European energy markets are going through structural change—and it looks like there's a lot more to come. We caught up with Dr Patrick Graichen, Director at Agora Energiewende for his thoughts
What do you consider to be the main structural faults with the European energy market?
In the power sector we are talking about the incomplete implementation of the third package on the internal energy market and the unclear future of renewable power financing beyond 2020. Furthermore, there is a blind spot of European energy policy: The problem of coal. Wholesale power prices are being depressed due to oversupply from depreciated, inflexible, high-carbon power plants.
In some countries, there is even the idea to grant them capacity payments. At the same time, the EU emissions trading system is facing a huge oversupply of greenhouse gas certificates, resulting in very low CO2 prices. Both factors are leading to a lack of proper investment signals.
Moreover, while it is now widely recognised that wind and solar are the cheapest low-carbon technologies at hand and we should install more of them, we still need to adapt our power markets to deliver the flexibility of services that suit best to higher shares of renewables.
A further structural challenge that we see at the European level as well as nationally is the inconsistency between infrastructure planning and the EU's decarbonisation targets. One specific example is the Commission's proposal from January 2016 for enhancing gas security of supply. This proposal projected gas demand roughly 40 percent above the levels that would be consistent with achieving the EU's 2030 climate and energy targets.
This inconsistency poses a very high risk of creating stranded assets and wasting taxpayer's money.
How can these problems be resolved?
The first thing is: The EU should fully implement the existing rules. Better markets and better unbundling would allow for more efficient energy markets in Europe. In addition, the EU needs a strategy for the "smart and managed retirement" of coal baseload capacity-these old power plants do not fit into a post-Paris Agreement world anymore.
This includes the ETS-greenhouse gases which are avoided by sending coal plants into retirement and efficiency benefits must be deleted from the ETS at the same time. Otherwise the whole effort is worth nothing.
In parallel, we need to further reform the ETS including a price corridor with a floor at about €30 per tonne of CO2. At the same time, those regions within Europe that still heavily rely on coal would need support to cope with the structural changes that the European decarbonisation pathway would mean.
Do you think European governments -and separately, the European Commission-could do more to support the electricity market?
Yes. The European power markets need to be coupled and streamlined more and more. This will result in more liquid markets and would allow the participation of renewable energies and demand side management in intraday and balancing markets - making balancing a whole lot cheaper than today.
How do you feel, if at all, European electricity markets could benefit from wider market integration?
Larger and more coupled markets are economically more efficient. Wider market integration increases flexibility in the power system and allows absorbing higher shares of power of wind and solar at lower system costs.
Do you believe European energy markets are evolving at a good pace?
The 2030 legislative package offers a critical opportunity to ensure that energy markets in Europe are pushing towards more competition and at the same time a rapid decarbonisation of the EU economy. This window of opportunity should not be missed.
What single area (management, technological, economical, governmental) requires innovation that would drive the market forward even more?
The technologies needed to move towards a low carbon, low cost European energy system are available, mature and affordable. What we need is a clear governance which combines challenges and opportunities. The job is to implement the concept of "Efficiency First" in European policy and to define the "Power Market Pentagon" in a consistent manner: refining short-term markets, financing of renewable energies, smart retirement of coal fired power plants, ensuring security of supply and reforming the ETS.
Now is the time to discuss and to decide on such a coherent framework which will last for the next decade. The preparation of the 2030 climate and energy package offers a major opportunity to the Commission, the Member States and the European Parliament to break out of the usual silo-thinking and to update the EU climate and energy framework so that all relevant policies are fully consistent with each other.