New market design to pave the way for a new deal for consumers
See also: Press release: Transforming Europe's energy system - Commission's energy summer package leads the way (15 July 2015)
What is meant by electricity 'market design'?
Market design is the set of arrangements which govern how market actors generate, trade, supply and consume electricity and use the electricity infrastructure...
It is important that these arrangements, or in other words the design –, can transform the energy system, and enable network operators, generators and consumers – both households and industry - to take full advantage of new technology.
The wholesale and retail markets should provide the basis for investment decisions, and boost the development of new services by innovative companies. In a network industry like electricity, an effective market design needs effective regulatory oversight, in particular distribution and transmission system operators.
The European Commission's new electricity market design initiative aims to improve the functioning of the internal electricity market in order to allow electricity to move freely to where and when it is most needed, reap maximum benefits for society from cross-border competition and provide the right signals and incentives to drive the right investments, while fully integrating increasing shares of renewable energies.
Why do we need a new market design?
Europe's electricity system finds itself in the middle of a period of profound change. The share of electricity produced by renewables will grow from 25% today to 50% in 2030. But when the sun is not shining and the wind is not blowing, electricity must still be produced in sufficient quantities to deliver energy to consumers and keep the electricity grid stable. The electricity market is constantly changing and today's market differs fundamentally from the market five years ago.
As the EU wants to set the conditions for a reliable and affordable energy supply for all EU citizens and businesses, and to make the European Union the world leader in renewable energy, those changes are set to continue. Firstly this means that even, more and more electricity will have to be traded across national borders and this requires efficient cooperation from all market actors. As the share of electricity produced by renewables will grow, the grids need to have the capacity for cross border cooperation to reflect this increasing variability of production.
New enabling technologies such as smart grids, smart metering, smart homes, self-generation and storage equipment are empowering citizens to take ownership of the energy transition, using these new technologies to reduce their bills and participate actively in the market.
How can the markets be made more flexible?
Flexible markets can be created by:
- offering consumers the possibility to actively participate in the market by adjusting their consumption to real time prices;
- ensuring that markets provide the right signals for investments in generation and the efficient use of available resources.
- building missing electricity infrastructure and making better use of existing infrastructure;
- ensuring flexible trading: for the efficient integration of renewables into the grid, generators, suppliers and traders need to be able to trade electricity as close to real time as possible as this will allow them to take account of better forecasts on how much solar or wind energy will be produced;
- eliminating regulated prices on one side and inefficient support schemes on the other. If electricity prices do not reflect the actual costs, this will give false signals to investors and consumers of electricity;
- introducing a more coordinated approach to renewable energy support schemes across Member States. Investments should be driven by markets. In a well-functioning market, in times of abundant supply prices are low and when generation is scarce prices are high. This way, prices signal to investors where it is most beneficial to invest,
Renewable energy producers need to be able to compete on an equal footing with conventional energy producers. Where public support is still required to ensure this, considerable efficiency gains could be made by converging renewables' support schemes across borders, particularly through enhanced regional cooperation.
Do we need more electricity networks?
Significant progress has been made in the efficient use of network capacities. The so-called "market coupling" (selling electricity together with interconnection capacity, instead of separately) in large areas of Europe and "flow-based" capacity calculation (taking the real physical flow of electricity in the highly interlinked European grid better into account) have resulted in significant increases of usable network capacities. Nevertheless, additional networks both inside EU countries and between them will still be needed. In order to avoid excessive network investments, other flexibility options have to be used, including enabling consumers to adjust their demand to generation patterns.
What needs to be done to balance networks when there with variable solar and wind generation?
Firstly, by spreading renewable energy generation across Europe through interconnected networks, high generation can compensate areas with lower generation. At the same time the market has to give clear financial incentives for renewable energy generators to make their production as predictable as possible. Furthermore, in periods of low generation, and high prices, by reducing their demand, consumers can help fill the gap by reducing their demand, while the market has to ensure they are adequately compensated for this role.
The transformation towards a low-carbon and efficient energy system is happening on wholesale markets. Why can't retail consumers enjoy the benefits yet?
Today, most EU consumers do not have access to information on the changing economic and environmental costs of using energy at different times of the day, week or year. These costs fluctuate all the time because of the weather and our daily routines, amongst other things.
