Implementing the EU’s Electricity Market Design

Photo: euractiv


Whatever the negotiation result of the revision of the electricity market design will be, the agreed framework for “capacity mechanisms” needs to be reviewed regularly due to the changing conditions of the European electricity sector, says Frank Umbach.

Dr Frank Umbach is a research director at the European Centre for Energy and Resource Security (EUCERS), King’s College, London. He is also Adjunct Senior Fellow at the S. Rajaratnam School of International Studies (RSIS), Nanyan Technological University (NTU), Singapore, and Senior Associate at the Centre for European Security Strategies (CESS GmbH), Munich.

During recent months, EU negotiations on the future framework of its electricity market design, including the remuneration for its capacity mechanisms, have intensified. Most questions centre on the future of coal power plants and for how long the EU Member States will be able to remunerate them. It is necessary to underscore against all heated debates that the principal decarbonisation objectives, and the gradual phase-out of coal power plants in the mid- to long-term perspective, have been accepted by all sides. The question is no longer whether the remuneration of coal-fired power plants will end, but only how long and under what conditions these remunerations will be granted.

Back in February 2018, only two weeks after Poland received the Commission’s support and acceptance of its “capacity market” legislation, the European Parliament voted on its position for a new power market design. By proposing stricter rules to implement an ambitious EPS limit of 550g CO2/kWh for power plants, the Parliament intends to end all public funding for future coal power plants. Instead, it seeks to promote a further expansion of natural gas as a cleaner fossil fuel for bridging the transition period to a non-fossil fuel energy system.

The Parliament’s proposals have been criticised for two main reasons:

  • It wants the new standards to be in force already by the end of 2019 for all new power plants (even the ones currently under advanced construction), and five years later for the existing ones, while the Council wants to postpone it to 2025 and 2030 respectively. Therefore, the proposals raise serious concerns with respect to the acquired rights for investors, and to ensuring the security of supply in the Member States concerned.
  • On the other hand, the Parliament’s proposal has exempted the “strategic reserve“ models of Germany and Belgium from the 550g CO2/kWh standard. In consequence, the Parliament has privileged “strategic reserves” over “capacity market” concepts despite the Commission’s traditional preference for technologically-neutral and more market-oriented designs. Therewith, the Parliament has introduced “double standards” for different capacity mechanisms, which is hard to explain.

As several expert workshops have revealed during the last months, Polish concerns are shared by environmental NGOs, energy experts, and other countries. At the beginning of September, six EU Member States – France, Poland, Ireland, the UK, Greece and Hungary – protested against any favourable treatment of the “strategic reserve” schemes vis-à-vis “capacity market mechanisms”. The six Member States defended the use of “different, appropriate solutions” for “different resource adequacy problems and structural issues”. Their position also includes a “suitable and realistic transition period for existing installations that do not yet meet the emissions’ criteria”. At least for their rather new coal-fired power plants, remuneration needs to be extended until 2030 as long as they are needed for their national capacity mechanisms.

On September 4, the European Commission has admitted the “mistake” in its February 2018 state aid decision for Germany’s ”strategic reserves” scheme, and conceded that it won’t make an exception for Germany for future rules of electricity market design that are currently being negotiated within the EU. In this process, the ”mistake” is currently being rectified.

Recommendations for the forthcoming Trilateral Negotiations

Creating an efficient EU’s electricity market with clear, non-discriminatory rules, stable regulatory frameworks, and consistent signals for investors will remain challenging in the future trilateral negotiations between the European Commission, the Parliament and the 28 Member States in the EU Council, even beyond the concluding talks in November or December ahead of the global climate summit in Poland. This will happen for the following reasons:

  • A fair burden-sharing of costs for expanding renewables and switching increasingly from coal to natural gas as a “bridging fuel” needs to take into account the diversity of the Member States’ energy profiles and national energy mixes. “Member States have a fundamental responsibility” to design the most appropriate mechanism to ensure the security of supply and the most cost-efficient decarbonisation strategy and instruments. Both “capacity mechanisms” and “strategic reserve” schemes are usually paid for by end-users in one way or another – and, therefore, need to be accepted by the public and the national governments. Otherwise, neither an effective EU electricity market, nor security of supply, nor cost-effective solutions, nor the intended decarbonisation will be guaranteed – neither on a national nor the European-wide level. Even worse, it could fuel some already-existing re-nationalisation trends within the EU’s energy policies, and anti-EU attitudes in already domestically polarised societies.
  • At the same time, due to the Member States’ responsibility for their national electricity market designs and “capacity market mechanisms” schemes, the overall assessment by the European Network of Transmission System Operators (ENTSO-E) for a coherent implementation of various national “capacity mechanisms” and “strategic reserves” will become ever more important to guarantee a full and cost-efficient functioning of the internal energy market. This coordination function is more needed as cross-border cooperation is considered as a step towards a gradual Europeanisation of the system of national capacity mechanisms and building an efficient as well as coherent European electricity sector.

Taking the above into account, the negotiators should respect the decision taken by the European Commission last February when it accepted the Polish ”capacity mechanism”, as otherwise neither ”legal certainty” nor ”investment security” (which includes ”protection of the acquired rights”)  for companies are guaranteed.

By accepting those agreed and approved “capacity mechanisms”, the European Commission and Member States need to uphold valid capacity contracts to guarantee investment security, and to distinguish the rules that apply to the existing and to the new installations. The six members have agreed on the clear definition for the criteria differentiating the existing and the new installations, which are set out as “the date of the final investment decision relative to the date of entry into force of the Regulation”.

  • The six countries have also demanded a realistic transition towards a “low-emissions electricity system at the lowest cost”. It requires a gradual phase-out of existing installations, making room for the new low-emission installations in a cost-efficient way.

Strategic Perspectives

Whatever the negotiation result of the revision of the electricity market design will be, the agreed framework for “capacity mechanisms” needs to be reviewed regularly due to the changing conditions of the European electricity sector. In this respect, pragmatism and flexibility are more needed than ever.

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