Power and gas traders have much to offer to further develop Europe’s energy transition, says Peter Styles.
The energy sector is undergoing a profound transformation, with the transition towards a low-carbon economy both at European and at global level affecting energy producers, suppliers, consumers and traders alike.
In combination with digital innovation and decentralised assets, the continuing imperative of decarbonisation will bring new opportunities for active participation of consumers in Europe’s energy markets and may entail a new role for the European natural gas system.
Yet, the changing nature of the energy supply chain, in parallel with an emerging goal of complete carbon neutrality across Europe, open a number of questions on the future of the energy sector, for example:
- Which technologies can help the EU reach its decarbonisation objectives? How can we make sure the most efficient technologies are deployed in the most cost-effective locations, irrespective of member state borders?
- How do we ensure that the transformation of the power and gas sectors leads to an overall economic, environmental, and operational optimisation of the European energy system?
- How can we succeed in enabling the participation of consumers and communities in the energy transition, while strengthening the overall resilience and security of supply of the energy system?
- In the course of all the changes, how can the benefits of competition and liquidity in the European single markets in power and gas, especially at the wholesale level, be preserved? Can the EU emissions trading system (EU-ETS) also be safeguarded and enhanced?
We, in the European Federation of Energy Traders (EFET), believe that Europe has the means to respond to the first three of these challenges, partly thanks to the evolution in the last 20 years of open, competitive, transparent and liquid power and gas markets and the creation of the world’s most important market in carbon abatement instruments.
The growing share of renewable energy sources in Europe’s power generation mix will lead to more frequent periods dominated by close to zero bids from generators with very low marginal costs of production. The intermittency of output from wind turbines and solar panels may potentially give rise to more frequent and higher price peaks.
However, peak prices, so far, tend to be suppressed by excess generation capacity in most countries. Complementary to the ever-greater volumes of wind and solar power output can be mechanisms and technologies such as demand-side response, electricity storage and cross-sectorial flexibility provided by power-to-gas or power-to-X installations.
It is becoming clear in the course of 2020 that the European Commission and some national governments are determined to carve out a special role for hydrogen produced using renewable sources.
I am confident that the wholesale power market will continue to play a vital role in matching supply and demand in the most efficient way, in the process enabling strong price signals and assisting local, regional and European security of supply.
At the same time, with the rise of distributed generation, community swap arrangements and decentralised storage, well-designed, efficient and fully integrated European wholesale energy markets could be combined with new models for local flexibility.
Strong links between the wholesale power market and possible local energy swap or ancillary service platforms might help better reflect the cost of energy at wholesale level and congestion costs in the consumer bill.
This may in turn help trigger greater consumer participation in energy markets and sharpen the consumer response to price signals. Such links between the wholesale market and local energy platforms can allow the benefits from liberalisation, which we observe at the generation and wholesale levels, to trickle down to end-users and to foster consumer empowerment.
Back office process standardisation, as well as standardisation of IT used in such processes, makes the electronic exchange of transaction and related data feasible. It has become possible for protocols and computer language to be developed, which facilitates the sharing of transaction data between counterparties.
The same standards have been applied to help in the submission of scheduling data by generators and traders to electricity and gas TSOs and in the submission of transaction details by traders and exchanges to regulators. This type of standardisation has constituted an important precondition for the advent of real market liquidity and ease of market entry.
As such, it has accelerated liberalisation of the power and gas sectors and aided integration and better functioning of national energy markets in Europe.
At the EU level, strengthening the EU-ETS constitutes the most effective solution to incentivise carbon abatement in the energy system. A well-functioning ETS was designed to be a cornerstone of the EU energy and climate policy, as it has the capacity to provide a robust EU-wide price signal for investing in low-carbon technology and to ensure cost-efficient decarbonisation of the EU economy. Indeed, unlike ‘command and control’ regulation, trading harnesses market forces to deliver the cheapest ways of reducing emissions.
The EU-ETS is the world’s biggest emissions trading market, accounting for over three-quarters of international carbon trading.
However, in the absence of schemes equivalent to the ETS elsewhere in the world, or ideally a global carbon price signal, measures taken within Europe can distort international trade, especially in the products of energy-intensive industries. Carbon leakage remains a largely unresolved barrier to the deployment of the most cost-efficient carbon abatement technologies in European heavy industry.
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Integrating power and gas systems
The energy market must play a central role in enabling efficient technologies and informing private investment. Given the advent of our European single market in energy, society could not tolerate a state-controlled or just nationally directed outcome.
This requires a market framework that recognises the environmental benefit of a wide range of available technologies – not only renewable energy sources for electricity (RES-E), but also hydrogen, carbon capture, utilisation and storage, renewable gases, capture of fugitive methane emissions, synthetic methane using extracted carbon – and allows them to reveal a price signal on a level playing field. That can help direct investment towards the most efficient and effective techniques, and enable the achievement of climate goals most economically.
Natural gas has an important role as an enabler, not least in supporting the transition from fuels with higher carbon intensity while RES-E expands, and as an alternative in sectors where full electrification is not currently feasible. Nevertheless, decarbonisation of the natural gas sector provides additional routes to pursue climate objectives in a more diversified and secure way.
As EFET we have carefully studied in the spring and summer of 2020 the European Commission’s proposed approach to further decarbonisation of the energy sector as set out in two draft strategies. In response, we have said that policy and legislation, including that dealing with renewable sources, will require refinement and further development. We are floating two sets of ideas, among others.
Firstly, the introduction of quotas to support the uptake of hydrogen in Europe. In addition to renewable hydrogen, any future quota and certificate system should leave room to recognise and reward decarbonised and low carbon gases. A pan-European system of low carbon quotas for gas suppliers, enabled by a ‘common currency’ of carbon content to be applied in certificates, can become feasible. This type of early-stage market based support mechanism could help kick start a market in renewable and sustainable gas in Europe.
Secondly, measures to redress the current ‘non-whole system approach’ to the use and allocation of costs of power and gas networks. Both proposed EU strategies currently fall short of recognising the need for market arrangements across electricity and gas, which would ensure that users face the forward-looking costs they cause (or the benefits they create) on the energy system.
This will involve a mixture of measures, to ensure complete markets for flexibility services to grid operators, optimum utilisation of existing infrastructure and changes to grid tariffs across electricity and gas networks to ensure they reflect the whole energy system’s costs occasioned by various users.
Peter Styles is executive vice chair of the board of the
European Federation of Energy Traders.
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