EUROPEAN COMMISSION Brussels, 5.11.2013 SWD(2013) 438 final COMMISSION STAFF WORKING DOCUMENT Generation Adequacy in the internal electricity market - guidance on public interventions Accompanying the document Communication from the Commission Delivering the internal electricity market and making the most of public intervention {C(2013) 7243 final} {SWD(2013) 439 final} {SWD(2013) 440 final} {SWD(2013) 441 final} {SWD(2013) 442 final} EN EN COMMISSION STAFF WORKING DOCUMENT Generation Adequacy in the internal electricity market - guidance on public interventions Accompanying the document Communication from the Commission Delivering the internal electricity market and making the most of public intervention On 22 May 2013 the European Council called for particular priority to be given to the Commission providing guidance on capacity mechanisms. The Commission met this call with the Communication Delivering the internal electricity market and making the most of public intervention. The purpose of this Staff Working Document is to elaborate on the guidance presented in the Communication. The guidance for Member States set out in the Communication and elaborated in this Staff Working Document to aims to help ensure that public intervention in relation to generation adequacy meets the aims of the Union policy on energy and complies with the common rules on competition. This guidance follows up on a public consultation, launched together with the Commission Communication Making the internal energy market work (COM(2012)663)1. The Consultation Document and all responses to the public consultation can be found on the Commission's website2. 1. A COHERENT POLICY FRAMEWORK The liberalisation of electricity markets and their increased integration in one internal electricity market create challenges for ensuring generation adequacy. As the Commission indicated in its Communication Making the internal energy market work, with the development of a competitive internal electricity market with multiple producers and unbundled network operators, no single entity can on its own ensure the reliability of the electricity system any longer. The role of public authorities in monitoring and ensuring security of supply, including generation adequacy, has consequently become more important. At the same time the integration of electricity markets progresses, bringing clear benefits to consumers which could amount to annual cost savings of up to 1 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Making the internal energy market work (COM(2012) 663 final) 2 http://ec.europa.eu/energy/gas_electricity/consultations/20130207_generation_adequacy_en.htm EURO 40 billion in case of full integration3. However, this integration of markets also implies that security of supply, including generation adequacy, is increasingly difficult to ensure on a purely national basis. Ensuring generation adequacy is also one of the main challenges as the Union moves towards a low carbon energy system. Article 8 of Directive 2009/72/EC4 (the Electricity Directive) obliges Member States to implement special tendering procedures or another procedure equivalent in terms of transparency in the interests of security of supply. However these procedures may only be launched where the normal authorisation procedure is insufficient to ensure security of supply. Public intervention to promote generation adequacy may entail public service obligations imposed on generators, suppliers and/or transmission system operators (TSOs). Such obligations have to comply with the requirements set out in Article 3(2) of the Electricity Directive. In particular, they have to be clearly defined, transparent, non-discriminatory, verifiable and guarantee equality of access for electricity undertakings. Member States have to be able to show that public service obligations are necessary, proportionate and transitional in nature.5 Public service obligations imposed on electricity undertakings must also be notified to the Commission.6 In addition, where public intervention comprises State aid pursuant to Article 107 (1) TFEU, Member States have to comply with the notification and stand still obligation of Article 108 (3) TFEU. The test which the Commission applies in assessing State aid normally entails assessing if the measure pursues a well-defined objective of common interest, is targeted at a well-identified market failure, is the appropriate measure, is proportionate and limits aid to minimum necessary, changes the behaviour of the beneficiaries and has a limited distortive impact on competition and trade in the EU. Where the Commission, in its role as guardian of the Treaties, has to assess public intervention for ensuring generation adequacy on the basis of Article 3 (2) of the Electricity Directive and Article 106 TFEU, it will include the guidance which it has provided in its assessment. 3 Booz & Co Benefits of an integrated European energy market http://ec.europa.eu/energy/infrastructure/studies/doc/20130902_energy_integration_benefits.pdf 4 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for internal market in electricity and repealing Directive2003/54/EC OJ L 211, 14.8.2009, p. 55 5 C-265/08 Federutility and Others v Autorità per l'energia elettrica e il gas. The Judgement of the Court sets out " First, such an intervention must be limited in duration to what is strictly necessary in order to achieve its objective… Secondly, the method of intervention used must not go beyond what is necessary to achieve the objective which is being pursued in the general economic interest. Thirdly, the requirement of proportionality must also be assessed with regard to the scope ratione personae of the measure, and, more particularly, its beneficiaries. 