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“A 3 Step Bumpy EU Energy Ride”


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FSR Director Jean-Michel Glachant at the ESADE conference in Madrid, 5 November 2013

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“A 3 Step Bumpy EU Energy Ride”

  1. 1. “A 3 Step Bumpy EU Energy Ride” Jean – Michel Glachant Holder Loyola de Palacio Chair in European Energy Policy Director Florence School of Regulation (European University Institute in Florence)
  2. 2. Intro 3 step: which ones? • Step 1: getting an internal EU market for electricity? Roughly Yes! Does it matter? Much less than expected… • Step 2: getting an internal EU market for gas? More or less a kind of! Does it matter? Not much… • Step 3: do these markets interact with other pillars of EU energy policy (Security of Supply; 20-20-20 targets)? Yes! They do a lot: they do their job…. (but no more)…
  3. 3. STEP 1/ An EU internal market for electricity… a journey from 1990 to 2015… • Four “Yes” in four directions • 1/ Short term Day ahead wholesale markets connected by implicit access to physical interconnections • 2/ Very short term balancing services crossing the borders of “electrical zones” • 3/ Retail competition blessed since a decade (2nd Package) • 4/ Long Term Europeanization of grids operation and investment going ahead (TYNDP – Grid Codes – PCIs)
  4. 4. Done? • Not so sure? • 1/ Price control still in place (see France or Spain) 10 years after the official launching of retail competition… • 2/ Wholesale access control (see again France or Spain)
  5. 5. Done? (2) • Certainly not… • 1/ New Wholesale revolution ignited by RES public push • 2/ New retail revolution pushed by RES public push (millions of “prosumers”) and smart retail grids • 3/ But but: that comes more from EU “Out of the market” energy policy than from the market … To be looked at latter on…
  6. 6. Concl for elec internal market? • 1/ Done in the EU and nowhere else in the world (notably not in the US) • 2/ Done our way (other exist as “Wholesale” mkt with no retail; or centralized wholesale mkt as PJM or UK 1990 etc.) • 3/ Does not matter that much: why? It is an internal market conceived in the 90’ to spur a “CCGT wave & Dash for gas” all over the EU. • 4/ Alas today we have massive national RES public pushes… and massive CCGT redundancy (Spanish LNG terminals working only at 50% capacity) • 5/ Will we soon destroy all our EU market or rebuild it before the 2020 horizon?
  7. 7. STEP 2/ An EU internal market for gas… much more difficult … • Elec & Gas: both monopolies • But: Elec has thousands of production units inside our EU monopolies + a common multidirectional grid (= easy entry with a small new CCGT plant); • Gas: a handful of foreigner producers + “point to point” grids… all tied with long term contracts (= hard to enter) • Long way to go: to open new LNG terminals (big units) + undo long term contract freezing of grids (Italy did 2 years ago) • BUT with help of economic crisis (-10% à to -20% gas consumption) it suddenly worked: single price zone Denmark to Italy; UK to Austria…
  8. 8. gas… more difficult … but • BUT BUT: we are also starting implementing an harmonized & open internal market • HARMONIZATION of transmission products across countries through existing interconnections: PRISMA trading platform • More advanced: Entry-Exit zones suppressing “point to point” • Even More Advanced : merger of trading zones keeping different short term balancing services on each border • Other more advanced tool: Market zones connected by implicit access to physical interconnections (Market Coupling) • Also starting: Long Term Europeanisation of grids operation and investment (TYNDP –Grid Codes – PCIs)
  9. 9. Done? • For 80% of EU gas it works… quasi single price • But fragile… sensitive to low gas consumption (hence length of economic crisis) • …And short term price convergence (day ahead) >> Long Term price of gas &capacity of physical transportation of gas inside EU and • …And quite high price level: EU short term price of gas = 3 times the reference gas price in the USA (imagine oil price x 3 times! !!)
