1. 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

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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: : 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: : National transposition where necessary
More details

9. 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

10. 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

12. Thanks for your attention!
Charlotte Renaud
Market Unit – Advisor

13. Back-up slides

14. 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

15. 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)

16. 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

17. 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!

18. 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 % hydro % intermittent
7% biomass % hydro
31% intermittent
a x4.5 increase in intermittent generation ?

19. 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

20. 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
Opportunity with 2030 Framework 20

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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