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The European electricity market: this radical reform that could change everything

European Commission President Ursula von der Leyen informed MEPs on June 8 that a radical reform of the electricity market was wanted. for him, “The electricity market not works and radical reforms are wanted to handle all of the challenges posed by the structural transformation related to the low-carbon transition. […]. It should adapt to the brand new actuality of dominant renewable vitality (RE) as a result of the electricity market was designed twenty years in the past when renewable energies have been marginal.

Faced with a disaster in electricity costs linked to the gasoline market, Emmanuel Macron on June 28 advocated a totally completely different restructuring of the European electricity market, suggesting a fixing “absurd” Its worth in a rustic with a predominantly nuclear and hydroelectric fleet, with futures costs for 2023 at 1,100 euros per megawatt, to not point out the acute worth peak on the finish of August, dates speculators betting on the weak spot of nuclear manufacturing.

The that means of such market reforms stays to be clarified in view of the assorted challenges related to the transformation of electricity programs, particularly:

  • defending shoppers, each households and producers, in opposition to the danger of a chronic worth disaster, which is a precedence in France, however a lot much less so in Berlin and Brussels;
  • Effective improvement of low-carbon, intermittent renewable vitality (ENRi), wind and photo voltaic photovoltaics, but additionally nuclear applied sciences in about ten Member States;
  • Maintaining safety of provide is compromised by shutting down many controllable manufacturing traces.

Flaws in market design for low-carbon transitions

Because of its specificity, significantly its non-conservability, electricity is a really particular good, with markets essentially structured on an hourly foundation. Through the competitors sport, producers are guided to align their worth affords hourly on the price of gasoline for every bit of kit to present themselves the perfect likelihood of being chosen. In this scheme, not like tariffs within the monopolistic context, there isn’t any motive why common annual costs ought to align with the typical full price of the technique of manufacturing.

Furthermore, excessive worth volatility makes long-term forecasting unattainable for potential buyers, particularly in capital-intensive low carbon tools with lengthy life cycles (a number of a long time) resembling nuclear energy, offshore wind energy or hydropower. In addition, ENRi is required for safety of provide and system stability, improvement of flexibility means (community, storage, interconnection, electrolyzer, gasoline turbine), many tools with excessive fastened prices the place there aren’t any buyers, steady and no certainty of earlier revenue streams in numerous markets related to electrical energy. .

Follow earlier market design changes

To handle the challenges of safety of provide and vitality switch, the market structure has already modified by including varied patches. For safety of provide, a number of European international locations put in place measures for remunerative capability (and never vitality) within the 2010s. Some that are primarily based on long-term contracts, resembling within the United Kingdom, Italy and partly in France, have confirmed to be only in encouraging producers to speculate. It is anticipated that the scope of those contract-based schemes will increase to sources of flexibility

To guarantee the event of ENRi, which is very aggressive right now, most international locations have carried out agreements guaranteeing their long-term revenue. Since 2017, they’ve been impressed by these carried out within the United Kingdom since 2013, resembling monetary contracts with the state, “contracts for distinction” (CfD), that are auctioned. They have been prolonged to nuclear initiatives, however by way of negotiations.

In these contracts, a reference worth is fastened, which covers the fastened prices of the ENRi producer. Committed to such contracts, the latter collects or distributes the distinction between the hourly market worth and this reference worth, relying on whether or not the primary is larger or decrease than the second. This is the precept of the Contract for Additional Compensation (CCR) which has succeeded within the feed-in tariff for giant renewable vitality installations within the EU.

The resolution to be adopted to speed up the transition is to multiply these contracts awarded by way of auctions with builders of ENRs by accelerating their frequency. The spot market is retained to stability the system hourly and to arrange exchanges between international locations, to satisfy investor demand for long-term worth indicators that enable low-carbon funding and to set off sources of flexibility (together with combining with the gasoline sector for inexperienced hydrogen manufacturing ).