  10. 10. Concl for gas internal market? • 1/ Among big countries only EU and US have open gas markets (but not of the same kind) • 2/ US produces own cheap gas in an open architecture of “long term contracted / fully booked / point to point “ gas grid • 3/ EU imports expensive gas from quasi cartel (Russia, Algeria, Norway) + from other LNG providers in a regulated frame of socialized “entry/exit” zones • 4/ As Asia today sucks all LNG available & USA cannot flood the entire world with shale gas • 5/ EU cannot get the US low price while escaping the Asia record price. For how long? Hum: let’s see…
  11. 11. STEP 3/ How internal markets interact with EU energy policy … as they should… as markets… • EU Elec market with 1/ “20-20-20 targets”; 2/ gas market; and 3/ “Security of Supply” • 1/ “20-20-20 targets”: Angela Merkel (EU Council Berlin 2007) 20% reduction GHG emissions + 20% Renewables + 20 % more energy efficiency • 20% GHG: automatic in the elec sector – elec cannot pollute more than permits emitted – only unknown there: carbon market price • 20% RES: not needed to reach GHG target – is an EU industrial policy (to start a “Green Industrial Revolution”) - by substituting local energy production to energy imports • 20% Energy Efficiency: not needed to reach GHG target – is a second EU industrial policy (to start a “Green Industrial Revolution”) - by substituting higher quality goods to energy consumption
  12. 12. Elec market interacts… … but • BUT: RES target (= percentage of non polluting energy) and Energy Efficiency target (= volume of energy consumed) influence C02 emissions; hence the demand for C02 permits; hence: C02 price is an end result of the 2 other targets and not a key driver for GHG emission reduction • RES target takes the lead: pushed by feed-in tariffs both wind and sun tak off (Germany 2006 23GW / 2011 53 GW) • In a depressing market: German wholesale price down from 75 Euro MWh in 2008 to 36 Euro 2013 • But RES paid outside the market: German RES surcharge 2014 (64Euro MWh) Total Year2006 4Bn Euro - Year2013 20Bn Euro
  13. 13. Elec interacts… … but(2) • BUT ”scissors effect” for consumers: German wholesale price 2008-2013 (– 40 Euro) MWh and Retail price (+ 40 Euro) <<UK retail price x3 in 10 years>> • Plus “squeeze” for thermal plants : Germ. wholesale market price 36Eur vs total cost Coal gen. 55Eur / Gas 70 Eur • Economic alternative to RES & to Fossil Fuel? Nuclear? UK government recent contract with EDF & Chinese at 108 Eur MWh… (German wind onshore 80 Eur) • A kind of deadlock?
  14. 14. Gas interacts… … but • Can gas “cleans” the energy mix? Yes by replacing coal (x 2 times more polluting with > 0.8 ton CO2 MWh). Ex: in USA GHG emissions at their lowest since… 1994. • In EU however coal ousts gas: German coal near to record 50% elec generation this year • Why so much coal in EU? German wholesale price 36Eur Total cost Coal gen. 55Eur (Only coal + CO2 = 28Eur) Total cost Gas gen. 70Eur (Only gas +CO2 = 51Eur) • For gas to come back against coal: x2 price of coal or /2 price of gas; or x8 price of C02 – not for very soon…
  15. 15. RES target dominates GHG target and internal energy market? • Yes GHG target bypassed by RES (> carbon price does not lead EU decarbonization) • Yes RES evicts gas by reducing net demand in EU wholesale market… but not coal (US Coal expulsed by US shale gas price is welcome by EU gas price) • Yes RES & Retail charges might start pushing consumers to become prosumers (Germany retail price 250 Eur MWh vs France 140) • …And quite high EU price level: EU wholesale price of gas = 3 times the USA; EU elec price for large industry 124$ MWh vs US 72$
  16. 16. Do RES dominate Security of Supply? • 1/ RES reduce our Long Term dependence to imported fossil fuel / in 2012 = (-23%) gas imported • 2/ However production of RES equipment is internationalizing fast (China already 1st manufacturer world wide) • 3/ RES ask for a new European grid operation and planning – while waiting this upgrade our short term security (“reliability”) is today lower • 5/ RES dries up market revenue for thermal plants: long term threat of unsustainable capacity investment • 6/ EU Utilities suffer 2008-12 return (-10%) every year
  17. 17. Thank you for your attention Email contact: Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP “Economics of Energy & Environmental Policy” My web site: 17