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European Commission - Speech - [Check Against Delivery]

Speech by Commissioner Arias Cañete at the 30th meeting of the European Electricity Regulatory Forum, Florence

Florence, 3 March 2016

President Bortoni, Director Pototschnig,

Ladies and Gentlemen,

Let me start by welcoming you all to this landmark 30th meeting of the European Electricity Forum.

Since 1998 the European electricity community has been coming to Florence with the single goal of building a robust, common EU electricity market.

Thanks to your work in those 18 years we have come closer to achieving that goal than before.

But the reality is that the internal electricity market is not in as good a shape as it should be. The challenges we are facing to repair it are enormous.

True, the liberalisation of the energy market that we have brought about by three consecutive legislative packages has brought some success.

  • We have introduced competition – to varying degrees in different markets - and more cross-border flows of electricity.
  • Thanks to market coupling and flow based capacity allocation the trade of electricity across Europe is quicker and more dynamic.

But in other ways we are still behind the times.

  • We have beenunable to adapt our market framework quickly enough to the challenges that decarbonisation, and in particular the massive roll-out of variable renewable generation, have brought along.
  • Andwe have been slow to grasp that a framework built around vertically integrated utilities and fossil-fuel based generation will not work under the new circumstances.

And the journey is only just beginning. By 2030 our energy system will have to look completely different to what it does now.

  • Our clean energy commitments in Paris means that in 2030 half of generation will come from renewables, and in roundabout 35 years it will have to be completely carbon-free. That is within one generation of power plants.
  • And alongside that we will see increasingly decentralised and variable production patterns and more flexible demand.

We must make sure that our electricity system is ready for the challenges this will bring.

And equipping ourselves to deal with those changes is what I want to speak about today.

The internal energy market is our biggest asset for successfully – and cost-efficiently – integrating renewable energies. But the way it is currently designed is hampering our ability to do that.

I see two main problems with the way the system works today:

  • First, we do not have proper price signals in today's markets. Both short-term electricity prices and ETS allowance prices are presently depressed and do not steer investments as we would like them to.
  • Second, our regulation and policy-making is still based on national interests and a purely national perspective. As a result, we have a patchwork of policy interventions and less market integration.  

Today I would like to give you some first ideas of how we want to address the problems as our plans for a reform of the electricity market design now start to take shape.

So first, how can we bring back the right price signals as we further decarbonise the power sector?

The first pre-condition to doing that is to re-launch the ETS. We have already taken some important steps in that direction.

In July 2015 the Commission adopted the proposal for a revision of the ETS, setting out the rules for the period post-2020. In line with the targets agreed by European leaders in October 2014, the annual reduction of emissions under the ETS will be increased from 1.74% to 2.2%, delivering a -43% reduction in the ETS by 2030 (compared to 2005).

Moreover the start of the Market Stability Reserve in 2019 will address the persistent oversupply in the market due to the economic crisis. Taken together, these two measures will make the ETS a stronger driver for emission reductions in the power sector and energy-intensive industries. We expect the carbon price signal to become stronger, thereby helping to steer investments towards non-fossil fuel technologies.


But we also need electricity markets themselves to send the right price signals for investment in adequate capacity or demand response.

For this prices must be able to rise when demand is high or generation scarce, and constraints on pricing have to be removed.

In a system with more and more generation with very low marginal costs, allowing for scarcity prices is key to ensuring viable and investment friendly energy systems. We will therefore propose to remove such price caps as a priority of the first order.

But pricing mechanisms must also better reflect the value of flexibility. Prices need to move more quickly, reflecting the changes of renewable generation and shifting demand.

We therefore need to promote short-term markets, notably integrated EU-wide intraday and cross-border balancing markets. Progress on this account has been too slow and needs to be accelerated.

And these new liquid and well-integrated short-term markets will also allow that all market participants play by the same rulebook. That means renewables will also have to take on their own responsibilities for balancing the system and in turn help strengthen the price signal.

Of course to steer investment short-term price spikes will need to translate into long term price signals. Hedging products like those being piloted by the German power exchange are important tools in this respect and we should further support the emergence of such long-term contracts.

But prices also need to steer investment to the right location. For this they need to reflect physical limitations in the transmission system rather than political borders.

This is not always the case today and we need to give ourselves the tools to ensure price zones are appropriately designed. Massive re-dispatch outside the market cannot be the solution in the medium term.

But a system based on scarcity pricing can only work if two further conditions are fulfilled.

First, scarcity pricing doesn't work with inflexible demand. We must therefore get serious on activating consumers and unlocking demand response.

That means translating price signals from wholesale down to retail markets. Therefore, consumers must have access to more variable tariffs; aggregators must be allowed to enter into the market; and crucially, price regulation must end where it still exists.

And that also needs to be accompanied by increased competition especially in the most concentrated markets. Only then will we be able to reassure consumers and competition authorities that high prices are the result of real scarcity rather than market abuse. Regulatory and competition policy must work together to this end.


