1. Can markets and RES coexist?
Market4RES Workshop
Post 2020 framework -
Can markets and RES coexist?
Dr. Oliver Koch Deputy Head of Unit
DG Energy Unit B.2 – Internal Market II
Wholesale markets; electricity & gas
28. April 2014
This presentation replects solely the personal views
of the author and does not bind the EU Commission

2. IEM is at a tipping point

3. Markets are integrated: EU-Power Grid
Scheerer (2012)

4. Markets are integrated: Market Coupling
Optimised capacity calculation
EU-wide aggregation of bids and offers 4

5. Renewables need aggregation

6. Shrinking role for energy markets
RES Support
Government (national)
Wholesale price
Market (EU)
System costs
Government (monopolies) (national)

7. Shrinking role for energy markets
Government (national)
RES Support
RES Support
Wholesale price
Wholesale price
Market (EU)
Market (EU)
Potential for cascade of „mee too“ subsidies, export / import restrictions
intenal market (art 28/34); PSO – State AId
System
costs
System
costs
Government / monopolies (national)

8. => “2030“ Process Issue: Coordination of RES and CO2 policies
Created
=> “2030“ Process
COM consultation – report to EU Council
Decision 2014/2015 ?

9. "State Interventions" Package: Key messages
Future EU Market Design
"State Interventions" Package: Key messages
More cross-border
More market-based
Competition between technologies

10. Market integration: support schemes
Phase in market exposure:
Competitive allocation mechanisms
Mechanism to reflect degree of maturity of technology
Competition among RES – technology development
Minimise impact on production decision
Feed-in tariff
Premium
Quota

11. Market Integration: RES and power market rules
Phase in equal treatment:
Balancing obligations
Bearing of grid costs
Dispatching rules
Different degrees of harmonisation for all users

12. Neben Finanzmarktkrise DAS Thema

13. Security of supply

14. Uncoordinated national interventions are a threat to the Internal Energy Market
Source ENTSO-E
Since 2011, the focus of the debate on energy markets has often shifted away from getting the basic market mechanism right and setting the correct preconditions for it to function. Whilst the work on this mechanism continued amongst experts, efforts at political level have had to be re-directed at preventing damage being done to the young market rather than reinforcing it. The November 2013 Public Intervention Package points at Member States' pivotal role in making the market a success rather than intentionally or unintentionally damaging it.
Member States must reduce and limit their interventions to what is really necessary. They should realise that they are mutually dependent when it comes to maintaining jobs in energy intensive industries or in ensuring generation adequacy and security of supply. Uncoordinated actions can weaken or even destroy the Internal Energy Market.

15. Cooperation in parallel supply crisis?

16. Issue: Will merit curve survive?
Wholesale Market Design
Issues
Issue: Will merit curve survive?
Somm say: no problem, 90% of market is forward trading, not via spot – really true?
Some say we need adapt market design to RES-reality – determine the right price for RES “design markets”
Shouldn’t rather RES and other subsidised technologies adapt to market?
Also: are negative prices good or bad, etc…

17. Future EU Market Design-
Issues

18. "Market Design" discussion
Future EU Market Design
Wholesale Target Model
Technical balancing,
ancillary service
ETS CO2 price
State interventions RES etc.
Generation Adequacy
+Flexibility?
"Market Design" discussion
EU ? Regional ? National?
State- "designed" trading?
Definition of what is "Market Design" is far from being clear. Broad approach (almost all issues discussed in energy policy are market design relevant); important.
But: also necessary to focus then on specific issues, otheriwse risk that discussion remains vague and general.
Market design an be:
1. Wholesale market design ("energy only"?, trading timeframes, maybe ancillary services);
2/3 In reality: RES / ETS discussion: Key importance! But not in focus – other process (2030); state interventions discussed separately.
4. "Technical" market design: how will alrogrithm be calculated (balancing), ancillary services, etc.
5. For many: Market design = "energy only" vs. capacity mechanisms. Adequacy – LT investment signals – flexibility (same different – address it separately?)
6. (!) specific in EU: impact of national / regional solutions in an integrated electricity market with meshed grids and cross-border pricing? (int literature is of limited value in this respect
7. Demand Side design: industry – household DSR; Smart grids, flexibility, DSO/TSO, etc.
8. Link to gas (supply crises, CCGT phase out), transport, heating
9. Legislative approach: self-regulation vs legislation (see market coupling implementation)
10. Market Design for many: state designs market (cap needs, adequate prices for RES, nuclear, etc. …)
Self regulation/
legislation
Demand Side participation
Link to Gas, Transport, Heating

19. 2014 Target Model: Outdated?
Future EU Market Design
2014 Target Model: MODERN!
2014 Target Model: Outdated?
Is target model somewhat outdated?
It's not! It IS a new market design (not only market coupling and grid operation - more in it than most are aware of, from joint adequacy assessment,solutions for cross-border SoS/ re-dispatch, for loop flow problems, more demand repsonse etc.)

