1. Peter Styles P.Styles@efet.org Peter Styles Istanbul, 8 th March 2011 European Federation of Energy Traders Prospects for Integrating and Trading Renewable Energy Resources: Lessons from the European Electricity Market Workshop on Integration and Cross Border Trade of Renewable Energy Resources in Regional Transmission Networks 8 March, 2011 Istanbul 1

2. Peter Styles P.Styles@efet.org Peter Styles Istanbul, 8 th March 2011 European Federation of Energy Traders Prospects for Integrating and Trading Renewable Energy Resources: Lessons from the European Electricity Market Workshop on Integration and Cross Border Trade of Renewable Energy Resources in Regional Transmission Networks 8 March, 2011 Istanbul 2 Europe without borders (by night)

3. Peter Styles Istanbul, 8 th March 2011 3 European electricity production portfolios Nuclear Coal Gas Oil Mix Hydraulic Wind

4. Peter Styles Istanbul, 8 th March 2011 4 For electricity: ÜSupply = demand (constantly!) ÜLimited storage (except for pump storage in CH and N) ÜTrading optimizes supply according to the location and time of demand and creates a wholesale tier ÜCross border wholesale transactions help efficient price finding over a wider European area ÜSeasonal and diurnal variations in availability of some production sources reflected in efficient peak pricing Why is the wholesale market important?

5. Peter Styles Istanbul, 8 th March 2011 5  Thus trading can optimize the market by creating:  Efficiencies across regions and countries  Efficiencies between fuels used in generation (gas, coal, hydro, nuclear, wind, etc.)  Efficiencies by virtue of play of inter-related products (e.g. weather derivatives; emission allowances; transmission rights)  Efficiencies through financial markets and derivatives  Efficiencies stimulated by price signals of new products Why is the wholesale market important?

6. Peter Styles Istanbul, 8 th March 2011 6  Current situation in several EU countries: ÜSubsidised fixed price paid, independent from the market price of electricity (called “feed-in tariff”) ÜPreferential access to the grid (now mandatory in EU) ÜNo balancing obligations for renewable generators ÜResulting loop flows create artificial grid congestion ÜMajor distortions ensue in the electricity market Much renewable power output is outside the market

7. Peter Styles Istanbul, 8 th March 2011 ÜNegative prices up to € 3,000 per MWh in central Europe when the wind blows in off-peak hours; occasional price spikes when it does not ÜCross-border transmission capacity on congested borders is not allocated in forward timeframes, owing to unpredictability of wind and solar generators’ output ÜUp to 60% of the electricity market in countries with high renewable generation penetration is effectively foreclosed to exporters inside the EU Strange effects of the current situation 7

8. Peter Styles Istanbul, 8 th March 2011 8 ÜRenewable generation and supply should become part of the electricity market, subject to normal dispatch and balancing mechanisms ÜFinancial support should be granted on a market basis, either through premium payments or (preferably) the establishment of quota and certificate schemes ÜThe renewable attributes of wind and solar power production must become tradable on a cross- border basis What solutions can ensure better integration?

9. Peter Styles Istanbul, 8 th March 2011 Stylised description of generation costs for existing and new renewable power locations 9

10. Peter Styles Istanbul, 8 th March 2011 Quota with certificates ensures adjustment of support to reach renewable target 10

11. Peter Styles Istanbul, 8 th March 2011 The European dimension of using certificates to trade renewable attributes of electricity (1)  Geographical flexibility as to the location of new renewable generation facilities, mediated through market mechanisms would be an efficient way to lower overall costs of achieving EU renewable targets  But EU Directive 2009/28/EC excludes the use of market mechanisms across borders except after the agreement of “joint projects” 11

12. Peter Styles Istanbul, 8 th March 2011 The European dimension of using certificates to trade renewable attributes of electricity (2)  Making certificates issued in countries with quota schemes eligible for credits in other EU Member States would be a good step towards a pan-European quota arrangement.  A further evolution could entail the creation of an EU top-up certificate, redeemable also in countries retaining feed-in tariffs. 12

13. Peter Styles Istanbul, 8 th March 2011 13  100% renewable energy (even just electricity) in the EU in 2050 is not realistic ÜGas will not disappear that quickly ÜNuclear will stay for a while ÜChallenge of matching peak demand for electricity with peaking supply if hydrocarbons are excluded Reality check !

14. Peter Styles Istanbul, 8 th March 2011 What would be the characteristics of the ideal support scheme to expand wind and solar power output while enabling integration into grid systems and safeguarding a well-functioning wholesale electricity market throughout Europe? 37

15. Peter Styles Istanbul, 8 th March 2011 Financial support consistent with market needs Market-based mechanisms reduce costs  Full integration of RES into the electricity market to promote liquidity and transparency  Flexibility to build RES generation where most efficient geographically  Guarantee at EU level that renewable attributes of RES generation are eligible for credits across borders  Transition for older technologies (wind, PV) away from subsidy and towards reliance on the EU ETS Such mechanisms also facilitate free trade 39

16. Peter Styles Istanbul, 8 th March 2011  Quick large-scale RES generation deployment in Europe will still depend largely on subsidies up to 2020  Subsidies do not have to be purely national and can be granted through market mechanisms  If market mechanisms and geographic flexibillity are precluded, costs rise, competition diminishes, and network congestion management is distorted  Reliance on the price of carbon emission allowances under the EU ETS may be a better solution post-2020 Conclusions 16

17. Peter Styles Istanbul, 8 th March 2011 17 Thank you for attention