Regions – the future for the European Internal Electricity Market? CERRE Executive Seminar, Brussels, 23 February 2017 Professor Nils-Henrik von der Fehr Joint Academic Director, CERRE University of Oslo

The European Electricity Network

Paradoxes and Dilemmas National models – but electricity does not respect borders Limited interconnection – but gains from trade are considerable National responsibility for security of supply – but incidents affect all Voluntary process – but costs and benefits are not equally shared Push for regionalisation – but members may differ considerably Self-sufficiency in capacity – but energy cannot be contained

Content of the Report Introduction The Current Internal Energy Market Paradigm What Has Happened ‘Regionally’? Gains from Cooperation and Integration Criteria for Defining Regions Responsibilities, Functions and Instruments A More Mandatory Regional Future? Governance Conclusion

Status: A Series of National Models, but... Gradual integration of (wholesale spot) markets Multi Regional Coupling of day-ahead markets covering 85 per cent of Europe on-going process on intraday markets Regional coordination of infrastructure or system development Ten Year Network Development Plan (TYNDP) Projects of Common Interest (PCI) Regional cooperation on system operation operational/security coordination centres/service providers, Network Codes: Capacity Calculation Regions European governance institutions ACER, CEER, ENTSOE

Gains from Cooperation and Integration Generation efficiency technologies with complementary characteristics location of generation capacity Security of supply pooling resources with idiosyncratic variations in input/output access to balancing resources and reserves Competitive pressure and liquidity market expansion Few studies that attempt to quantify (overall) gains Newbery, Strbac and Viehoff (2016): EUR 2.4 billion per year from market coupling

Criteria for Defining Regions Technical synchronisation: but market integration and coordination across non-sync. areas interconnection: will undermine the rational for integration Economic economies of scale and scope: may be exhausted before complete integration externalities: arguments both for centralised and local control Governance responsibilities and liabilities: political sovereignty regulation: requires comparable regions institutions: ‘similarities’

Responsibilities, Functions and Instruments ‘Deepness’ of regionalisation integration of responsibilities, functions and instruments: merger of TSOs coordination of functions and instruments: regional coordination bodies cooperation on instruments: voluntary agreements between TSOs Regional structure(s) single: ‘clean’, but not well tailored to responsibilities, functions and instruments multiple: tailored, but difficult to oversee and govern Process of regionalisation ‘big bang’, directly to final design, one-time realisation of transaction costs gradual, towards final design, continual realisation of transaction costs ‘organic’, voluntary, without defined pace or final design, small transaction costs Measurement of performance: how to asses if a region performs well?

A More Mandatory Regional Future? Markets day ahead: almost done, through (slow) voluntary process intraday: exposes voluntary nature of development Capacity Allocation and Congestion Management (CACM) Code Infrastructure planning and investment TYNDP and PCIs not lack of cooperation or coordination, but regulatory obstacles System operation less cooperation than in markets and infrastructure national competence, TSOs responsible for incidents, liable for compensation no strong track record for the ISO model more indirect approach may deliver more results

A Regional Structure Emerging? Capacity Calculation Regions ENTSOE proposed 11 ACER settled on 10 Could develop into six with new interconnections North West, South West, Baltic, South East, Italy N, Italy-Greece Multi-Regional Coupling covers three first of these a driver for further integration? Instability of regional groupings may be concern for market players

Governance Regulatory governance structure Regional regulators cooperation between NRAs: more regulators than regions (cf. Nordic & Irish exp.) regional regulators: requires correspondence with industry regional structure single, European-level regulator: compatible with any regional structure Regional regulators requires transfer of power from Member States not compatible with multi-layered regional industry structure The Winter Package Regional Operation Centres (ROCs), taking over responsibilities from TSOs overseen by regional groupings of NRAs under ACER umbrella

Conclusion No ‘one size fits all’ solution to the regions issue Solutions may differ between infrastructure, market and system operation Regional structure should not threaten Market Coupling of Regions Market integration may be a driver for integration in other areas Regional security coordination service providers may define the future Fate of Winter Package governance proposal critically dependent upon willingness of Member States to give up competence