All of this will hopefully strengthen market signals and reduce the need for public policy interventions. However, we are under no illusion that these interventions will disappear altogether any time soon.

And this brings me to the second challenge: moving away from a purely national approach to a true internal market perspective.

The most urgent issue here is dealing with the generation adequacy policies that we see emerging in a number of Member States.

In many cases these follow a purely national logic and focus exclusively on introducing measures to remunerate national generation capacities, without taking account of the benefits of market integration.

This is not a viable approach and if left untouched seriously risks distorting the internal energy market. That is why we will propose a European or regional framework for capacity remuneration mechanisms.

This framework will not be about taking a final decision on whether or not such mechanisms are needed. It will be about avoiding a certain number of mistakes:

  • avoiding that such mechanisms reward exclusively national generation capacity, at the expense of cross-border generation and demand response,
  • avoiding that they lock-in conventional generation capacity incompatible with decarbonisation pathways,
  • and avoiding that they reinforce dominant positions in already highly concentrated markets.

The framework therefore needs to include a common approach to assess the adequacy of the system taking into account the advantages of market integration. And this assessment should inform all decisions on whether to introduce such mechanisms.

Likewise we will need to get more prescriptive on the design of such mechanisms. We will aim at presenting a blueprint for mechanisms that are best able to avoid the above pitfalls. As part of this we will determine how such mechanisms can be opened across borders to ensure that the contribution of market integration is taken into account.

I can assure you that for all of this, we will work hand in hand with Commissioner Vestager and take fully into account the outcome of the sector inquiry.

Likewise, as the energy transition gathers pace, we will need investment in renewable energies to become as efficient as possible. To support that, we are advocating a more coordinated approach to support schemes across Member States.

Like for capacity mechanisms, this requires converging on a design for support schemes which guarantees full market participation of renewables producers. We do think this is compatible with a framework that will allow attracting the investment capital that the sector needs.

And like with capacity mechanisms, we also think that support schemes should, in principle, be open for the participation of capacities in other Member States. With more and more of the generation capacity coming from renewable investments, completely decoupling these investments from market realities cannot work in an integrated internal market.


But beyond a stronger framework for policy interventions, we also need some institutional change to overcome the national perspective.

For me, more coherent and better coordinated system operation is intrinsically linked to market integration and our renewable policy objectives.

Our aims include a 15% interconnection rate, seamless day ahead electricity trading across borders, and more integrated short-term markets with higher shares of variable power generation.

All of this makes sense in a system where common areas are synchronous with each other. The frequency here is the same as in Brussels, Istanbul, Madrid or Warsaw. So it doesn’t make sense to put barriers up between system operators.

What we therefore want to propose is the creation of regional operational centres.

Let me stress: they would not be here to replace transmission system operators. In fact it is down to the successful voluntary cooperation of many transmission system operators that we recognise the benefits for closer co-operation.

But on some questions, we have now reached a degree of interdependence that is becoming difficult to handle on a purely voluntary basis.

The idea would be for the regional centres to coordinate on many levels, such as adequacy planning, activation of remedial actions, training and certification, or reserve sizing and balancing procurement.



But with more integration and trading rules comes the need for an aligned regulatory oversight.

Regulators have worked hard at breaking down barriers to market entry. But the role of regulators is evolving. A much greater emphasis is now being placed on bringing national regulatory authorities together.

That will need to be strengthened in the new electricity market design to ensure that decisions taken in one country do not adversely impact on a neighbour. This will require more cooperation between national regulators.

But it will also, in some cases, require ACER to take some decisions directly. Where we need a common European or a regional solution, we cannot wait for 28 national regulators to come to an agreement, or fail to do so.

Likewise, we must avoid regulatory gaps from appearing.

As co-operation between system operators will intensify and become more formal, ACER will need oversight over these new structures. And the same holds true for power exchanges, if they hold monopoly functions. We will need to strengthen ACER’s powers accordingly.


Ladies and Gentlemen,

The bottom line of all of this is that if we want the internal market to retain its central role as we decarbonise the system we cannot leave things as they are. We have to further integrate not only our markets, but also our institutions and our policy-making.

The reforms we are looking at will be central to the energy transition and to making good the ambitious and historic objectives we set ourselves in Paris.

Proper price signals reflecting scarcity, short-term markets valuing flexibility, a proper carbon price; institutions that underpin further market integration – all of these elements will be essential to integrating renewables into our system. And that needs to be backed up by a more market-oriented policy framework for renewables themselves.

With over half of electricity in the EU already coming from low carbon sources, electricity is already in the forefront of decarbonisation. But this is only just the start. By 2030, renewables will be the dominant player in the electricity system, smart technologies will be the norm, and consumers will be the ones driving the market forward.

In order to get there we need to ensure that our electricity market keeps pace with those changes. I am confident that our discussions here in Florence, and in the future, will guide us on the path to follow and I look forward to working with you all to make it a reality.

Thank you.


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