At the June meeting of the Florence Electricity Regulatory Forum, the European Commission informally presented its current thinking on the reform of EU electricity markets. The presentations and conclusions provide some useful additional pointers to the structure and content of the package of measures that the Commission is expected to propose towards the end of this year as its "new electricity market design".
The latest Florence Electricity Forum, which met on 13 and 14 June, covered a very wide range of topics. Of particular interest were presentations by Commission officials on "Upgrading the wholesale market" and "Reform of EU balancing rules". As usual, the presentations were expressed to represent the personal views of their authors rather than the official views of the Commission but they nevertheless provide a useful view of the current policy direction. They follow the speech by EU Energy Commissioner Cañete at the Florence Forum in March this year outlining at a very high level some of the issues that would be covered. In this note, we summarise the key issues that seem likely to be covered, and also identify which pieces of current legislation will be amended.
The Commission divided the issues into 4 groups: locational elements, tariffs and incentives, "level playing field" and short-term markets. It appears that they will be addressed by a combination of revisions to the third package legislation, Directive 2009/72 and Regulation 714/2009, the proposed EU Electricity Balancing Guideline (one of the EU network codes) and presumably accompanying guidance and other measures. The revised Renewable Energy Sources (RES) Directive 2009/28 will also form part of the package. At the same time, it is not clear how the Commission's Competition Directorate-General, DG COMP, will present the results of its state aid sector inquiry into electricity capacity mechanisms. Some integration and coordination is almost certain.
The Commission noted that only 32% of congestion income received from price differences between bidding zones in 2014 was applied to maintaining or increasing interconnection capacity. It outlined the potential to increase investment in capacity by amending the relevant provisions of Regulation 714/2009. This is presumably a reference to Article 16(6) of Regulation 714/2009, which requires interconnector revenues to be used for guaranteeing availability and/or maintaining or increasing capacity. Only if they cannot efficiently be used for those purposes can they be applied to national tariffs. It therefore seems likely that the Commission will propose a revision of Article 16(6) – either changing the order of priorities so that investment stands alone, or tightening the criteria for using the revenue for tariff reduction.
ACER's 2015 market monitoring report indicated that the available capacity on many interconnectors was significantly below their thermal capacity. It also noted that interconnection is limited in order to solve internal congestion on 56% of interconnectors. The Commission noted that this is contrary to Annex I, point 1.7 of Regulation 714/2009, which provides that "TSOs shall not limit interconnection capacity in order to solve congestion inside their own control area, save for [reasons of cost-effectiveness and minimisation of negative impacts on the internal market in electricity] and reasons of operational security. The Commission is apparently considering reinforcing these provisions in order to maximise cross-border capacity. This might involve defining the permitted exceptions more clearly than at present.
Finally in this category, the Commission referred to bidding zone configuration. The Capacity Allocation and Congestion Management Guideline, Regulation 2015/1222 (CACM), sets out a process for the definition of bidding zones. The Commission is concerned that the current process will not properly reflect network congestion, and appears to be contemplating a revision of CACM to improve the decision-making process. Meanwhile, ACER has just started a process of defining capacity calculation regions in accordance with Article 15(1) of CACM, following the failure of national energy regulators to reach agreement on this issue. This process will also expressly address the definition of bidding zones, and in particular the controversial question of the possible definition of a bidding zone border between Germany/Luxembourg and Austria.
Tariffs and incentives
The Commission noted the wide variation in the design of transmission tariffs across the EU (with significant differences as to both the basis and level of charging). It sees this as having the potential to distort investment in generation, and highlighted the need to clarify the framework and start to remove the distortions. However, this appears to ignore the fact that as recently as December 2015 ACER noted the findings of its consultants that "the distortions are not evident at the moment and highly uncertain in the future, and the evidence and associated impact are not easily identifiable or are not material", and therefore concluded that existing rules set out in Regulation 714, Regulation 838/2010 and amendments currently proposed in ACER Opinion 09/204 would be sufficient, and that therefore no Network Code was needed. Unless the Commission simply means that it will implement the principles set out in Opinion 09/204, it seems likely to propose measures in this area, whether consisting of the start of a process to develop a transmission charges Network Code, or the amendment of Regulation 714/2009.
Level playing field
The Commission referred to a number of issues under the heading of a level playing field. In particular, this relates to the equal treatment of different technologies. So to supplement existing rules in the Energy Efficiency Directive ensuring non-discriminatory treatment of demand side resources, the Commission appears likely to propose more detailed rules specifically aimed at demand response. These would include a common EU framework for demand response aggregators, giving consumers the right to contract with aggregators without needing the prior consent of their suppliers, financial arrangements (presumably providing for settlement as between the aggregator and the supplier) and data access. The Commission also appears to be considering giving aggregated loads and flexibility products access to balancing, wholesale and capacity markets. New rules might also give consumers the right to a smart meter and/or a dynamic electricity price contract. These seem most likely to be adopted in the form of an amendment to Directive 2009/72.
