to be a shared regulatory framework across all the countries initially and then across the later stage countries involved in the “Common Energy Market”.

There has to be open access to grids for companies wishing to trade power. Just as the free movement of goods, capital and labour exists today, all barriers to the unconstrained movement of electricity have to be removed.

Once European approval for a new grid connection is made it would seem logical that the private sector be allowed to compete to build it out. Somehow Europe’s TSO monopolies have to be brought into a normal customer orientated business system.

And so Europe can get to over 50% of its electricity demand from renewables using Supergrid, perhaps well above it. How is the remainder to be achieved? This will be the subject of another blog, but suffice it to say at this juncture that electricity storage and smart meters and appliances to adjust demand will play dominant roles.

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One Response to On a single electricity market for Europe

  1. Roger Faulkner April 17, 2015 at 2:18 am #

    Spot on, Eddie as far as it goes. It is worth mentioning that there is more than nationalism/provincialism holding up the development of a European Supergrid. Another big source of resistance comes from environmentalists & outdoor enthusiasts who despise overhead transmission lines. In the past you have said that there are no remaining unsolved technical problems with building an HVDC supergrid, but that is not true. At a minimum, we need a very high transmission capacity HVDC power line that is underground, because the public in Europe will not accept a lot of new overhead lines to create a supergrid. That remains the chief problem to solve before we can have a supergrid. My proposed solution is the elpipe (www.elpipe.com), which enables much higher capacity underground power lines than are feasible with cables, and even higher capacity than the biggest overhead power lines. There are a few other feasible technologies (superconducting lines and gas insulated lines), but for various reasons I believe elpipes are the most practical solution.

    Until we stop pretending that we can shove overhead lines down the public’s throat to build a supergrid, we will continue to be frustrated.

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