Most retail consumers are, sometimes unknowingly, paying a premium for the stability. This not only makes energy more expensive because we need to pay for more power plants and networks to meet occasional demand peaks, but it also means that we import and burn more fossil fuels than we need to.
However, some consumers choose contracts that take advantage of the highs and lows of the market and make savings on their bills. For example, consumers in Finland or Sweden who opt for dynamically priced electricity contracts have saved 15%-30% on their electricity bills thanks to dynamic contracts and smart metering.
Another barrier to consumers fully benefiting from the ongoing energy transition is the difficulty of comparing bills and advertising from different energy companies – a situation that encourages consumers to stick with their current supplier. Whilst wholesale markets are becoming more transparent and competitive, retail consumers are still often confused about the supply options they have. What's more, even if a consumer is able to find a better deal, contractual obligations and administrative hurdles can discourage them from making the switch.
What will make a new deal for consumers?
The wholesale and retail markets should provide the basis for investment decisions, and boost the development of new services by innovative companies. In a network industry like electricity, an effective market design needs effective regulatory oversight, in particular distribution and transmission system operators.
The European Commission's new electricity market design initiative aims to improve the functioning of the internal electricity market in order to allow electricity to move freely to where and when it is most needed, reap maximum benefits for society from cross-border competition and provide the right signals and incentives to drive the right investments, while fully integrating increasing shares of renewable energies.
Why do we need a new market design?
Europe's electricity system finds itself in the middle of a period of profound change. The share of electricity produced by renewables will grow from 25% today to 50% in 2030. But when the sun is not shining and the wind is not blowing, electricity must still be produced in sufficient quantities to deliver energy to consumers and keep the electricity grid stable. The electricity market is constantly changing and today's market differs fundamentally from the market five years ago.
As the EU wants to set the conditions for a reliable and affordable energy supply for all EU citizens and businesses, and to make the European Union the world leader in renewable energy, those changes are set to continue. Firstly this means that even, more and more electricity will have to be traded across national borders and this requires efficient cooperation from all market actors. As the share of electricity produced by renewables will grow, the grids need to have the capacity for cross border cooperation to reflect this increasing variability of production.
New enabling technologies such as smart grids, smart metering, smart homes, self-generation and storage equipment are empowering citizens to take ownership of the energy transition, using these new technologies to reduce their bills and participate actively in the market.
How can the markets be made more flexible?
Flexible markets can be created by:
- offering consumers the possibility to actively participate in the market by adjusting their consumption to real time prices;
- ensuring that markets provide the right signals for investments in generation and the efficient use of available resources.
- building missing electricity infrastructure and making better use of existing infrastructure;
- ensuring flexible trading: for the efficient integration of renewables into the grid, generators, suppliers and traders need to be able to trade electricity as close to real time as possible as this will allow them to take account of better forecasts on how much solar or wind energy will be produced;
- eliminating regulated prices on one side and inefficient support schemes on the other. If electricity prices do not reflect the actual costs, this will give false signals to investors and consumers of electricity;
- introducing a more coordinated approach to renewable energy support schemes across Member States. Investments should be driven by markets. In a well-functioning market, in times of abundant supply prices are low and when generation is scarce prices are high. This way, prices signal to investors where it is most beneficial to invest,
Renewable energy producers need to be able to compete on an equal footing with conventional energy producers. Where public support is still required to ensure this, considerable efficiency gains could be made by converging renewables' support schemes across borders, particularly through enhanced regional cooperation.
Do we need more electricity networks?
Significant progress has been made in the efficient use of network capacities. The so-called "market coupling" (selling electricity together with interconnection capacity, instead of separately) in large areas of Europe and "flow-based" capacity calculation (taking the real physical flow of electricity in the highly interlinked European grid better into account) have resulted in significant increases of usable network capacities. Nevertheless, additional networks both inside EU countries and between them will still be needed. In order to avoid excessive network investments, other flexibility options have to be used, including enabling consumers to adjust their demand to generation patterns.
What needs to be done to balance networks when there with variable solar and wind generation?
Firstly, by spreading renewable energy generation across Europe through interconnected networks, high generation can compensate areas with lower generation. At the same time the market has to give clear financial incentives for renewable energy generators to make their production as predictable as possible. Furthermore, in periods of low generation, and high prices, by reducing their demand, consumers can help fill the gap by reducing their demand, while the market has to ensure they are adequately compensated for this role.
