EU Electricity Markets with Ambitious Renewable Participation

In this paper, Paulina Beato (Member of the Expert Group on Electricity Interconnection Targets Barcelona Graduate School of Economics) analyzes the elements that would enable the completion of electricity markets to encourage a rational equilibrium among three classical objectives of energy policy.

The objectives of EU energy policy are decarbonization, security of supply, and competitiveness. In order to achieve these objectives, mechanisms that push towards new decarbonized renewable investment without jeopardizing security of supply and competitiveness are required. Current design of electricity markets are not enough for this purpose. In real world, the central problem of electricity markets is that they rely on short-term capacity scarcity, price increase and demand elasticity to recover fixed costs; however, authorities do not accept either scarcity or abrupt price increases and consumers do not have the capacity to change their demand when  prices increase.  In addition, electricity markets together with ad-hoc mechanisms to increase renewable generation have created overcapacity in some EU Member States.

Overcapacity has negative impacts on the three EU energy policy objectives identified above. First, it is clearly an economic problem in terms of efficiency of  resource allocation and competitiveness. Moreover, it may generate negative prices, and thus, added complexities.  Second, it may affect security of supply, since gas plants that are used to back-up renewables may lose the incentive to supply electricity. Third, it represents a barrier to an energy transition based on renewable deployment. The two first impacts have been widely analyzed. However, the impact of overcapacity on new renewable investment  has not been subject to such an ample discussion.

The article analyzes two elements which would enable the completion of  electricity markets to encourage a rational equilibrium among the three goals. One element is retailers’ capacity adequacy requirements. Retailers may choose between centralized and decentralized options to ensure flexibility and capacity adequacy. Under the decentralized option, retailers contract in advance a certain amount of firm capacity to attend demand. In order to have time for the development of new projects, options for such requirements would be between one and four years in advance. Under the centralized option, retailers make payments to an ad-hoc institution in charge of ensuring that they are able to attend their customer’s demands. The other element is to require a certain percentage of retailer electricity sales or capacity to be from renewable resources. Retailer renewable requirements would generate a forward market of renewable electricity that would provide renewable generators with the opportunity to complement the revenues from the energy markets.

Read the Paper here

Paulina Beato is an Economist  that holds a Ph.D. and a Master  in Economics, University of Minnesota. Catedratica de Analisis Economico and  Tecnico Comercial y Economista del Estado. Currently Paulina is member of  the Board of TSB a UK Bank and Chair of the Board of Barcelona Graduate School of Economic. She is also a member of the European Union Expert Group for Power Interconnection.

Previously, Paulina was a Member of Board of Directors of REPSOL from 2005 to 2014 Chairperson of Audit Committee, 2006- 2010 and a member of Board of Directors of Solfocus from 2006-2010. She also held positions as a principal Economist in the Infrastructure and Financial Markets Division of the Inter-American Development Bank from 1995-2005 and was chairman and CEO of Red Electrica de España 1985-1989 and secretary of Expert Commission for the Energy National Plan 1982-1985