6 Article 3(15) of Electricity Directive 3 The Commission will consider the topic of capacity mechanisms and State aid in detail as it develops, in consultation with Member States, Guidelines on State aid in energy and environment. These Guidelines should then specifically address how State aid rules apply to such interventions. Without prejudice to new guidelines on State aid in the energy and environmental fields, the guidance provided sets out how generation adequacy can be ensured in an integrated internal electricity market undergoing the shift towards decarbonisation: - As a starting point, public authorities at Union and national level should let the market work to encourage appropriate investments. As in any other sector of the economy, price signals are pivotal to incentivize generators and consumers to balance supply and demand. - In parallel, and as required by Directive 2005/89/EC 7 (the Electricity Security of Supply Directive) public authorities must regularly undertake an objective, facts based, assessment of the generation adequacy situation in their Member State fully taking account of developments at regional and Union level. The rules contained in the Electricity of Supply Directive and its transposition and implementation may be insufficient to tackle the challenges of the future in a fully satisfactory way. Therefore, as set out in the Communication Delivering the internal electricity market and making the most of public intervention, the Commission may consider taking further legislative initiatives in this regard. - Where a concern about generation adequacy emerges, its causes should be properly identified, including policy uncertainty and failures in regulation at the national level. Where possible, such causes should be removed. - In line with Article 34 TFEU and the Electricity Directive, Member States, when intervening to ensure generation adequacy, should choose the intervention which least distorts cross border trade and the effective functioning of the internal electricity market. Such an approach will help ensure that interventions are also cost effective. Each of these points is addressed in more detail below providing additional guidance to Member States. That guidance, including the checklist summarising the key points, is designed to assist Member States to meet their obligations under the Union acquis when assessing the need for interventions to ensure generation adequacy and in choosing the appropriate method or design of intervention. In a spirit of loyal cooperation, choices on when and how to intervene to ensure generation adequacy should be properly discussed and weighed against each other at the 7 Directive 2005/89/EC of the European Parliament and of the Council of 18 January 2006 concerning measures to safeguard security of electricity supply and infrastructure investment OJ L 33, 4.2.2006, p. 22 4 regional and EU level. The Commission Services are fully committed to working with Member States and regions through the Electricity Coordination Group and bilaterally with a view to effectively and efficiently addressing generation adequacy concerns. 2. ASSESSING GENERATION ADEQUACY AND INVESTMENT NEEDS OBJECTIVELY An objective in depth generation adequacy assessment is needed to establish that the normal authorisation procedure will not be sufficient to ensure security of supply. It also helps ensure that public intervention is cost-effective. Such an assessment can in particular allow a clear identification of the gap between the capacity needed to ensure security of supply and the capacity which the market is likely to deliver absent public intervention. 2.1. Comprehensive adequacy assessment including Union policies An objective, facts-based and comprehensive assessment of the generation adequacy situation should take account of the expected impact of the Union policy on Energy and the Union policy on the environment. In particular, the following pieces of legislation are relevant: the recently adopted Regulation (EU) no. 347/20138 (the Energy Infrastructure Regulation) the EU emission trading system9, energy efficiency measures under Directive 2009/125/EC10 (Eco-design Directive) and Directive 2010/30/EU11 (the eco labelling Directive), and the implementation of Directive 2012/27/EU12 (the Energy Efficiency Directive). The potential increase in the use of electricity in other sectors such as heating and transport should be estimated. Finally, the economic and financial crisis and its impact on 8 Regulation (EU) no. 347/2013 of the European parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure OJ L 115 25.4.2013 p 39 9 This includes the expected ETS carbon prices over the relevant assessment period, reflecting the continuation of the ETS linear factor beyond 2020 as enshrined into law. This impacts both electricity supply and, via the transmission in electricity prices, electricity demand. The projected ETS carbon prices in the published EU energy reference scenarios may serve as an orientation. See e.g. http://ec.europa.eu/energy/observatory/trends_2030/doc/trends_to_2030_update_2009.pdf, For a partial update and extension to 2050 see: http://ec.europa.eu/energy/energy2020/roadmap/doc/sec_2011_1565_part1.pdf; A new trend scenario will become available in the course of 2013. 10 Directive 2009/125/EC of the European Parliament and of the Council of 21 October 2009 establishing a framework for the setting of ecodesign requirements for energy-related products OJ L 285, 31.10.2009, p. 10 11 Directive 2010/30/EU of the European Parliament and of the Council of 19 May 2010 on the indication by labelling and standard product information of the consumption of energy and other resources by energy-related products OJ L 153, 18.6.2010, p. 1 12 Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency OJ L 315 14.11.2012 p 1 5 electricity consumption in Member States most affected shows the relevance of adjusting demand prognosis regularly to macro-economic parameters. A generation adequacy assessment requires a judgement about likely energy market developments as well as wider economic developments, and thus a degree of uncertainty in the assessment is unavoidable. However, uncertainty is equally present when judging the likely impact of public intervention, particularly if they are complex and therefore more likely to result in unintended consequences. The degree of uncertainty can be reduced and the reliability and objectivity of adequacy assessments increased if the principles described below are respected. Process-wise, Member States can and should continue to rely on the expertise of TSOs in carrying out generation adequacy assessments. Generation adequacy assessments should be transparent and open. In particular modelling, data sets and assumptions feeding into the assessment should be made available to all stakeholders (including system users) so that they have an opportunity to express their views and challenge the data before the assessment is finalised. 