Market-based energy-transition through innovation. By Michael Mieszczanski

Electricity is essential to our economy and modern way of life. It keeps society functioning and our economies operating and growing. The power system – delivering electricity whenever we need it – is thus one of the core infrastructures of any society. In Europe notably, the power system is in the midst of transformative change. By 2030 the share of renewable energy sources (RES) will grow beyond 45 per cent of the EU’s total annual demand – up from today’s 30 per cent. Most of these are volatile (wind and solar photovoltaic (PV)); they are decentralised, connected to the power system at distribution level (especially solar PV) or further away from consumption centres (especially true for onshore and offshore wind). We also observe significant increases in selfconsumption, electrification of heating/cooling and transport as well as large-scale roll-out of smart meters in some countries. New stakeholders and market players get on board and develop a wide range of opportunities for customers, who have to be present in all markets. In other words, the power system is going through a paradigm shift.

All this increases system operators’ unique position of responsibility towards society to ensure the reliability of the power system. Transmission system operators (TSOs) respond to this through enhanced co-operation within and beyond ENTSO-E, improving planning and the operation regionally and at pan-European level. However, as the physical reality of the system evolves, the electricity market design also needs adjustment to incentivise market behaviour in line with the physical needs of the power system. On the latter aspect, the imperative for TSOs across Europe is to reconcile markets with the 2020 and 2030 sustainability agendas and to make the best use of innovation, putting empowered customers centre-stage.

Innovation allows consumer participation
To keep the system in balance, demand must become more flexible; i.e., customers must be enabled to respond to market signals. However, if this flexibility was imposed on the customer, quality of life and industrial and commercial productivity could suffer greatly. Fortunately, innovation in information and communication technology (ICT) is providing tools, which empower customers to make their own choice on how flexible they are with their electricity demand. Large industrial and commercial customers can continuously manage their consumption and also their system services. Alternatively, they can set the parameters and leave the day-to-day management to a service provider or their electricity supplier. Through these choices and parameters, customers are managing their demand much more actively than in the past.

Among the most important obstacles to consumer participation in many countries, is the lack of enabling ‘hardware’: smart meters, which are needed to deliver accurate information on cost and consumption as the starting point for active customer participation. When the hardware is there, consumer billing needs to shift from static consumption profiles to actual, time-stamped consumption and billing.

Another precondition for customer participation in the market is the incentive to do so. The increasing proportion (some 30-35 per cent) of fixed charges, taxes and levies of the average final household electricity bill reduces the relative savings for households from decreasing wholesale prices. Whenever possible, these costs must be reduced or transformed into more dynamic market components.

To link up wholesale and retail prices, TSOs and DSOs (distribution system operators) have already launched joint initiatives for closer co-operation in relevant areas such as data management. However, we do believe that Europe-wide or regional rules are needed to facilitate access to flexible sources at the distribution level to all markets.

A future-proof market design
Renewables drive innovation, and renewables necessitate innovation: The more RES we have in the system, the more the system has to be sophisticated, responsive and flexible. Therefore, empowering consumers alone will not suffice. The market design needs adjustment and price signals need to be strengthened. The updated market design must reveal system costs and the value of services delivering adequacy, flexibility and resilience.

We therefore believe that scarcity prices—wholesale price spikes reflecting temporary scarcity situations (e.g., periods of low wind or solar and high demand)—are central to enabling the future market design to ensure power system adequacy and resilience, and to mobilise effective endconsumers’ participation in markets.

Scarcity pricing entails unconstrained price formation in all market-timeframes (day-ahead, intraday and balancing) to reflect the real cost of electricity. In this context, the reference to such a need in the joint declaration of the Pentalateral Forum of 8 June 20151 is a positive sign.

Since more frequent scarcity prices will expose market participants to new financial risks, this will trigger the market to develop corresponding risk-hedging products. These products will allow market participants to mitigate their financial risks while also providing more stable investment incentives. One example is the recent launch of intraday cap futures by EEX2.

Likewise, the market needs adjustment to move renewables onto a level playing field with other technologies and let them bear the same responsibilities (in particular balancing responsibility) as other market participants. They also have to be exposed to price signals, in particular when we see negative prices at wholesale levels. Subsidies for mature RES technologies should be phased out or – if still necessary in the future – they should be designed in a way that minimises the market and operational impacts and be sufficiently co-ordinated across Europe to support trading or participation across borders. To move in this direction, renewables have to get better trading opportunities, which they currently lack in some markets.

Innovation underpins the transition
The power system’s need for flexibility is enormous and another important way of making the system more flexible is energy storage. TSOs are neutral with regard to the various energy storage technologies. However, it should be noted that only hydro-pumped storage is competitive enough in the present market environment and that the current hydro-pumped storage capability in Europe is limited. The role of innovative storage solutions, such as power to gas or small-scale storage, have gamechanging potential that need to be realised.

Innovation is an important enabler of the energy transition. Innovation comprises more than just technology; it also encompasses both process and business model innovation. However, due to a lack of research and development incentives for TSOs in several countries, innovation efforts across Europe are very heterogeneous. The regulatory model for TSOs is based on national oversight to ensure cost-effective delivery for local consumers. This poses challenges for fostering the required participation of TSOs in the innovation to underpin the large-scale transformation of the power sector.

Likewise, a significant innovation potential lies with new actors from the ICT sector, independent aggregators, ‘prosumers’ and storage solutions. The TSO community thus needs to be prepared for game-changers such as low-cost local storage and must be prepared and able to define the co-operation with these actors.

While learning and knowledge can be achieved and shared from local to pan-European level, it is necessary that a specific pan-European power system innovation is enabled. The funding mechanism to allow for this evolution challenges the existing regulatory model.

1 Joint Declaration for Regional Co-operation on Security of Electricity Supply in the Framework of the IEM
2 https://www.eex.com/en/about/newsroom/news-detail/eex–trading-of-cap-futuresto-begin-on–14-september/89880

ENTSOE-E
Michael Mieszczanski is EU & Corporate Affairs Advisor at The European Network of Transmission System Operators for Electricity, ENTSO-E. ENTSO-E represents 41 transmission system operators (TSOs) from 34 countries across Europe. European electricity TSOs operate, maintain and develop the extra high voltage grid and facilitate wholesale power markets. ENTSO-E was established by the Third Energy Package; a series of EU laws on the liberalisation and integration of gas and electricity markets.

For further information please visit: entsoe.eu