The ACER report on wholesale electricity markets makes a case for the status quo despite evidence that these same markets have delivered massive and unnecessary electricity price rises for EU citizens, writes Mike Parr.
Mike Parr is the director of PWR, a UK-based company providing market research and technical support in the field of renewables and energy efficiency.
ACER is part of the constellation of EU institutions that are ostensibly there to make the European Union a better place for its citizens. Given current events, it should therefore be acting in the interests of EU citizens by asking probing questions about markets and their functioning.
The report it delivered on 29 April does neither. Markets, in the view of ACER, are in need of little reform.
Much of the report, in fact, reads like a lobby document for vested interests. It fails to address the key problem: how to price wholesale electricity for what it actually costs to produce. But ACER explicitly rejects the idea that this is possible (Section 3,2, where it provides partial examples of why this would not work).
An increasing number of people at all levels within the EU institutions are losing confidence in the ability of either ACER or CEER (The Council of European Energy Regulators) to deliver the electricity market reforms needed. These concerns are echoed by some Member States, such as France and others, who have made clear their desire for fundamental reform of the sort wholly absent from ACER’s report.
The report is 78 pages long, and it is not possible here to undertake a page-by-page analysis. I will therefore restrict this analysis to sections 3 (EU wholesale electricity market design: benefits and remaining implementation challenges) and 4 (Ways to improve the EU wholesale electricity market).
Section 3.1 (page 18) states: “The EU electricity market design is influenced by both the characteristics of electricity (e.g., that it cannot be stored easily) and broader policy goals.”
This is questionable. Although electricity is not stored at a large scale now, the electricity system is transitioning to a hybrid system of renewables coupled with electrolysers producing hydrogen that will provide, via a re-purposed gas network, the Terawatt hour-class storage needed by an EU energy system.
This is EU policy. ACER mentions hydrogen five times in the document but assumes that this energy carrier will only have a significant impact post-2030. In addition, this fits badly with the statement on page 53, which states: “this ACER assessment focuses on the benefits and drawbacks of the EU electricity market design, not least in terms of its ability to deliver the EU’s decarbonisation trajectory over the next 10-15 years”.
Given the 2032-2037 time frame, why was hydrogen only briefly referred to on page 32 in the context of more long-term flexibility? Given its potential as a store of electricity, why was it not considered as a significant influencer of market design?
The report is riddled with contradictions, and it is clear that nobody has read the full report for coherence. Page 55, Section 5.1 analyses various options for electricity market intervention and rejects the “division of the electricity market into distinct technologies …. administratively-set production quotas and prices for each technology”.
Page 35 Section 4.2 describes the various measures used by Member States to encourage renewables, which define price and technology and indirectly production quotas. ACER, on page 55, denies and criticises points which they describe as realities on page 35.
The title of Section 3.2 is “Dispelling some myths…” but ACER then develops its own myths about ‘pay-as-bid’ vs ‘pay-as-clear’. It cites the example of California in 2001/2, the electricity wholesale price scandal and the attempts by Californian authorities to do something about it.
It then fails to mention that the scandal was caused mostly by Enron plus others using grotesque market manipulations. Such market manipulation sits very badly with the ACER (& NEMO) “myth” of perfect markets needing no reform and featuring honest and rational players.
Much of Section 3 is concerned with the minutiae of cross-border trading, which only accounts for small amounts of the overall load. For example, between Iberia and France, electricity swaps account for around 5% of the total Iberian load. Not considered is how electricity interconnectors have proved very effective in spreading the contagion of high electricity prices.
Section 3.4.2 discusses network congestion and “time and space granularity of electricity markets”. However, in the network of the future, post-2030 physical congestion is likely to be a thing of the past.
Too much electricity from too much renewables on a given network segment? Use electrolysers to convert it into hydrogen. Not enough electricity? Fire up the hydrogen powered turbines. Neither renewables nor electrical or energy loads roll across the landscape like peripatetic gypsy caravans. Which means that one can plan for both renewable and hydrogen generation and storage in the network locations where they are needed.
The idea of such planning is wholly absent from ACER’s report, which proposes markets as a substitute. The problem with this approach is that current markets are cost-maximisation/profit maximisation mechanisms, that are functionally incapable of planning anything.
In a renewable world with electrolysers and hydrogen as the main storage mechanism, what role for markets? It is no surprise that ACER never even attempts to pose the question.
Section 4.2 briefly covers how renewables are remunerated before focusing on power purchase agreements (PPAs) i.e., those between an owner of renewable generation and a company that wants to purchase renewable power.
However, PPAs only account for a minuscule part of overall power generation in a given member state. Nevertheless, ACER’s report reads like a lobby document for more PPAs and frames them as a “commercially-driven approach” in contrast to the “subsidy-driven” approach of centralised competitive tenders, i.e., auctions and contracts for difference. However, renewables via the auctions/CfD route deliver by far the lowest cost electricity and provide the certainty that renewables developers need.
At no point does ACER consider the impact of zero marginal cost renewables on wholesale electricity prices. Indeed, nowhere in the report does the phrase “zero marginal cost” appear.
And yet, that is a defining aspect of renewables. Because they have zero marginal costs, they cause massive price falls when they form a large part (60%+) of the generation mix.
Take Germany and Spain, for instance. By 2030, Europe’s largest economy will have 340GW of renewables connected to its system, Spain 100GW etc. Most of these renewables will have fixed price CfD-based contracts, which means that a basket-price approach to forming the wholesale price of electricity becomes easily realisable.
But these realities and the market impacts of large-scale renewables are never considered.
If the member states are serious about doing something with respect to high energy prices and the ACER report, the first step would be to have ACER cross-examined on the report and its contents at the next European Council.