The EU power target model: dead or alive? Taking stock & looking ahead

EEM 15 in LisbonJean-Michel Glachant

Loyola de Palacio Professor at EUI (Robert Schuman Centre)

Director Florence School of Regulation

Opening the EU market power with… no market design

• 1// 15 first years: building EU market without EU “Common Market Frame” (1996-2011) >> FUN but NOT a joke!

a/ Opening MS markets in the EU without any “Common Market Frame” (1996-2009) # E&W or California

b/ Push 2004-06: TargetModel as aftermath of 2nd Package?

c/ DG COMP 2005-07 + Berlin Council 2007 “green light 2020 to “Big EU Packages shift” but not a defined “Common Market Frame”

d/ Hence the “EU Target Model” is not in 3d Package – but comes from new institutional frame built in 2009-2011 (ACER –ENTSOs-Grid Codes etc.) + Infrastructure Package

2

Building a EU Target Model

• 2// 4 past years(2011-2015): building EU “Target Model”

a/ NOT built by EU legislator (as CA); not EU executive Commission (as E&W); not EU regulator ACER or NRAs; > consensus stakeholders “General Assembly”(as Texas ERCOT)

b/ Key players: TSOs but ENTSO-E EU Body; ACER but Commission; + MS Comitology hence consensus GA

c/ Hence “EU Target Model” consensus based on existing industry + market foundations

d/ TSOs are regulated “grid based control zones”; PXs are initiatives of business companies (except Spain & Italy; E&W, CA)

TSO zones are given; PXs zones & rules are given

& BOTH have veto rights

3

Building consensus around 3 pillars

• 3// Building consensus around 3 pillars for EU “Target Model” Pillar 1 ~Pricing EU energy on Day-Ahead

° EU as gigantic “market based” Merit Order at continental scale° Merit order: technologies compete by fuel cost / output flexibility (efficient dispatch)° Merit order: reasonable proxy of “system signal to gen. investment choices” (what volume of capacity? – which technology?)° Day ahead because makes sense for “thermal gen. unit” commitment

°° BUT NO centralized market (PXs are initiatives & non regulated) °° Gen. units “self –dispatched” (Trading PXs is voluntary not mandatory)°° Hence “no grid” put into Day Ahead energy market process°° >> 2 step Market: (1) Energy Market with no grid (2) Grid constraints “Ex Post”

>>>Day Ahead Merit Order…of course grid access permitting…

4

Building consensus around 3 pillars

Pillar 2 ~Simplifying Day-Ahead cross-border “energy pricing”

° How to get EU as gigantic “market based” Merit Order at continental scale?

°How to make “Day Ahead energy pricing” coherent from one PX to the other?

° How to make underlying “Market Based” flows from one TSO to the other consistent with actual grid constraints? [NO GRID in any PX Day Ahead pricing]

°° TSOs extend implicit “grid zone copper plate” basis (for each PX pricing) TO “implicit” allocation of “virtual grid capacity” between PXs Day Ahead pricing

°° TSOs calculate a “virtual zone capacity” linking PXs at Day Ahead stage. PXs take it and put it in “generalized Merit Order calculation”

°° Hence “no real flows” but “virtual grid” put into Day Ahead energy market coupling

>> 2 step Market: (1) MarketCoupling with no grid (2) Grid constraints “To come”

5

Building consensus around 3 pillars

Pillar 3 ~Last mile Target Model: Un-Simplifying “energy trade” with real systems° We have EU gigantic “market based” Merit Order at continental scale° It comes from “Day Ahead energy pricing” coherent from one PX to the other ° BUT real power systems still have to enter the game

°° TSO had the right to inject their own calculation of “virtual grid capacity” in PXs coupling of Day Ahead merit order°° TSOs now have the duty of making the power system “mimicking” the Day Ahead Merit Order coupling: they have to “implement” the EU Merit Order°°TSOs do it one by one; each TSO in its own “control zone”; implementation of EU “continental scale merit order” in decentralized between independent TSOs

