European utilities are calling for electricity tariffs to better reflect the fixed capital costs of renewable energy as grids incorporate a greater amount of energy generated from clean sources.
The utilities trade body Eurelectric told news agency Reuters this week that tariffs need to include more fixed-price elements to cover high upfront capital costs.
EDP-Energias de Portugal chief executive Antonio Mexia, the new head of Eurelectric, commented to Reuters that the EU’s drive to decarbonise power generation is producing an electricity market dominated by fixed capital costs, not only with low-carbon renewables and nuclear, but also through the enormous investments needed to make up for the intermittent nature of renewable energy.
Mr Mexia said the EU’s drive to reform power markets should produce a new market framework that better rewards and allocates capital investment.
He said: “We need to move from a system of ex-post competition to a system of ex-ante competition”, which means competing on capital cost instead of on operating cost.
Cost of smart grid integration
Mexia also cited the highly capital intensive nature of implementing smart grid technology to allow renewable energy sources to connect to the network.
Outgoing Eurelectric president Johannes Teyssen, chief executive of German utility E.ON, told Reuters that Europe needs a new system for rewarding capacity because the generating assets themselves will make up 90 to 95% of total costs.
“If you do not reward capacity, you do not get capacity and you do not get energy,” Teyssen told Reuters.
He said an increase in the fixed part of generating costs should also work its way into power tariffs.
He said the basis for pricing a grid connection should be the value of having access to reliable power and that price needs to be predominantly based on the grid’s fixed costs.
In most EU countries there is a base fee for subscription, but the lion’s share of the typical power bill is variable and depends on consumption. He said a fair power pricing mechanism should include a combination of fixed and variable costs and called for a discussion about this on national and EU level.
“If you move to a world with more and more fixed production costs, power pricing needs to reflect that,” he said.