Speech for Mr Christopher Jones at the III International Business
Introduction and the Energy Union Priorities
It's a pleasure to be here with you at the opening of today's symposium on markets and sustainability for a competitive energy sector. I'd like to thank FUNSEAM, the IEB and the University of Barcelona - not only for organising this event - but for their high quality research on the most important issues for Europe's energy sector today.
Such work is going to be critical to navigate the many changes that are upon us - falling oil prices, new technologies, and the widespread uptake of renewables - to name just three.
In this context of change, there is also a real sense of opportunity for Europe. And the Commission wants to ensure these opportunities are not missed. The Energy sector is expected to be the one of the largest beneficiaries of the € 315bn EU Investment plan.
And the EU has committed itself in recent months to the construction of an Energy Union - to
ensure Europe's citizens and businesses will continue to benefit from affordable, sustainable and reliable energy in the years ahead.
The Energy Union should be based on five mutually reinforcing dimensions, notably:
- Supply security, based on solidarity and trust
- Moderation of energy demand
- Decarbonisation of the EU energy mix
- Research and innovation
- A competitive and completed internal energy market
Today I want to focus on the last point - which has been at the very core of EU energy policy
for the last 20 years. Last October, the Commission adopted a Communication setting out progress on the Internal Energy Market.
We have made considerable progress over the past 20 years on the path to an Internal Energy Market. But where has that left us? And how is this progress reflected in terms of our overarching objectives - competitiveness, sustainability and security of supply?
I would like to analyse these three objectives of the Internal Energy Market one by one, and tell you where we stand for each one of them.
Where do we stand on the Internal Energy Market?
1. Competitive energy
In terms of competiveness, there is no doubt that EU policy over the past twenty years has made our wholesale markets more competitive. A year ago, the Commission published its report on energy prices.
It showed that the wholesale prices for electricity have dropped significantly in the EU – between 35% and 45% in the period between 2008 and 2012 - and that the wholesale gas prices have remained roughly stable since 2008. This means, on the wholesale level, electricity prices are at about the same level as in the US.
As regards gas, while LNG prices have gone up post-Fukushima, prices on Europe's most liquid hubs have remained in check. While functioning hubs have so far been available only in North-Western Europe, the last two years show important positive developments in Italy, Poland and the Czech Republic as well. Well-organised, transparent market places which operate with the same rules make it easier for sellers of gas to shop for gas across borders.
Unfortunately, retail energy prices have risen significantly in recent years, often due to taxes and levies, but also network charges, which represent a significant and increasing part of the retail energy bills. So the challenge now is to ensure that successes on the wholesale markets are replicated in the retail markets. This is the key to ensure that gains in competitiveness actually result in increased affordability and more competitive prices for European households and industry.
2. On our second objective of sustainable energy:
Since 2007, when the EU leaders agreed on the 2020 targets in the field of energy and climate, we have made significant steps towards our second overarching objective: a more sustainable energy future.
Increased renewables penetration on our markets has brought challenges – in particular to stabilise the grid with the inflow of variable solar and wind power. A well-integrated market across Europe will be the best solution to tackle this challenge. It allows areas with complementary energy mixes to connect.
A prime example is the French and German electricity markets where the cross border flows enable Germany to keep its system stable when the wind is blowing and the sun is shining. At the same time, it allows France to ensure supplies when temperatures drop.
These examples show that the completion of the internal energy market is also important to achieve our sustainability goals.
3. Secure energy
The current political circumstances make our third objective - security of supply - a particularly pressing one. The 2030 Framework and the European Energy Security Strategy have highlighted the importance of an integrated market for both our long and short term supply concerns.
In the gas sector, developments in Ukraine over the past year have shown how much competitive and liquid markets are necessary to an effective protection against abuses of market or political power by individual suppliers.
So a completed and well-functioning Internal Energy Market will provide real long-term remedies to make security of supply a reality.
What are the challenges we face?
This brings me on to some of the key challenges that we will be facing in the coming years.
The key challenge I want to mention is about continuing investments in the necessary infrastructure for interconnected markets - in both electricity and gas.
The Iberian Peninsula is, of course, a prime example here.
Electricity and gas interconnection capacity between the Iberian Peninsula and mainland Europe has too low for too long. But we finally are making progress to resolve this.
Here in Spain, the Commission has identified 4 electricity and 2 gas projects as Projects of Common Interest and has co-financed the Spain – France electricity interconnector under
the European Energy Programme for Recovery.
The Transmission System Operators of Spain, France and Portugal have just signed a common strategy paper for the development of interconnection of the Iberian Peninsula with
the internal electricity market.
And this month the interconnection capacity between Spain and France will be increased from the current 1400 MW to 2800 MW with the commissioning of the interconnection between Baixas (FR) and Santa-Llogaia (ES) in the Eastern Pyrenees.
These are hugely important first steps towards ending the isolation of the Iberian Peninsula from the wider EU energy market – an aim that is not only good for Spain and Portugal, but good for the entire European Union.
