Capacity Mechanisms conference – Brussels, 28 September 2015

***Check against delivery***

 

Introduction

 

Good morning Ladies and Gentlemen,

It’s a pleasure for me to open this conference.

I am happy that so many could accept our invitation to discuss capacity mechanisms - the support that EU countries grant to electricity generation to prevent power shortages.

Today's topic is a delicate one, for EU competition policy and more widely.

It involves complex technical details. They are interesting in themselves, and I am sure you will have a good discussion at today's conference.

But behind the technicalities, the implications of capacity mechanisms are huge.

They are designed to prevent brownouts and power cuts - this is important for potentially every home and organisation in Europe.

They link in with the growing use of renewable energy sources – crucial for the transition towards a sustainable and de-carbonised economy. 

They often involve subsidies – with very direct implications for tax payers.

They reward capacity providers for being ready to deliver or for reducing consumption when needed, not for the electricity actually sold – challenging the way we think about the electricity market.

Finally, but not least, capacity mechanisms may affect competition in the EU's internal energy market, and raise barriers between EU countries' – more than is often understood.

I will not try to cover all those implications today. 

I will say a few words on what drives the growing focus on capacity mechanisms in the EU, what the Commission is doing to understand those drivers, and where I think the debate is headed.

 

 

EU electricity markets and rationale for capacity mechanisms

 

When switching on the light – at home or in the office – we often take for granted that electricity is available. But a steady supply depends on complex technical and market factors, and they are changing fast. 

The key factor driving that change is renewables. 

Renewables are, clearly, the future of energy generation. They are key to decarbonise the economy and electricity generation in particular. It is clear that the market share of renewables will continue to grow. That is why we in the EU have set ourselves ambitious binding renewables targets not only up to 2020 but until 2030. The rollout of renewables in the EU over the past ten years has helped convince other countries – notably developing countries – that decarbonisation is possible, and that a global climate deal at the Paris COP 21 is within reach.

At the same time, the rollout of renewables is a challenge. 

Wind and sun, the most dynamic renewables technologies, do not provide consistent levels of power to the grid as they depend on weather conditions. That puts pressure on existing electricity systems.

Conventional generation – such as gas and coal – typically have higher operating costs than renewables. They recover investment costs mostly when demand peaks, and when renewables are not available. This makes for a more difficult investment climate.  As a result, fewer conventional generation plants are being built than before.

Some EU countries are, therefore, concerned that there may not be enough electricity capacity, and that the risks of blackouts will increase, over the coming years.

The Sector inquiry

 

That concern is of course legitimate, and a number of EU countries have already taken action. 

By now, one EU country in two has a capacity mechanism in place or is planning to introduce one - and they come in all shapes and sizes.  They range from market-wide schemes to measures designed to help build just one power plant or keep existing plants on the grid. 

Those existing capacity mechanisms seem to have created without much coordination between countries, and sometimes even without coordination within individual countries. In one EU country, for instance, there are seven different mechanisms to support different types of capacity.

The Commission has been aware of this for some time.

The State Aid Guidelines for Energy and the Environment, adopted last year, therefore included for the first time a set of principles devoted to capacity mechanisms.

The Commission has organised workshops with national representatives to give guidance and allow them to exchange notes.  Conferences have been devoted to the topic.

Still, there is a lot of uncertainty: some EU countries ask the Commission for State aid clearance of their capacity mechanisms; others argue that they do not involve any State aid in the first place.

That is why I decided to launch a State aid sector inquiry on capacity mechanisms earlier this year - to obtain a clear and complete picture of the situation.  It covers eleven EU countries: Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden.

Through the inquiry, we want to reach stakeholders who are not heard in ordinary State aid procedures. We want to identify the best and most successful examples. And we want the lessons learnt to feed into the legislative proposal that the Commission will make next year on EU electricity market design.

By now, we have sent over 200 questionnaires, to public authorities and market participants, in the eleven countries. The respondents include producers using renewable and conventional sources, demand-side aggregators, traders, exchanges, network operators, and regulatory authorities.

We had a very good response, and I want to thank those who have taken the time to reply. Of course, the inquiry cannot be done in isolation from Brussels.  I hope that today’s conference will stimulate the dialogue, with all interested parties.

The Sector inquiry – first results

 

So, what are our first impressions from the sector inquiry? 

The inquiry confirms that the answer to security of electricity supply lies, fundamentally, in the internal EU energy market.  A well-functioning market is essential to and be able should deliver secure and affordable electricity over time, given the right regulatory framework.

At the same time, many respondents point out that consumers do not yet respond strongly to price increases and shortage situations, that storing electricity is still costly and technically difficult; and that securing financing for projects that last 20 years or more – as is typical in energy – is not easy.

So, if we are serious about the transition to a low-carbon economy, with secure and affordable electricity, energy markets need a better design.  For a start:

Our grids need to be better connected - when clouds cover the solar power plant in Spain, the wind turbines off the coast of Scotland may still be spinning.

Consumers should be encouraged to participate more actively in the energy market. Smart meters may enable everyone to optimise their energy use and – for instance – programme the washing machine to start in the middle of the night.

Wholesale markets need to become more efficient, with real-time price incentives and trading that is more responsive to changing conditions. For example, trading intervals should be shortened from hourly trading to 15-minute intervals. This makes it easier for solar or wind energy producers to make reliable energy offers, less exposed to changing weather conditions 

If there are regulatory barriers at national level which prevent all this from happening, let us make it a priority to remove them.  As many of you will know, the Commission has launched a consultation on the future of energy market design in the EU.

That is the long-term view needed to deliver security of supply long-term. 

That said, the inquiry confirms that capacity mechanisms may, in some situations, be necessary and legitimate to deliver security of supply in the short to medium term.  The Commission's State aid Guidelines recognise this – provided that there is a real and demonstrated need.

Unfortunately, the sector inquiry suggests that capacity mechanisms are sometimes seen as quick-fix solutions - as alternatives to real market and regulatory reforms. If, for example, consumers were given a stronger incentive to respond to price increases and demand peaks, they would reduce their consumption and there would be less need to introduce a mechanism to support peak power plants.

The necessity of the capacity mechanisms we have looked at so far is not always clear either. In some cases different sources within the same country provide conflicting information on this.

These are just preliminary impressions. We will have a more complete picture when the Commission publishes its interim report on the inquiry at the beginning of next year.

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Closing remarks

 

Let me finish by saying that I do not see the role of the Commission in the area of State aid as purely corrective. Enforcement should not be our only response to the competition problems that we see. In State aid, as in other policy areas, prevention is better than cure.

This is why we seek to build well-functioning partnerships with national authorities. I have travelled to several capitals since I took office. The conversations I’ve had with the representatives of governments have been frank and useful.

If you ask me, that is the best approach. My colleagues at the competition department of the Commission and myself will always be ready to explain the rules, clarify our positions, and look for solutions that work in the different national contexts.

The sector inquiry is a similar process.

In the past few months we have seen that national administrations are more interested to discuss and apply State aid rules as they assess generation adequacy and develop capacity mechanisms.

Stakeholders have reached out to us from every segment in the industry; including generators, transmission operators, suppliers and industry associations.

This is excellent news.

There are few, if any, areas of EU policy where common solutions make more sense than in the area of energy.  Working together, we can help give the sector a more rational, efficient and consistent shape. And when we do, we will have taken steps in the right direction for the environment, for consumers and taxpayers, and for Europe’s security of supply.

Thank you.