Viewpoint: Please don't drop the ball now, Europe

In the liberalised electricity sectors of many European countries the markets at the heart of the power system were designed for a different time and for a different purpose. Jury-rigging them to cope with new technology is both short-sighted and risky.

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Wholesale markets play a role in all competitive electricity systems. They keep energy supply and demand in equilibrium by providing a shortterm price signal to generators, allowing them to make economic decisions. They remunerate providers of the "ancillary services" vital to the smooth operation of the network. And they give investors confidence in future revenues to ensure new generation capacity is built.

That a very high penetration of wind energy can precipitate technical and market changes is not news. "Smart" technologies that put consumers face-to-face with markets also have implications for market designs.

Long-term system adequacy is the current issue du jour. High penetration of wind energy can and does suppress energy prices in the short-term, as we have seen in Germany and elsewhere. Some policy makers fret that the prospect of lower, more capricious prices risks eroding investors' confidence in new, flexible sources of system capacity - on both the supply and the demand sides.

Theoretically, an efficient market provides a price signal that delivers the optimal amount of all of the electrical products - including system capacity. But some European governments recognise that the existing markets are not perfect and are nervous about entrusting energy security to energy-only markets. Egged on by utilities with fossil-fuel assets, they are in various stages of proposing or implementing policies to ensure adequate capacity (see The trouble with capacity markets, Windpower Monthly, November 2013).

Eyes on the prize

Opinion is polarised about paying providers of firm capacity such as gas generation simply for being available. But, despite the brouhaha about capacity payments, there are more fundamental issues at stake. In the scramble to patch up national markets to cope with new technologies, there is a risk the baby will be thrown out with the bathwater.

Something approaching a European internal energy market, a project first announced in 1986, could become a reality in 2014. It is an important step towards a pan-European electricity market - and great news for wind.

The politics of energy mean that system security is treated as a national issue and there is almost no coordination of capacity payments. The failure to write legislation that allows providers from other countries to sell capacity into the UK's proposed mechanism is already causing friction. A fragmented approach to adapting markets for more wind energy and other new technology threatens to turn back the clock on the hard-won progress Europe has made towards a fully integrated market, to wind energy's disadvantage.

The big prize

Bigger networks and markets unlock efficiencies of scale by balancing, trading and operating over larger areas. Generators benefit from new markets, and consumers benefit from broader competition. And, crucially, by providing access to a wider range of sources of capacity, they also address some of the adequacy problems that capacity payments intend to fix.

Very high wind penetration is certainly technically possible. In Denmark last November, wind contribution reached more than 120% of Danish electricity demand with no ill effects, enabled by the country's strong cross-border interconnection. Of all generation technologies, wind energy perhaps benefits more than most from electricity network and market integration.

New technologies, including wind, and the opening up of markets mean the European electricity system is changing fast. The entrenchment of past-their-sell-by-date market models, by intervening in ways that risk expensive market distortions and retarding progress towards larger, more robust market systems is retrograde.

The peculiar nature of electricity means that, perhaps more than almost any other commodity, its markets are social constructions and not handed down from the gods, perfectly formed and to be preserved for perpetuity. As the founder of the Council of European Energy Regulators, Jorge Vasconcelos, puts it: "They exist to serve the social needs of their time."

New generation and information technologies, along with far-sighted regulation and European integration, have the power to recast the model on which electricity markets function, to the benefit of society and the environment. Unilateral tinkering around the edges of national markets does not.

Oscar Fitch-Roy is a senior policy consultant in the renewables advisory division of DNV GL

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