[On investments and price signals]
Hubs and power exchanges will also play a key role in the construction of a competitive energy market. They do not just facilitate trade. They also provide important information on the value of the traded commodity.
In the short term, these price signals make sure that power and gas are dispatched in an economically sensible manner.
In the long term, these price signals are crucial to indicate where investments in additional infrastructure or generation capacity make sense.
In other words, price signals help optimise the use of existing infrastructure and make sure we invest in the most economically sensible projects for the future.
[On renewables integration]
The increasing share of variable renewable power generation also raises new challenges for the operation of the electricity system in order to ensure secure and stable operation.
We need to make sure that the overall system becomes more flexible, that consumers can better participate in markets and that energy across borders can be exchanged with more ease.
To this end we may provide enhanced rules for cross-border energy trade and propose appropriate measures to encourage renewable energy producers to better integrate in the wider electricity market.
For us, potential ways forward might involve: increasing the flexibility of conventional generation capacities, such as gas-fired power plants; making the demand for electricity more flexible; encouraging the building of storage capacities; and increasing transmission capacities to add flexibility to the system.
Among other things this will require more coordination between TSOs, and a more harmonised approach to grid connection standards.
The Network Codes and Guidelines being developed under the Third Energy Package will prove critical in this regard.
Our approach to renewables is changing, too.
Policies that helped infant technologies to take off and gain market shares might not be equally well-suited to handle larger shares of RES-based electricity (we are talking about eg a quarter of DE s electricity).
And they are probably also no longer suitable for defending the EU's position as the world leader in RES technologies.
Clearly, at times when all the electricity being produced is exempt from normal market rules, a competitive electricity market ceases to exist.
In our November 2013 Communication on public interventions we gave clear advice on how best to design support schemes, calling for them to be market based and cost-effective. Investors will find that they prefer to manage market risk instead of regulatory risk.
[On the importance of balancing]
Now to system balancing. More sources of generation will be less "controllable" and the role of system balancing – the process that TSOs undertake to ensure generation matches demand in real time – will change over the coming years.
There is significant scope for more cross-border integration of electricity balancing, which could lead to significant cost saving.
The upcoming Guideline on electricity balancing will be crucial in achieving this. We are also thinking of possible ways to have RES operators assume balancing responsibilities.
[On generation adequacy and capacity mechanisms]
While we need to ensure generation adequacy, uncoordinated and divergent national approaches risk undermining the achievements of the internal energy market.
The Commission has set out clear principles on this:
1. A thorough assessment of the generation adequacy situation is needed to justify implementing a capacity mechanism.
2. And though ability of energy-only markets to deliver all new investments in generation may be contentious, the need for effectively functioning markets for efficient
investments is not!
The side-effects of existing public interventions, such as the promotion of renewables, cannot be used as an excuse for the introduction of more public interventions, such as capacity mechanisms.
Such mechanisms must not undermine the business case for demand side solutions or market coupling.
When you do not allow price signals to work, you should not be surprised that investment is not forthcoming.
The UK capacity mechanism has successfully applied these principles. I am also glad to say that Ireland and Greece, who already have capacity mechanisms, are now reviewing their mechanisms to bring them into line with these principles.
But we recognise also practical difficulties of implementing the cross border dimension. And as in the UK we may have to accept second-best solutions at the beginning.
Full cross border participation requires knowing export and import capacities 2/3/4 years in advance and a procedure to certify and monitor performance by capacity providers.
Doing this means hard work – the first answers may be regional mechanisms developed by neighbours – but we also want to avoid the problems seen in the US where “regional” mechanisms are incompatible with each other.
This is why I welcome the work being done in Member States such as Germany and in the Pentalateral forum.
In order to better assess the system requirements for keeping the lights on, we may need to provide an EU-wide harmonised framework for assessing the adequacy of the electricity system, and its ability to meet demand.
This could include a framework for capacity remuneration mechanisms. Such possibilities will be explored through a Communication of the Commission in the course of 2015.
[On Demand-side management and energy efficiency]
A final challenge is to make space for energy efficiency and demand response, which are often better and cheaper options than building up or maintaining generation capacities and vis-à-vis establishing mechanisms that offer flexible supply.
Shifting load from peak to off-peak periods could reduce generation needs by up to 10%. Effective use of Demand Response would yield annual savings in the order of €60 to 100 billion in Europe. And provisions under existing EU legislation – namely Article 15 of the Energy Efficiency Directive – ensures that demand side opportunities are not overlooked. These now need to be fully implemented at national level.
Conclusion and outlook
Ladies and Gentlemen,
The success of the Internal Energy Market will both depend on and contribute towards success in the other four dimensions of the Energy Union project.
On 25 February, the Commission will adopt its proposal for a Communication on the Energy Union.
It will include concrete measures to tackle the key challenges I have mentioned. Clearly, there is a huge amount to be done, and I would very much welcome your ideas on our proposal in the coming months.
Thank you for your attention.