Thursday, May 1, 2014

EU energy market battles- who is in control?

Last year the Times reported that ‘Brussels is threatening to block a subsidy scheme for gas-fired power stations that the Government hopes will keep the country’s lights on’- the UK’s plan to create a Capacity Market to allow gas plants to compete for subsidies by acting as peak back-up suppliers when energy demand is high and wind-power low. It would be funded by levies on consumers’ bills. However, the European Commission has warned that this contradicted the aim of creating an internal EU-wide energy market. Evidently it would prefer grid balancing to be achieved by using supergrid links across the EU, trading power excesses between countries to meet local shortfalls, and enhancing competition.

In the UK’s case that would mean building more undersea interconnector
s- which is already planned. But the UK’s proposed Capacity Market was meant to be more than just a mechanism for subsiding gas peaking plants, it was also meant to support other grid balancing options, including demand side management and energy storage.  As Germany has found, with a big renewables input, you need incentives to maintain backup since renewables undermine the peak power market. German energy expert Frank Peter says ‘We need a suitable market design for the new conditions. In the future, gas power stations, partly also coal power stations, need to be able to be operated economically within this system. This is one of the main challenges that the German government needs to focus on’. So they also need something like a capacity market.

Interconnectors can certainly help. Although  Frank Peter says ‘as costs for renewable technologies drop dramatically, long distance energy transportation makes less and less sense’, he goes on ‘ it does make sense to connect the production of renewable energy over a large area. Conventional power stations can serve as a model for this. In this way, there is a higher probability that some kind of renewable source can produce energy at any given moment. The argument for a network connection is no longer to do with costs, but the fact that more renewable energy can be used’.

The big utilities of course don't like any of this- they would prefer the status quo, ideally without disruptive renewables, and some see supergrids also as undermining their control of local/regional markets by introducing cross-EU competition for all types of power.  However they are loosing traction. For example, according to, with consumers (or ‘prosumers’)  now generating their own power and selling excess back to the grid, Germany's giant RWE energy utility is shifting their activities to sales, trading and decentralized power. It evidently wants to depart from its traditional developer and ownership roles in relation to large centralized power plants and instead use its expertise to help manage and integrate renewables into the grid. This was necessary since ‘the massive erosion of wholesale prices caused by the growth of German photovoltaics constitutes a serious problem for RWE which may even threaten the company's survival’.

RWE's share price has lost one-third of its value over the last three years due to the European energy transition and the company now looks to be addressing the possibility of further shrinkage in a dramatic way. Under the proposed new model the guiding principle is ‘from volume to value' with, according to a document quoted by, the focus on ‘technologies ranging from large-scale offshore wind and hydro to onshore wind or photovoltaic’. But it added ‘ we will no longer pursue volume or percentage targets in renewables. We will rather leverage our skill set by taking a ‘capital-light' approach. Based on funds sourced largely from third parties, we will position ourselves as a project enabler and operator, and [as a] system integrator of renewables.’ It went on, ‘developing an innovative and profitable prosumer business model is a challenge we also need to address successfully, as we see a billion-euro market emerging alongside our traditional value chain.’

However there were some row backs and prevarications.  RWE Innogy told Power Engineering International that, ‘there is no RWE strategy to transform its business completely to renewables. The last target for renewables was 25% of the capacity (not production) in 2025’, although the German newspaper Handelsblatt reported that RWE Chief Executive Peter Terium wanted no further investments in fossil-fuelled powered plants: ‘In 2020, conventional forms of power generation should contribute no more than one fifth of the operating result’.

It may take a bit of time, but as Stephen Lacey of GreentechGrid put it last October:  ‘We may be about to witness one of the most profound transitions ever to occur in the utility industry’, with RWE evidently planning to transform itself ‘ from a traditional electricity provider into a renewable energy service provider.’

And all this at least partly because of the spread of grass roots power! It can’t happen here! But we live in hope that DECC will have noticed that elsewhere in the EU local ownership is the driving force for change, with ‘prosumers’ and local energy co-ops now running much of the show, in Germany especially, including in some cases, city-wide distribution grids being taken over from the utilities.

Even with decentral systems like this, there will still be a need for balancing capacity and interconnectors, and someone has to run that, but a new system could be emerging in which grid services like this are shared under some form of collective control, as they used to be when power systems were publicly owned.  Far fetched? Well it’s interesting that one of the results of the recent reactions against utility price rises has been a swing in public support for the idea of re-nationalising energy, with in a You Gov poll last November, 68% of the public saying the energy companies should be run in the public sector, while only 21% said they should remain in private hands

Back in the now, however, the Chancellor, desperate it seems to squeeze ‘green crap’, has capped the Carbon Price Support rate at £18/ton of CO2 from 2016-17 until 2020, saying ‘this will save a mid-sized manufacturer almost £50,000 on their annual energy bill. And it will save families £15 a year on their bills too - over and above the £50 we’ve already taken off.’  What he didn’t say was that this attack on the carbon market will, by reducing the carbon tax on fossil fuel, reduce the incentive to invest in non-fossil options like renewables and energy efficiency - and also, perversely, given the government’s commitment to it, nuclear power.   We’re not there yet, but we could be heading back to free market for fossil fuels..and a coal and gas boom. 

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