Empirical Microeconomics, Energy, Electricity Markets
Senior Analyst, International Energy Agency,
Executive Director, E-Control,
Director of Regulatory Oversight and Market Design, Engie,
Secretary General, ENTSO-E,
See below for video and event materials.
Competitive electricity markets are being challenged by the need to decarbonise. In OECD countries, current power sector CO2 emissions should decrease from 411kg/kWh to 63kg/kWh in 2040 and to virtually zero by 2050. In Europe, while 200bn dollars would have to be invested in fossil fuels by 2040 to achieve this decarbonisation, 1.5 trillion dollars will be required to support renewables. Renewables will also require investment in transmission and distribution of 900bn dollars.
Market transformation is happening: demand is stagnating; renewables show accelerating growth. However, institutions and policies that can ensure stability are lacking. Current wholesale electricity prices in Europe are low and declining. So how can we have low-carbon investments based on wholesale electricity prices? This depends on carbon prices but in the current context it will take time to strengthen the carbon price signal in a way to attract investors. Carbon prices are subject to political argument and interference, which creates long-term risk for investment. Additional support schemes and instruments could be needed.
The decarbonisation objective means that, by 2030, renewables will be deployed much faster than old facilities will be retired, creating additional excess capacity and further lowering wholesale prices. Integrating higher shares of wind and solar production will require new operational requirements to allow enough flexibility in the system. This transition can be effective if there is transparency in the short-term markets (intraday) for all stakeholders, consistent low carbon support and CO2 pricing, and guaranteed security of supply and scarcity pricing.
Still, there are concerns about the affordability of such a system. What will be the costs for the final consumer (energy representing 1/3 of monthly outgoings in Europe) and its impact on European firms’ competitiveness? A paradigm shift needs to occur and consumers should be empowered thanks to IT and smart technology. With the increasing share of intermittent technologies, consumption should be flexible and respond to peak supply as well as diverting from the peak demand hours, to maintain the viability of the system. However, there is currently a low degree of competition in the retail market, with mostly regulated prices all over Europe. This is preventing the incentivisation of flexibility to the final consumer.
Event summary by Augustin Lagarde, Research Intern