°°°For minimum Europeanisation of this last step “loop”: open to all TSOs cross-border access to all “balancing reserves” of each TSO°°° Europeanizing procurement of balancing between TSO zones also calls for harmonizing Intra-Day trading>> 3 step EU Market: (1) Day Ahead MarketCoupling with no grid (2) Intraday market adjustments (3) Grid constraints loop arriving “Ex Post” at “Gate closure”

6

• Pricing energy Day-Ahead: EU T.M assumes that energy bid forecasts at Day Ahead is actual power market equilibrium What if not?

If CCGTs Day Ahead commitment replaced by intraday variable WindMills &PV? If “ generation capacity adequacy” looses Day Ahead pricing as good proxy of system value of capacity?

• Simplifying Grid Access: EU T.M assumes that actual “grid location” of generation is not big deal if EU market is made of “zones” being coupled What if not?

If actual location of Generation on grids becomes key for EU System Operation & for EU Market Equilibrium…If rational design of each zone of system operation becomes “EU system significant”

• Opening cross-border “Balancing & reserves” procurement : EU T.M assumes that cross-border procurement is “Zee” key in system balancing & reservesWhat if not?

If “demand” of system services is key. If we need players to become highly (responsible for / responsive to) their interaction with system’s balancing & reserves needs…

7

EU Market Frame achieved?

Wait a minute…

EU “RES Push” questioningIntegrating RES? Or creating RES efficient EU market frame?

• How much RES could existing Target Market swallow?

a/ /no problem: it should work; Target Model based (“Melting Pot”)

b//problem: Target Model shouldn’t work; design issue (“Salad Bowl”)

• EU wholesale energy prices do not trigger generation investment: and so what?

a/ / Temporary or Permanent issue? Lasting as long as redundant plants (overcapacity) are not closed> waiting end “blood bath”? Or Permanent issue: adequacy of “energy market price based generation investment” cannot be assumed anymore (Newbery, Green-Léautier)?

b/ / Feasibility of a Europeanization of MS SoS capacity mechanisms? EU wide single SoS mechanism inefficient? What minimal EU harmonization of SoS rules & principles?

8

Creating RES efficient EU market frame? Within or outside existing Target Model

• “Consensus” among key players (as: Commission, ACER, ENTSO-E, Eurelectric)

a/ /no problem keeping Target Model: it should work; so good so far

b//only problem: enhancing Target Model to work better within new power system (as: distributed gen; res intermittency or short previsibility)

• A bit of semantic?

a/ / Yes As nobody has strong “Market Design” power at EU level > fear of opening Pandora box if “4th Package” pushed at forefront

b/ / NO As “Target Model” in EU is created by consensus “drafted” into Principles & Rules by ENTSO-E, ACER & Commission (incl. DG COMP) > better to go step by step & NOT coming back to frustrating & uncertain hazards of Parliament & Council “Packages”?

9

Creating RES efficient EU market frame? Within existing Target Model?

• Current approach: transforming existing Target Model with two auxiliary engines

• 1) Adding engine “Europeanisation of LT Capacity mechanisms” substituting to “Investment signal given by Day Ahead Energy pricing” ?

@Florence School last Monday:

“A Target Model for Electricity Capacity Remuneration Schemes”

• 2) Adding engine “Organizing open market platform for system flexibility” substituting to “Organizing cross-border procurement of reserves & balancing between TSOs” ?

10

www.florence-school.eu

How to conclude? Yes: existing EU Target Model won’t

survive in 2020 – 2030 # However it won’t dy: It will be

‘momified’ or upgraded ‘à la terminator’ # When & How?

# I don’t know: To be seen in 2016-2019…

www.florence-school.eu

www.florence-school.eu 13

Thank you for your attention

Email contact: jean-michel.glachant@eui.eu

Follow me on Twitter: @JMGlachant already 8 125 tweets

My web site: http://www.florence-school.eu