The transformation towards a low-carbon and efficient energy system is happening on wholesale markets. Why can't retail consumers enjoy the benefits yet?
Today, most EU consumers do not have access to information on the changing economic and environmental costs of using energy at different times of the day, week or year. These costs fluctuate all the time because of the weather and our daily routines, amongst other things.
Most retail consumers are, sometimes unknowingly, paying a premium for the stability. This not only makes energy more expensive because we need to pay for more power plants and networks to meet occasional demand peaks, but it also means that we import and burn more fossil fuels than we need to.
However, some consumers choose contracts that take advantage of the highs and lows of the market and make savings on their bills. For example, consumers in Finland or Sweden who opt for dynamically priced electricity contracts have saved 15%-30% on their electricity bills thanks to dynamic contracts and smart metering.
Another barrier to consumers fully benefiting from the ongoing energy transition is the difficulty of comparing bills and advertising from different energy companies – a situation that encourages consumers to stick with their current supplier. Whilst wholesale markets are becoming more transparent and competitive, retail consumers are still often confused about the supply options they have. What's more, even if a consumer is able to find a better deal, contractual obligations and administrative hurdles can discourage them from making the switch.
What will make a new deal for consumers?
A fundamental change is necessary in the role consumers play in the market. We need to give consumers the opportunity to adapt their energy usage to take advantage of real-time changes in supply and demand.Consumers need to be able to act as buyers and sellers – with innovative companies offering them new services based on clearer and comparable billing and advertising rules that facilitate switching suppliers, but also through access to trustworthy and relevant price comparison tools and by leveraging their great bargaining power through collective schemes (e.g. collective switching, energy cooperatives). Consumers need to be free to generate and consume their own energy under fair conditions in order to save money, help the environment, and ensure security of supply.
Finally, consumers in situations of vulnerability or energy poverty and household less able to shift their demand or to become prosumers need to be effectively protected during this transition and offered targeted assistance to improve the energy efficiency of their houses.
How will we ensure that consumers and their data are protected in this new setting?
EU legislation already provides energy consumers with extensive rights, and the enforcement of these rights remains a priority. On top of this, the Commission will consider creating new energy specific laws within its Consumer Protection Cooperation Regulation. It will commit resources to improving the monitoring of energy poverty throughout the Union and spreading best practices to help ensure that citizens from all walks of life benefit from this transition.
The effective use of smart metering systems requires processing of personal data. Therefore care must be taken to protect personal data and provide security. The Commission is recommending a "security and data protection by design"approach.
What is self-consumption of renewable energy?
Today, thanks to the significant reduction in technology costs, consumers can produce their own electricity onsite from renewable energy sources (e.g. solar or wind power), and consume some or all of it, either instantaneously or in a deferred manner through small-scale energy storage (e.g. a heat pump or a battery). In this way consumers who produce can save money by generating their electricity rather than buying it, and even inject the non-consumed surplus electricity into the grid.
Self-consumption can help reduce grid losses as the electricity is generated and consumed locally. It can also lower energy system costs, e.g. solar photovoltaic generation in sunny countries at peak demand driven by air conditioning. Finally, self-consumption can help mobilise private investment to finance the energy transition.
At the same time, self-consumption can raise new challenges and reduce grid operators' revenues. The grid may also need technological adjustments to maintain safety and reliability. The Commission has identified best practices to support EU countries to promote self-consumption in a cost-effective way.
What role can energy storage play in the new market design?
Secure operation of the grid has become more challenging with the rapid growth of variable renewables, and generators and consumers must be able and incentivised to respond to this flexibility challenge. Integrating storage in the electricity market would further increase the necessary flexibility: electricity should be stored when there is a surplus and prices are low; it should be released when generation is scarce and prices are high, smoothing out variable power production.
What are the next steps?
Following a public consultation on electricity market design, the Commission will prepare legislative proposals in the second half of 2016. Possible amendments to the internal market legislation, Renewables Directive, Energy Efficiency Directive and Infrastructure Regulation could be foreseen.
The Commission will also continue its work with the relevant stakeholders to create tools which will enable consumers to become active participants in the market, such as comparison tools, identifying minimum standards for key billing information, and data protection.
