Electricity Market Design

Presentation at the 31st USAEE/IAEE North American ConferenceNovember 5-7Austin, Texas

Lars BergmanIAEE and Stockholm School of Economics

Drivers of renewable power in Europe

• The EU ”20-20-20” Directive– 20 % reduction of CO2 emissions in 2020 compared to

1990– 20 % renewable (primary) energy in 2020 compared to

1990. Estimated to imply around 35 % renewable electricity

– 20 % more efficient use of energy in 2020 compared to 1990

• A new directive on energy efficiency has recently been confirmed by the European Parliament

• The German decision to phase out nuclear power

Sharp increase in renewable generation:The German example

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Source: BMU-Leitstudie 2010

Renewables are heavily subsidised – but the costs are also falling

• According to the German solar energy industry association (BSW) the installation cost of solar PV has fallen around 65% since 2006. Increased competition has caused difficulties for many solar PV manufacturers.

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Capacity markets is not a new discussion – but there is a renewed interest in Europe

•Push for carbon neutral power sector and fast increase in renewables challenges the evolving European power market•Wind and solar less controllable and flexible – and dependent on weather•Significant contribution to energy production, but little firm capacity•Need for flexible generation and demand response•Challenges in financing conventional power plants

Wind and solar production, 50 Hertz control area Example weeks, 2011

The evolving European market model is challenged before it has hit the ground…

• The Target Model for the European power market is based on an energy only design

• Current and evolving market design is far from “pure” energy only

• Existing capacity mechanisms in several countries• With various design and purposes

• Proposal and discussions in several other countries

• Are we (unintentionally) going towards a patchwork…

• …and how will that affect the integrated European market

GreeceQuantity based mechanism

ItalyPrice based mechanism. Proposal for reliability contracts

Germany“Proposal”

NorwayRKOM

SE & FIStrategic reserve

RussiaCapacity market + long term contracts

PolandProposed as part of market reform

UKCapacity market from 2015

IrelandPrice based mechanism

Spain & PortugalPrice based mechanism

France Capacity obligations from 2015

Towards a new market design?

• European TSOs are coordinating their investment plans and foresee major transmission capacity investments in order to– Accomodate fast growth of wind and other

intermittent power– Reduce bottlenecks in the transmission system in

order to enhance competition and cross-border trade

• In the Nordic area: Increased number of price areas, but far from nodal pricing