2.2. Recognize the cross-border dimension of electricity systems and markets In the Union, the very large majority of Member States have their electricity markets coupled with at least one other Member State. In Central West Europe, electricity markets are deeply connected through price coupling, a practice expected to expand throughout the Union by 2014-2015. Coupled markets imply that power flows out of a market when prices in a neighbouring market are higher. Inversely, power will be imported when domestic prices are higher. The traded volumes can constitute a multiple of the interconnection capacity available but physical flows will be limited to the available capacity on the given interconnectors. Market coupling is a first step towards a fully integrated market allowing short and long term trading of energy, renewable energy sources (RES), balancing services and security of supply across borders. In addition well-functioning intraday markets are critical to integration and to realising the benefits of RES and cross border connection for security of supply. Given this increasing integration of electricity markets and systems across borders it is now increasingly difficult to address the issue of generation adequacy on a purely national basis13. Member States’ generation adequacy assessments need to take account of existing and forecast interconnector capacity as well as the generation adequacy situation in neighbouring Member States. Surplus generation in neighbouring Member States may alleviate adequacy concerns; shortages may exacerbate them. Stochastic analysis may help evaluate the risk of unfavourable weather conditions or other forms of system stress affecting generation adequacy in an entire region and the impact it may have on individual systems. 13 Booz & Co Benefits of an integrated European energy market http://ec.europa.eu/energy/infrastructure/studies/doc/20130902_energy_integration_benefits.pdf 6 Under the Electricity Directive and the Electricity Security of Supply Directive14, Member States are required to monitor security of supply and produce bi-annual reports. These reports should assess the projected balance of supply and demand for the next five year period and the prospects for security of electricity supply for the following five to fifteen year period. However, not all Member States have fulfilled their obligations under Union law in the same manner. In order to improve compliance, the Commission Services will establish a streamlined reporting system to facilitate the notification of these assessments and their publication. National generation adequacy assessments should be complemented by regional and Union-wide assessments.15 The joint declaration that the Member States of the Pentalateral Forum recently issued is seen positively in this regard16. The Network of European Electricity Transmission System Operators for electricity (ENTSO-E) produces Union-wide generation adequacy assessments in accordance with Article 8 of Regulation (EC) No 714/200917 (the Electricity Regulation). ENTSO-E's report is currently the main Union-wide assessment of generation adequacy. However, the ENTSO-E report builds on national assessments and hence it too continues to suffer from differing methodologies being employed at Member State level. As a result, the mutual interdependence of Member States when it comes to generation adequacy and security of supply is also not yet fully or adequately recognised in its generation adequacy assessments18. The Commission Services, working with the Member States, the Agency for the Cooperation of Energy Regulators (ACER) and ENTSO-E in the Electricity Coordination Group, are currently examining ways in which the deficiencies in the assessment methodology at Union and national level can be remedied to ensure that generation adequacy assessment is more coordinated and that the Union-wide report produced by ENTSO-E can meet the needs of policy makers, In this regard, peer review of national generation adequacy assessments is important. Depending on the conclusions of this 14 Article 4 of Electricity Directive and Article 7 of Secuurity of Supply Directive 15 Council conclusions of 6 June 2013 on the Commission Communication "making the internal energy market work" 16 The Pentalateral Energy Forum is an inter-governmental initiative consisting of Austria, Belgium, France, Germany, Luxembourg, the Netherlands and Switzerland to promote collaboration on cross- border exchange of electricity. The political declaration can be found at : http://www.benelux.int/pdf/pdf/201306_PoliticalDeclarationOfThePentalateralEnergyForum.pdf 17 Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity OJ L 211, 14.8.2009, p. 15, 18 For example national TSOs continue to be apply different methods to calculate the required margin against peak load; variable RES is not treated in a harmonised way despite the importance of understanding the cross border impact of changes in wind and solar production. Each of these impact on the potential availability of interconnection capacity at times of system stress. 7 work, the Commission could propose the adoption of legally binding guidelines under Electricity Regulation or the updating of the Electricity Security of Supply Directive. Member States can improve the quality of their assessments by integrating the ENTSO-E analysis as well as the generation adequacy assessments of their neighbours into their own adequacy assessments. Bilateral and multilateral discussions of national generation adequacy assessments between neighbouring Member States and with stakeholders can further improve the quality of the assessment. Best practices highlighted by ENTSO-E or the Electricity Coordination Group should be followed where appropriate. 