Three Moves to Get the EU Power Market Right

The European Union will this year have to come up with good ideas on how to best use – and integrate – energy sources as different as wind, solar, hydro, nuclear, coal and gas to produce the cleanest, cheapest and most reliable electricity possible. In short: it will propose how to best design Europe’s future energy market. EU energy ministers kicked off the discussion in April.

Any decision will have major implications on the energy sources that Europe will use to produce power in the coming decades. The prize of having a low-carbon power sector by 2030 is substantial, with a real opportunity to move the EU significantly towards its target of a 40% reduction in carbon emissions by 2030. 

For this to happen, the European Commission, whose proposals on the issue are expected by the end of the year – will have to take a number of decisions.

First: the EU’s power markets need to change, so as to push highly polluting, inflexible coal and lignite power plants, accounting for nearly 75% of the sector’s carbon emissions[1], into retirement. Existing gas fired plant could generate all the electricity produced by coal and lignite fired power stations by simply increasing their utilization rates from 26% to 68%. Ultimately, new build renewables plant could generate some of this electricity. This would have the advantage of dramatically reducing CO2 emissions, improving air quality and human health while increasing efficiency[3].

Second: the new renewable electricity will likely be produced in a different place from where it will be most needed (far from big industries or cities, for example). To ensure that power can easily be transported to where it is needed, sufficient interconnections and transmission lines will be required.

Given local opposition to overhead lines, such as seen recently in Bavaria (with a typical high voltage transmission project taking 15 years to implement in Europe[4]) and concerns about their exposure to adverse weather, the EU might have to think about using underground cables, which, however, come at a (significantly higher) cost.

On the other hand, the gas network is already available and can provide energy storage and transportation for the renewable sector, thanks to the conversion of electricity into gas – the so-called Power to Gas. This unique capability can contribute to the decarbonisation of the energy system, while avoiding the huge costs of reinforcing the electricity grid.

It will also provide an increasingly valuable balancing and flexibility service to the electricity system through management of intermittency. All of this, of course, will have to be combined with efforts to build a truly integrated EU energy market, where sources compete on an equal basis.

Third: the power system has to have enough flexibility to handle peak demand, making sure that there are no blackouts, even when everyone has lights and air conditioning on, washes laundry, cooks while watching TV etc.  

For the time being, the EU only needs 65% of existing non-variable (“dispatchable”) capacity to meet peak demand. But this could get close to 100% by 2030 if no new firm capacity is added, as the highly polluting, inflexible plants retire. That’s assuming that power demand continues to stagnate rather than grow, i.e. there is a continued emphasis on energy efficiency to ensure power demand remains decoupled from economic growth and that sectors such as heating aren’t electrified.

Lowering the peaks in demand by working with consumers to shift their consumption to off-peak periods will contribute, but will be unlikely to provide a complete answer. Power storage, although progressing, is not expected to solve the problem any time soon.

It is therefore likely that the EU will need to add additional, flexible power plants, able to cover peak demand. Prices – i.e. the prospect of price spikes during periods for which there is a shortage of electricity on offer – should provide the initial incentive.

But for such an approach to be effective, the market has to be allowed to function properly, with no subsidies distorting price signals.  Providing a financial incentive for having power plants available to handle unexpected variations in demand or supply, even if the capacity isn’t then used (what the sector calls “capacity remuneration mechanisms”) is one option of last resort. 

If such mechanisms are introduced, they should preserve market competition, reflect the costs incurred by those who develop that capacity and, over time, be harmonised across the EU, in line with current State Aid Guidelines and the EU’s Climate and Energy objectives, and should therefore include criteria to support low carbon intensity, flexibility and reliability.  

Although these challenges are difficult, they can be solved, allowing us to achieve the prize of a low carbon power sector for Europe. On April 11, EU energy ministers kicked off the discussion on the issue, with some encouraging signs. Now, it’s up to the European Commission to move forward on the right track.

Malcolm Rice-Jones is the Chair of GasNaturally's Power Generation Task Force