The Commission also mentions under this heading curtailment rules, balance responsibility, connection rules and priority dispatch. Its objective seems to be to ensure that renewables are treated in the same way as conventional generators: that they have the same balancing responsibilities, that they are no longer entitled to priority dispatch and that they are treated in the same way as conventional generation for the purposes of curtailment and redispatch. This would need amendment of, among others, Article 16(2)(c) of the Renewable Energy Sources Directive.
The group containing the largest number of issues in the Commission's presentation is given the heading "short-term markets". Across all timeframes, the Commission is keen to ensure that energy prices reflect scarcity in terms of time and location. This follows Commissioner Cañete's comment at the previous Florence Forum in March, that "prices must be able to rise when demand is high or generation scarce, and constraints on pricing have to be removed". He therefore indicated that the Commission would propose the removal of price caps. It remains to be seen whether the Commission will leave the market to drive prices, or will propose the adoption (or indeed the rejection) of artificial scarcity pricing mechanisms that apply a derived price in certain circumstances in place of the market price. Commissioner Cañete also emphasised the need for short-term price signals to be translated into long-term signals, and also for locational signals (which the Commission also proposes to address, as outlined above). It is not clear, though, how the necessary changes would be made, although a new pricing Chapter in Directive 2009/72 seems a strong possibility, because the changes would cut across more markets than the single time-frame Network Codes/Guidelines.
In the day-ahead and intraday markets, the Commission intends to focus on harmonising gate closure times and on developing consistent products and market times and principles. This is likely to involve amendments to CACM. The process for modification is set out in Article 7 of Regulation 714/2009.
In the balancing market, the Commission proposes a range of measures. It emphasises the need to consider both balancing energy and balancing capacity. In the case of balancing energy, the Electricity Balancing Guideline, currently undergoing scrutiny in comitology, will set out detailed rules. In the case of balancing capacity, the rules are likely to be set out in amendments to Directive 2009/72, or more likely Regulation 714/2009. In the case of balancing energy, the Commission appears to be focusing on the standardisation of balancing products, merit order activation of balancing energy, single marginal pricing and gate closure times. The Commission is likely to propose moving some rules (eg. relating to the provision of balancing energy by TSOs and the establishment of independent demand side response providers) to the revised third package, most likely through amendments to Directive 2009/72. The Commission will also propose new rules on regional calculation of balancing capacity.
A particular focus of the Commission seems to be to ensure better coordination and greater consistency across the entire range of products and timeframes, including demand response, balancing and capacity markets.
The final organisation and content of the measures making up the "upgraded energy market design" package are not yet certain, but our expectation is that they may look something like this:
- Directive 2009/72: likely changes include a new framework for demand response aggregators, a level playing field for demand response and flexibility products in all timeframes and enhanced consumer rights to smart meters and dynamic pricing. A new pricing chapter, focusing on scarcity pricing, the translation of short-term signals into long-term investments and locational signals, also seems likely. The Commission may also include rules on capacity mechanisms here;
- Directive 2009/28 (the Renewables Directive): likely proposals include the amendment of Article 16(2)(c) to remove or modify priority despatch for RES;
- Regulation 714/2009: the Commission seems likely to propose the amendment of Article 16(6), either to change the order of priorities for investment of interconnector revenue, or to restrict the use of such revenue for national tariff reduction. Amendment of Annex I, point 1.7 is also likely, to reinforce the prohibition on the curtailment of interconnectors in order to resolve national constraints. Further amendments may introduce rules on balancing capacity, including rules on regional calculation. The Commission may also propose further harmonisation of transmission tariffs; and
- CACM – Regulation 2015/1222: the Commission may propose further harmonisation of intra-day and day ahead market products and market rules, as well as reform of the process for defining capacity calculation regions and bidding zones.
In addition, there may be further measures from DG COMP in relation to capacity mechanisms, and there may also be proposals from the Commission relating to the regulation of power exchanges.
The new energy market design has often been described as a "Fourth Package". However, as we commented some months ago when the Commission first issued its consultation, the proposals mainly refine and develop the Third Package rather make radical changes of direction, and should therefore perhaps be referred to as "Package 3.9" instead. Whatever the title, a lot more work will be needed before these high-level thoughts from the Commission become workable legislative proposals.