2.3. Include reliable data on wind and solar Wind and solar power generation can mean large and sometimes sudden swings in the amount of electricity fed into the system. As with any other change in electricity supply or demand, this needs to be balanced by generation capacity which can be brought into operation quickly, releasing stored electricity, or demand response. The availability of flexible generation capacity and interruptible supply contracts is therefore becoming an increasingly important consideration when assessing generation adequacy.19 Generation adequacy assessments should contain clear assumptions on the development of variable wind and solar power in their own system, as well as in neighbouring systems which they are interconnected with. Those assumptions should be based on applicable RES targets and/or on the expected contribution of power generation to CO2 emission reduction within relevant timeframes (e.g. a 1 year, 5 year and 20 year time horizon). Reliability factors for wind and solar may vary substantially depending on their location, but also on this point, the Commission encourages Member States to cross-check methods applied with stakeholders and to exchange best practices, e.g. with ENTSO-E. As variable wind and solar power grows in the energy mix, generation adequacy assessments – national, regional and Union-wide – can no longer focus only on the amount of available generation capacity. They also need to consider the quality of available generation capacity, in particular how quickly it can respond. 2.4. Include the potential of demand response Generation adequacy relates to balancing supply and demand of electricity. Both have a role to play in this. Where consumers voluntarily reduce demand, as part of their supply contract or in response to high prices, this is a sign of well-functioning markets and not a sign of a generation adequacy problem. The availability of timely price-signals for consumers could facilitate demand-response, which is being addressed by the roll out of smart meters across the Union. 19 Almost all responses to the consultation raised the impact of RES on the market and its impact on generation adequacy. For example the UK Government response discusses the impact that more low marginal cost pricing will have on the market, a point addressed in detail in the Clingendael paper submitted in response to the consultation. 8 Where a gap between generation and demand exists, it can be bridged by increasing generation or reducing demand. Both are equivalent from a system security viewpoint. The potential for demand side management in the Union is estimated to be 60 GW, i.e. the capacity of approximately 60 nuclear power reactors or 120 middle-size combined cycle gas turbines20. If the potential for the demand side to participate in the system is explicitly recognized in a generation adequacy assessment, assuming a realistic timeframe for it to materialize, stranded investments in generation can be avoided. The involvement of industrial users and aggregators of household demand in the preparation of generation adequacy assessment is important as other stakeholders, in particular generators and TSOs, may unconsciously be biased towards generation and/or network solutions. 2.5. Distinguish between missing money and missing capacity Currently, there is overcapacity in many markets. This can be seen in the existing ENTSO-E system outlook and adequacy assessment21, and national generation adequacy assessments. This is partly a result of the financial and economic crisis and the resultant drop in demand, but may in some Member States also at least in part be related to old capacities which are artificially being kept on the grid22. At the same time, the financial and economic crisis has stalled investments in new-built generation capacity. Low demand, in combination with increased deployment of wind and solar generation, has also been pushing wholesale electricity prices down in some Member States like Germany, Belgium or Spain, exerting pressure on utilities’ returns. Moreover, the recent evolution of coal and gas prices in combination with a low price of carbon has also resulted in modern gas plants being displaced in the running order by coal plants, including those due to be withdrawn soon to comply with Directive 2001/80/EC 23 (the large combustion plant directive). Some operators of gas power stations are now expressing concerns about the financial viability of their existing plants, and discussing potential mothballing or even shutdown24. 20 The project SMART-A estimated that in addition there is an energy efficiency potential to be reaped from additional energy efficiency measures. 21 ENTSO-E (2013) Scenario Outlook & Adequacy Forecast 2013-2030 22 See for example the recent analyses of the Commission services and of the Worldbank carried out at the request of the Bulgarian government as regards the Bulgarian energy system 23 Directive 2001/80/EC of the European parliament and of the Council of 23 October 2001 on the limitation of emissions of certain pollutants into the air from large combustion plants OJ L309 27.11.2001 p1 24 As companies could have an incentive to exaggerate intentions to shut down capacity it is particularly important that public authorities carrying out generation adequacy assessments make reasoned judgements about expected economic developments and their impact on the financial viability of existing generation capacity over time. 9 When faced with a structural generation overcapacity in the market, Member States may consider other measures such as facilitating exports by adding interconnection capacity or allowing for the retirement of environmentally inefficient plants, for example through the implementation of environmental legislation or by removing subsidies. Creating market wide capacity remuneration schemes may under such circumstances be counter- productive as it may (depending on the criteria set for capacity to participate in the scheme) postpone the exit of inefficient capacity from the market. In liberalised markets, investments are not guaranteed by the State. Only where there is a real threat to generation adequacy and security of supply as a result of closure or mothballing does the financial viability of existing plant become a matter of public concern. It is very important that there should not be state support to compensate operators for lost income or bad investment decisions. 10