Electricity Markets: The Search for Common Ground
Simon Skillings (1), IGov Advisory Group - 24th April 2013
There is a lot of electricity market reform happening in Europe at the moment. There is also a lot of discussion as to whether these reforms are necessary, inadequate, or simply misguided. However, it is less clear that these discussions represent true engagement regarding a well-defined and well understood set of issues. The territory is littered with terms such as ‘market reform’, ‘market failure’, ‘central planning’, ‘the internal energy market’ and ‘capacity payments’ that are poorly defined and yet seem capable of arousing passionately held beliefs.
Wouldn’t it be great if we could identify some common ground from which to build a coherent pan-European debate? There must be some areas of consensus that we can use to define the challenge we face and help us to explore potential solutions. I would like to propose four statements that provide the foundation for an inclusive electricity market reform discussion.
- The design for renewable support mechanisms needs to evolve as the market share for renewables grows and becomes a large proportion of the overall market.
- As the share of intermittent renewable generation increases, non-renewable generation (e.g. gas-fired power plant) will need to provide a range of services to keep the lights on, such as flexible operation, and providers must be able to forecast the future value of these services.
- Power prices are going to increase and it is important to remove suspicion that energy companies are using price increases as an opportunity to extract excess profits.
- New information and communication technologies present the opportunity that a significant proportion of demand can become price responsive, thereby alleviating security of supply and affordability concerns.
None of these statements should be controversial. They each demand the attention of policy makers seeking ensure that market designs evolve to cope with a changing reality. Those discussions that are currently underway have two interesting characteristics. Firstly, they tend to be national in scope, seeking domestic solutions to domestic problems. Secondly, there is no consensus over the extent to which these issues are best addressed through improving competition and price formation in the market or by prescribing outcomes that must be delivered by some central authority.
What is clear, is that a tapestry of disparate national approaches risks undermining the goal of a truly integrated EU energy market and the considerable cost savings that this can engender. It is, therefore, vital that Member States address their market reform agendas in a European context, opening the door to a full and free sharing of resources to meet future challenges. It is also beholden on the European Commission to recognise the potential limitations of the current Internal Energy Market target model in delivering the level of certainty that investors and national governments seek. This requires a full and frank discussion over the application of State Aid regulations to the energy market and the extent to which it is appropriate for Member States to pursue policies of self-sufficiency/security.
For my part, I find the discussions extraordinarily biased towards the supply side problems. The demand side of the market is a sleeping giant that has the potential to revolutionise the way society thinks about energy. It is simply unsustainable to pursue policies that inflict increasing pain on consumers without holding out the prospect of a better future to which they can aspire. We need a market that encourages the entry of new business that are expert in seeking out and delivering products and services that make lives better – surely the true objective of a competitive, liberalised energy system.
Perhaps this is where we should look to find the common ground.
An edited version of the article first appeared in Public Service Europe http://www.publicserviceeurope.com/article/3356/seeking-consensus-on-electricity-market-reform
(1) Simon Skillings is a Senior Associate with E3G. He is co-author with Markus Beckus from GE of a report launched in Brussels on 17th April entitled ‘Creating New Electricity Markets in Europe to Meet Energy Policy Challenges‘. He is also a Director of Trilemma UK Ltd and an Honorary Fellow at the University of Exeter College of Life and Environmental Sciences and sits on the IGov Advisory Group.