New energy market design: facilitating investments in all low carbon technologies
On 8 October 2015, FORATOM published its response to the public consultation launched by the European Commission on a new energy market design for Europe. FORATOM welcomes the intention of the European Union to redesign the European electricity market. The EC is expected to publish legislative proposals for a new European electricity market design in 2016.
FORATOM believes that investment in all forms of electricity generation should be driven by market signals. This means that market-distorting subsidies should be progressively removed so that the market price reflects the actual cost of generation, including system costs and back-up. In the absence of an effective carbon price under the EU Emission Trading System (ETS), the need for alternative investment signals is particularly important for low carbon generation, i.e. nuclear, renewables and eventually carbon capture and storage (CCS).
FORATOM supports a technology-neutral approach whereby the new market design should enable all low carbon technologies to compete on a level playing field, so that decarbonisation objectives can be achieved at the lowest possible cost.
Over the past decade, the large increase of power generation from renewable energy sources has been made possible by public subsidies. The introduction of intermittent renewables on the European system has resulted in overcapacity, the decrease of average spot prices on the wholesale market and the replacement of conventional gas power generation by coal. The nuclear fleet is also impacted, with the threat of early shutdowns and the postponement of new builds.
The low wholesale market prices, based on marginal costs, are insufficient to incentivise new investment in any type of electricity generation, but the problem is particularly acute for low carbon generation with its high up-front capital costs and correspondingly high financing charges. While the carbon price is low, the market needs to find a way of rewarding low carbon investments, in both renewables and nuclear, long term so that investors have confidence in the eventual pay-back. FORATOM believes that this could be achieved for example through the use of long-term contracts based on tendering of average cost pricing, as proposed by DG ECFIN in July 2015. The following are the main principles FORATOM would like to see embedded in the new market design.
For further information, please watch the interview of Jean-Pol Poncelet, FORATOM DG, on the new market design.
Principles for a new market design
FORATOM insists that an electricity market design with a single objective, namely to adapt the market to the intermittency of renewable energy sources, is a mistake. Flexibility will have to increase, but the adequacy of long-term generation is important as well. Market failures will have to be rectified using appropriate regulatory instruments if the market is to be able to support the EU’s energy and climate policy objectives.
The current market design does not incentivise investments in low carbon generation, including in renewables, and needs to be revisited. With a growing share of variable renewable energy sources in the power system, short-term electricity markets based on marginal costs will be unable to provide an efficient signal for long-term low carbon investments, even if the wholesale electricity prices are uncapped to reflect scarcity of supply. As a consequence, the market design, even with a well-designed short-term market and effective carbon price, needs to be supplemented by additional instruments to secure investments.
The new market design should include instruments able to mitigate the revenue risk over 20 to 30 years, in order for investments in new low carbon generation to be driven by the market. In particular, long-term contracts allow the use of project finance or hybrid financing approaches supporting higher leverage and thereby reducing the cost of financing. This aspect is especially important for low carbon technologies that are characterized by high up-front costs, such as nuclear and offshore wind power.
Market-driven instruments including long-term contracts can offer revenue stability and are needed if Europe is to meet its goals to decarbonise its power system at an affordable cost while ensuring security of supply.
Taxes and Levies
While the EU is promoting low carbon energy sources, the Member States’ taxation systems are frequently at odds with this objective. Member States apply a large variety of taxes and levies in the energy sector, which interferes with the development of the internal electricity market, influences dispatch decisions, hampers investments in existing and new power plants and distorts competition between technologies. The introduction of new taxes also increases regulatory risks.
The further integration of electricity markets in Europe is a key EU objective and the minimisation of these distortions should be prioritised. The process for the creation of the Energy Union should provide more transparency and dialogue on taxes to help Member States understand the EU-level consequences of different national taxes and levies.
The European Commission should take further steps to reveal the drivers of recent price increases and provide more transparency. The EC should also communicate to national governments and regulators the urgent need to remove unrelated taxes and levies from energy bills, including nuclear-specific taxes.
Market Driven Investments
To make renewable energy sources (RES) fit for the market, the same rights and obligations of market participation as for other market participants should be made applicable. In the period after 2020, a review of subsidies should result in the phase out of market-distorting support for all mature low carbon technologies.
The ETS also has to play a greater role by delivering a clear carbon price signal. Together with the recent agreement to establish a Market Stability Reserve, the legislative proposal to reform the ETS Directive will enable the ETS to provide additional incentives for the reduction of greenhouse gas emissions, improvement of energy efficiency and investment in low carbon technologies.
FORATOM sees technology neutrality and competition in the market as the key principles of a cost effective transition. The EU and the Member States should strive to develop the regulatory framework in such a manner that investments in all mature low carbon technologies can take place under the same market rules.