Market advisor – EURELECTRIC 23rd Forum – Energy Day in Croatia How to define and implement an energy policy in light of new EU guidelines for the year 2030? Charlotte RENAUD Market advisor – EURELECTRIC 23rd Forum – Energy Day in Croatia Zagreb, 28 November 2014

EURELECTRIC – a pan-European association with partners around the globe

DISTRIBUTION NETWORKS EURELECTRIC represents the EU electricity industry – all across the electricity value chain ENERGY POLICY & GENERATION ENVIRONMENT & SUSTAINABLE DEVELOPMENT MARKETS RETAIL CUSTOMERS DISTRIBUTION NETWORKS

What our industry stands for – our 5 guiding principles We believe in: A European, integrated approach to the entire power system An affordable energy transition thanks to competitiveness and cost-efficiency oriented policies Electricity as a major contribution to the decarbonisation of Europe’s economy Active and empowered customers as the core of our business and the centre of our innovation policies A market design and regulatory conditions that ensure sufficient generation and infrastructure investments

Today: internal energy market or x28 chaos? UK carbon price floor NL coal tax ENERGY MARKET INTEGRATION AND (MORE) PREDICTABLE POLICIES MARKETS ARE FRAGMENTED AND POLICIES ARE START/STOP ETS as the key driver Strong innovation policy National RES and EE schemes National carbon price floors/taxes National capacity mechanisms

What ambition, when? Early, economy-wide, high ambition Climate is a lower political priority than before the economic crisis, BUT there is still some priority and therefore some policy ambition The power sector is always the first (easy) target for climate policy Therefore we face a choice: No ambition Low ambition = few sectors (power) = stop/start policies High ambition = whole-economy = stable policies (Not a realistic option for the power sector) Costs the power sector investment in low-carbon technologies and loss of market share from energy saving Gains the power sector new market share through electrification of additional sectors; new markets via services

EU Council Decision on 2030 climate and energy policy framework 2020: 20/20/20: ETS / national binding / national 2030: 40/27/27: ETS / EU binding / indicative 2030: 43/45/27: for electricity sector EURELECTRIC welcomed the adoption of this ambitious framework Lessons learned from 2020 package EU ETS as key driver to deliver this objective - clear proposal to consolidate EE and RES targets to be delivered through market-based and cost-efficient policies

It’s not over until the lady sings… The road to a 2030 framework It’s not over until the lady sings… Step 1: 22 Jan 2014: Commission proposals on goals These are only preliminary recommendations Step 2: March 2014: European Council political decision on goals Politicians can ignore recommendations – postponed decision to autumn Step 3: 2015: Commission drafts legislation to implement goals, spread burdens The devil is in the details And new Commissioners might have new ideas Step 4: 2016-17: Parliament and Council Co-Decision on legislation The EP definitely has its own ideas Elections in Member States can mean changes of government Step 5: 2018-19: National transposition where necessary More details

The growth of RES, which is necessary to pursue the European decarbonisation agenda, brings a new reality to power systems Decarbonisation targets Breakdown per sector The necessary growth of RES to decarbonise the power sector implies market adaptations that have to meet two fundamental requirements of electricity customers across Europe: To maximise customers’ value for their money, RES should be developed through integrated electricity markets while keeping their costs down Customers expect that their lights stay on – security of supply is key and should also be guaranteed in a cost-effective way 9

EURELECTRIC’s proposals for a cost-efficient, market-based transition towards decarbonisation Enhancing market functioning as a “no regret” option Making RES fit for the market Making market fit for RES

Thanks for your attention! Charlotte Renaud Market Unit – Advisor crenaud@eurelectric.org +32 2 515 10 55

Back-up slides

What does a 40% GHG target mean? power sector decarbonisation signal 40% across the whole economy 43% compared to 2005 30% compared to 2005 ETS sectors = power and energy intensive industry power sector decarbonisation signal Effort-sharing sectors = transport, buildings… agriculture etc ?% electrification signal Linear factor CO2 cars Energy efficiency Stability reserve Transport in ETS?c Energy labelling EPBD Eco-design

ETS reforms Done: Back-loading (2014) Proposed: Market stability reserve (2021) Linear factor increase (2021) Global aviation ETS (2016) Under consideration: Include maritime transport, other transport fuels (tbc)

Our view: ETS problems and reforms 3 different problems, 3 different solutions Short term: Surplus of 2bn-2.5bn allowances Solution: Permanent set-aside Medium term: Fixed supply and demand shocks result in price volatility Solution: Supply adjustment mechanism Long term: The ETS cap is not coherent with the EU 2050 goal Solution: Revise the linear factor

Market Stability reserve Commission has identified the inflexible supply of allowances as the key item for the allowance surplus Positive: Can support the ETS market balance in case of future economic shock Slowly addresses the surplus Built on simple, transparent, robust design But: Commences 2021 Too slow to address surplus  2030 ETS reforms are too little too late – we need action sooner!

The RES increase challenge 21% of electricity mix today to 45% by 2030 EU RES 2013 – approx. 21% EU RES 2030 – approx. 45% 7% biomass 7% hydro 7% intermittent 7% biomass 7% hydro 31% intermittent a x4.5 increase in intermittent generation ?

