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Better by design?

Europe’s evolving energy market needs to focus on effective mapping

The rapid scale of change in Europe's energy market poses complex challenges for regulators, policy makers, producers and consumers. The advance of renewable energy asks questions of what the right back-up power system would look like. And in many markets, said Norbert Schwieters, Global Energy, Utilities and Mining Leader, PWC, chair of the panel session on European electricity market harmonisation and the role of market designs yesterday, cleaner fuels has yet to make inroads. "In Germany, coal is the fuel of choice in the fossil fuel area, not natural gas."

By 2030, Europe will have 50 percent of its power market from renewable energies, forecast Patrick Graichen, Executive Director at German think tank Agora Energiewende, up from about 29 percent now. "The biofuels story is over," he said.

A modeling exercise undertaken by Agora found that wind and solar will have the most crucial role to play as the cheapest of renewable energies.

The EU's overall renewables target of 27 percent by 2030 will largely be delivered by the power sector, as biofuels and renewable heating sources are limited.

The biggest pain will be borne by the coal sector. "There's no other way than phasing out coal. It is very clear it needs two-thirds less coal use by 2030 compared to 2010 in order to get to the EU's carbon emissions reduction targets. And that means about half of the coal plants in Europe will be shut down in the next 15 years," said Graichen.

There is also a pressing need for more flexibility in the power sector. Increasing versatility in the system should go hand in hand with the growing share of variable renewable energy sources.

Greater flexibility, agued Graichen, would mean 40 percent less investment required. "The question is what is the right market design for such a world? Textbook economics tells us that an emissions trading system (ETS) that deals with CO2- and with a liberalised energy market with marginal pricing at wholesale power market-means the rest will take care of itself. But the real world situation is different. There's no ETS that delivers the social cost of carbon. So we will always have some capacity instrument to back up that situation otherwise there will be blackouts."

Dalius Misiūnas, CEO of Lithuania's Lietuvos Energija, highlighted his country's experience in electricity interconnection. "We import most of our power, so we trust the market. But there are three things that are needed to make the market function. First, infrastructure, second, platforms and third, rules."

Despite the recent talk of supergrids carrying power lines to transport solar power from south to north, and wind power from north to south, Misiūnas doubted whether these could happen in practice.

On the platform issue, this has largely been resolved. The biggest drag on progress is on rules, said Misiūnas. "It's difficult to get results at the regional or European level, and that is because of national aspects. Every European member state thinks of energy as a matter of national security. That's a reality," he said.

Misiūnas warned against subsidy tourism. "Investment is going after subsidies. Hopefully it will reduce, but national regulations on support mechanism for renewables are what is stopping us."

Fintan Slye, CEO of Ireland's EirGrid, flagged up how different market structures are shaping things. "There are three elements that need to be in place to for market design to deliver outcomes desired by the Paris commitment on decarbonisation".

First, there must be a clear vision about what market design is doing, looking at regulation, targets and geographies. Second, market design must recognise and reward the dynamics of a market that has a large amount of renewables in it. "That market must have flexible capacity," said Slye. "One of the things Ireland has learned is that because of its small synchronous system is that you need core system services to ensure it stays stable at high levels of renewables."

Lastly, there is need for market design to encourage innovation. "The scale of disruption that is going to come from technology is substantial. So far we've only nibbled around the edges. But the speed and pace of disruptive technological innovation will turn the market on its head," said Slye.

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