This is the path of reflection that is at present being carried out in Germany throughout the framework of the platform “Towards a climate-neutral electricity system” established by the Ministry of Economy (see for instance the proposal for Agora-Energiewende 2022). But there isn’t any recognition of the necessity for a capability system, to which Germany appears hostile, or of the curiosity in guaranteeing a sure stability within the gross sales worth provide, when the hourly worth of electricity usually relies on the worth of fossil fuels. gasoline and CO2 Because the interval of average wind is almost all (this we have now noticed all summer time).

Purpose of client safety

Restructuring France’s “market design” has the identical goal, however with the priority of discovering an answer to make sure steady and average costs for shoppers, reflecting the growing provide by low cost renewable vitality sources and nuclear energy, with out these latter having to bear. The results of the episode of excessive gasoline costs.

The market structure resolution should result in a technique of defining the ultimate gross sales worth that is easy, constant and according to the long-term price of all tools, and ship a long-term worth sign to all producers, not simply renewable vitality, to encourage them. funding

In an article in Energy Review (June 2022, n°662) we have now designed such an electricity market mannequin, which we name the central long-term purchaser mannequin. This public entity shall be accountable for concluding CfD contracts with all producers (ENR, nuclear, fossil fuels), aggregating them and promoting nearly all wholesale electricity to suppliers and enormous shoppers at costs according to long-term prices. End of all methods. It provides to the present “market design” consisting of a long-term market centrally organized by a public middleman.

Centralized long-term patrons, a coherent resolution

The unbiased public entity to be put in should carry out a number of capabilities:

  • sharing funding and market danger with producers by way of CFD-type contracts for every instrument (and probably by way of bodily contracts);
  • Organization of long-term markets for awarding contracts by way of auctions to keep up aggressive strain, and that by sort of know-how;
  • Short-term market purchases of most bodily electricity in accordance with monetary contracts signed with producers, understanding that the hourly market at all times ensures short-term coordination and financial integration with different programs. For a producer, by combining revenue from spot gross sales and contracts for distinction (CfD) with businesses, the brand new producer has a assured revenue stream that will allow him to speculate for the long run.
  • Sale of all electricity acquired to suppliers at a sale worth commensurate with long-term consumption, the definition of which shall be decided by the regulator. Suppliers, who’re equipped on a uniform and clear foundation, compete on the idea of their costs and repair choices, contributing to system flexibility.

France’s adoption of this mannequin would restore actual financial and institutional coherence to the electricity sector.

This new market mannequin will reply coherently to the three predominant goals of accelerating vitality transition, safety of provide and client safety. It could be reputable to grow to be an open selection possibility for Member States, particularly those that need to pursue a transition technique open to all low-carbon applied sciences, nuclear and renewable vitality, particularly since it isn’t opposite to necessity. Short-term exchanges with European guidelines, completely different programs, proceed to function on a aggressive foundation inside a extremely built-in spot market.

What about France?

France’s adoption of this mannequin would restore actual financial and institutional coherence to the electricity sector. The reform will reply each to criticism of the unclear mechanism for setting electricity costs and to the necessity for clear affirmation by the Prime Minister earlier than deputies on July 6, so that France can train its sovereignty over vitality selections. , which it did first by renationalizing EDF.

This adoption may also resolve the issue of renewing the Regulated Access to Historic Nuclear Electricity (ARENH) system in 2025 as truthful competitors shall be established between all suppliers and EDF Commerce within the retail market. In addition, since this competitors relies on remaining costs according to the long-term price of the electricity combine, it can not be vital to make use of a regulated gross sales tariff (TRV) for residential and third-party prospects, opposite to Article 5 of the Electricity Directive which prohibits any worth regulation apart from social causes. prohibits

An unbiased public company with business standing shall be created, with capabilities impressed by the British physique LCCC (Low Carbon Contracts Company) which brings collectively all CfD contracts signed with renewable vitality and nuclear producers throughout the Channel. Renationalisation is not going to clear up the present issues if it isn’t accompanied by an overhaul of the electricity market and competitors guidelines on the European degree as proposed right here, a situation lately renationalised by a financier from Standard & Poor’s for the restoration of EDF. ranking

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