Costs  Competitiveness Intermittency  Security of Supply Europe is on track to reach the 20% RES target, BUT is facing two important challenges on the road Costs  Competitiveness Intermittency  Security of Supply Source: Eurostat Different non-coherent purely national answers from MS to these challenges risk further fragmenting the market, endangering the construction of the internal energy market 19

How to strike back the balance between the 3 objectives of the EU Climate and Energy policy? Opportunity with 2030 Framework A strong ETS as key driver for RES investments Operational integration of RES into the market Cost-effective RES support schemes that maximize market orientation and minimize market distortion Further Europeanisation and cooperation on RES development Environment & Energy State Aid Guidelines 2014 - 2020 Opportunity with 2030 Framework 20

Operational integration of RES is necessary, both in the market and grid aspects Responsibility of generators for: Selling in the market (directly or via aggregators) Nominating / Scheduling (towards TSO) Balancing (costs of imbalances) Same obligation for all generators for: Grid connection / usage (fees) Dispatch / Grid access (no priority) For existing plants there will have to be a transition depending on national circumstances and incentives/ compensation in Member States EURELECTRIC State Aid Guidelines Aid granted as premium on top of market price (selling in the market) Standard balancing responsibilities, unless no liquid intra-day markets exist Not Applicable No retroactive measures: only obligations for projects under schemes notified as from 1 July 2014 21

RES support: Increase cost-efficiency and avoid market distortions EURELECTRIC State Aid Guidelines Competitive bidding process, but Not for small scale RES (solar<1MW, wind<6MW) Not if demonstrated less successful Not necessarily technology neutral When no tender, premium, but Not necessary for solar < 500kW, wind <3MW Premium + “measures to ensure that generators have no incentive to generate under negative prices” Investment aid mentioned (but not explicitly favoured) Differentiation on the basis of capacity not on maturity (apart from demonstration projects) A. Increase cost-efficiency by avoiding overcompensation Tenders for investment or operating aid, with multiannual planning of volumes for investor visibility Technology-neutral tenders for technologies that are mature When no tender, apply degression rates if transparent to investors B. Avoid market distortions In operating aid schemes, eliminate payments that distort operational/dispatch decisions Limit remunerated hours for operating aid Introduction of investment aid (€/MW) minimizes distortion, can be technology- neutral and facilitates transition towards full market integration of RES C. Link support schemes with their stage in the maturity value chain 22

FIP / Green Certificates Before 2020, RES remuneration should thus undergo an evolutionary process Balancing obligations Technology neutrality Reducing market distortions Tendering of support Investment aid FIP / Green Certificates FIT The Environment & Energy State Aid Guidelines provide a solid basis and set direction for a market based approach of RES technology development, but allow potential harmful exemptions 23

Energy, flexibility and capacity are all needed and should be properly valued in a future-proof wholesale market design Energy Flexibility Capacity Efficient dispatch Short term system adequacy Long term system adequacy Delivers energy in the most cost-efficient way by having the market define the system’s merit order Enables the system to respond to short-term variations in the supply/demand balance Ensures long-term system adequacy e.g., in the case of extreme load peaks or backup intermittent renewable generation Forward, day-ahead and intraday markets Day ahead, intraday and balancing markets, ancillary services Market-based capacity remuneration mechanisms Ongoing energy market integration with market coupling and cross border intra-day markets (although taking too long) Energy market integration and cross-border balancing ongoing, grid related services to be developed Rather separate CRM national initiatives, with an increasing discussion on cross-border participation Goal What it does Market instruments Where we are today 24

To maximise cost-efficiency and market orientation, any capacity market should follow a set of fundamental design features Description Overarching goal must be generation adequacy (i.e., firm capacity without any other political targets) Remunerate plant availability/firm capacity Market-based Technology neutral Open to new/existing plants Open to generation/demand response/storage Open to cross-border participation, while not distorting the energy market Goal Product Design features Geography The completion of the IEM and coordination of the key elements of market design are crucial for EU energy policy 25

Summary of recommendations Enhance market functioning as a “no regrets” option Fully implement a European energy market through integrated forward, intraday, day-ahead and balancing markets to ensure incentives for flexibility, including demand response Set up more interconnections between national markets Remove wholesale price caps and regulated end-user tariffs and other distortions in wholesale and retail electricity markets Make RES fit for the market Introduce a universal balancing requirement as a first step Use market procedures such as auctions to make new investments cost-efficient Adapt existing support schemes and introduce new mechanisms to minimise market distortion Post-2020, the ETS should be the main driver for RES investments Make the market fit for RES Capacity markets, where necessary, should be market-based, technology-neutral, open to existing plants and new investments, and equally open to generation, demand and storage Decentralised capacity certificates or centralised auctions for capacity are the preferred types of capacity markets Adopt a regional instead of national approach to capacity markets All capacity markets must be open to cross-border participation Evolve towards a market design that delivers a level playing field for all market participants and properly values energy, flexibility and capacity 26