20. Need for new Market Design?
1. Preserve market path – give ongoing harmonisation a chance !

21. Need for new Market Design?
2. Scope for finetuning?
Flexibility – demand response - hedging
Will flexibility markets evolve?
Will DRS kick off?
Need to finetune target model (options markets, etc.)
Adequacy: guidance needed?
Adequacy assessment
C/B-openness
Protection levels / solidarity

22. Need for new Market Design?
2. Scope for finetuning?
System operation – IEM with fragmented TSOs?
Fragmented system operation – capacity calculation
CASC/CAO – CORESO - SSC - TSC = enough?
EU ISO needed?
Governance:
Role of ENTSO-E – EU or national perspective?
Role of ACER : EU or national perspective?
3rd package "bottom up" approach – suffient?

23. Making the Internal Energy Market Work
2011
The Heads of State of Government recognized the importance of having an internal energy market in place and set a clear deadline for its completion by 2014
2012
Report "Making the Internal Energy Market work" published by the European Commission assessing the state of the internal energy market
In the last years, our common vision that energy markets can function and deliver what society needs has increasingly come under attack, sometimes in words but most often in deed. In 2011, Heads of State and Government agreed to set the deadline to complete the EU internal energy market by 2014.
In November 2012, the European Commission reported exhaustively on the state of the internal energy market, taking stock at what has been achieved and identifying the main challenges for the future. The challenges were related firstly to need to implement and apply existing legislation, secondly to make our energy systems fit for low carbon future and thirdly to the consumer at the center stage.
As the deadline set by the Heads of State and Government approaches, it is not only necessary to finalise the detailed technical rules required to integrate our energy markets across borders, but also to reiterate once more that market functioning in the energy sector is ultimately the only realistic tool to achieve our common policy objectives. Therefore, 18 month on the Commission will once again report on the progress reached in completing the internal energy market.
June 2014
European Commission will report on the progress reached in completing the internal energy market

24. Thank you very much for your attention
Dr. Oliver Koch
Deputy Head of Unit
European Commission
DG Energy
Unit B-2 (Internal Market II: Wholesale; gas & electricity)
DM 24 – 6/117
Brussels/Belgium

25. Long-term: new legislation?
Commission Toolbox:
Advocacy
(e.g. communication on state interventions)
TFEU
Art 28?
Procurement? …
3rd Package
"PSO?
Art 3 E-Reg …
COMP Law
GBER
EEAG
Art 102/106?
Long-term: new legislation?
"2030" discussion – revised targets ?

26. Outlook …but: decisions need to be taken at one stage!
Next years = decisive
- Will “consensus approach” work?
- More COM intervention / harmonisation needed?

27. Issue: who decides about the “gap”?
Wholesale Market Design
Issues
Perceived security of supply concerns
Issue: who decides about the “gap”?
Central adequacy decision/estimation? (most got it wrong, even in more stable times…)
Decentral or fully market-based decision on what is needed possible? (e.g. BDEW approach?)

28. (Key) issue in EU: How to avoid fragmented solutions?
Wholesale Market Design
Issues
(Key) issue in EU: How to avoid fragmented solutions?
How to organise cross-border
co-operation on security of supply?
Technical dimension
Political dimension
Everybo´dy seems to agree "we need more C/B cooperation in SoS"; however: Can we show that we can technically organise it? Do you trust in it?
As in "RES" debate: why should we pay for neighbours?
=> Aequacy: can we rely on neighbors?
Also technically: CB may not be as easy as it may seem under current target model
Fragmented solutions: not only "incomplete", but distortive – every national-only SoS system is de facto distoritive

29. Technical dimension How to organise cross-border
Wholesale Market Design
Issues
How to organise cross-border
co-operation in security of supply matters ?
Technical dimension
C/B adequacy planning - in practice?
C/B capacity/capability/flexibility ‘markets’
Common definitions (products)
Common procedures (tender, auction, cap ticket,…)
Physical long-term reservations/PTRs needed?
Definitions: Which product to be certified: capacity? capability? Flexibility? Great variety if one looks into proposals
Procedures: central certifications (of what? Cap tickets, etc., different standards)
PTRs needed? Some say yes, some say no…again: can market coupling/implicit auctions/intraday solve the trick? (even with different "supply standards")

30. Political dimension How to organise cross-border
Wholesale Market Design
Issues
How to organise cross-border
co-operation in security of supply matters ?
Political dimension
Parallel supply crisis: what happens?
Upfront agreement on load shedding rules?
=> Can Member States rely on neighbours?
No common load sheeding standard; would it be realistic to try?
If different standards –how to share scarce resouces in time of crisis?

31. Issue: Allocation of "flexibility risk"
Wholesale Market Design
Issues
Issue: Allocation of "flexibility risk"
Fair balancing responsibility for RES ? How?
Additional "backup" responsibility needed?
Will full balancing responsibility (see State interventions package) and intraday markets be sufficient? Will intraday and balancing be sufficient as "backup" for intermittent energy?
If not: do consumers or intermittent generators pay for backup costs?
Not to mention: Redispatching debate, grid connection debate (see State Interventions Package)?

32. Issue: Fair demand side participation
Wholesale Market Design
Issues
Issue: Fair demand side participation
Is model neutral to supply and demand solutions?
Does it maximise potential flexibility, storage, DSR, energy efficiency ?
Fair balance between DSOs/TSOs
How can we ensure that established generation and demand side (big & small) can participate at equal footing)?