Why the EU’s electricity market design proposal actually matters

 

By Simon Skillings | E3G

 

This piece was originally published by EurActiv

 

 

The European Commission’s vision of an Energy Union with citizens at its core, where consumers take ownership of the energy transition, is to be applauded but needs to be followed up with genuine policy change, writes Simon Skillings.

Simon Skillings is Senior Associate at E3G, a UK-based think tank promoting ‘Third Generation Environmentalism’.

There is a vision of the future energy system that has become widely accepted. And it is a very seductive vision. It speaks of empowered energy consumers, liberated by new digital technologies to consume flexibly in a way that minimises costs to themselves and the overall system. However, the danger with any powerful narrative is that it can override a more practical and evidence-based assessment of current trends. I fear that the European Commission’s electricity market design initiative might be falling into this very trap.

When the Commission announced that ‘our vision is of an Energy Union with citizens at its core, where citizens take ownership of the energy transition’ and ‘to reach our goal, we have to move away from an economy driven by fossil fuels, and based on a centralised supply-sided approach relying on old technologies and out-dated business models’ it was pinning its colours to the mast of change. Along with many others across the EU, including those in government and industry alike, it was highlighting the dawn of a new smart energy system triggering the emergence of new business models and a changed relationship between customers and the industry.

It is reasonable to expect that such a dramatic transformation would need to be underpinned by some radical new thinking in the policy arena, particularly in the area of the market and regulatory framework – if you do what you’ve always done, you’ll get what you’ve always got. Indeed, the Commission appears to have recognised this and placed the ‘market design initiative’ as a core piece of legislation to drive forward the Energy Union concept.

However, the noises emerging from Commission officials working on the market design initiative do not suggest any radical departure in policy thinking.

The focus of attention appears to be on refining wholesale price signals and improving regional co-operation. Those efforts that are being directed to the demand side of the market involve sorting out data ownership issues and removing barriers to entry for demand aggregation businesses. Whilst these are all very worthy objectives, they represent a continuation of the policy agenda that has been pursued for many years – hardly a radical change of direction that has citizens at its core. Or, indeed, is there much evidence of how this places ‘energy efficiency first’ to quote another slogan often associated with Energy Union policy agenda.

Instead of attempting to change consumer behaviour to make it easier to operate the energy system, real consideration needs to be given to how new technologies can be used to improve the lives of citizens. We already know that delivery of energy policy objectives will require huge investment in consumer premises – in efficiency, digital technologies, low carbon heating, cooling and transport. This represents a real opportunity to align individual and policy interests. But it isn’t going to happen, at least not at the rate required, under the current policy paradigm.

We expect consumers to act as perfectly rational economic agents, responding to price signals and investing accordingly. It seems fanciful to expect this ‘price and pray’ approach to deliver the wide consumer engagement needed. Meanwhile, investments in generation and network infrastructure enjoy regulatory mechanisms to de-risk future returns or are even in receipt of direct public funding. It is interesting to contrast the extent of ‘policy airtime’ devoted to the need for capacity mechanisms compared to that exploring how to make smart demand-side measures in consumer premises a credible opportunity for investment.

Proposals on market design that are consistent with delivery of the Energy Union vision would need to answer two questions.

  • Firstly, how to tackle the behavioural constraints that limit consumer engagement to that subset of the population with the time, ability and inclination to put in the effort required?
  • Secondly, how to ensure there is an equitable allocation of investment between generation, networks and demand resources?

It is, perhaps, understandable that Commission official have chosen to stick to familiar territory since these are tough questions to answer. Moreover, it is quickly apparent that addressing these questions will require significant changes to market, regulatory and governance structures – something which is decidedly unappealing when there is a limited period to develop policy proposals and draft legislation.

It is still not too late for officials to put consumers at the heart of the market design proposals as envisioned when the Energy Union concept was launched last year. This does not need to involve detailed legislative proposals at this stage since there are many difficult issues to resolve. However, it is necessary to acknowledge that change is needed and to set out a roadmap for tackling the key challenges.

The demand side of the market is a ‘sleeping giant’ that could transform the future energy system. The risk for the EU is that those elsewhere in the world, where regulatory and market frameworks are different, will act more quickly to awaken this giant and leave the EU trailing in the race to create an efficient, flexible and low carbon energy system. And, if this happens, it will not take long for people to realise that, when it comes to market design, the Energy Union initiative was a major missed opportunity.

 

About tomburke

Tom Burke is the Chairman of E3G, Third Generation Environmentalism, and an Environmental Policy Adviser (part time) to Rio Tinto plc. He is a Visiting Professor at both Imperial and University Colleges, London. He is a member of the External Review Committee of Shell and the Sustainable Sourcing Advisory Board of Unilever and a Trustee of the Black-E Community Arts Project, Liverpool.
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