CEZ Group paper on EU electricity market design

Since 2003, European Commission set forth to introduce an internal European electricity market (IEM) based on connecting national markets and stimulating free trade of electricity across the continent. The aim of the IEM has been optimal allocation of investments and the most affordable prices for European customers.  A significant progress has been achieved, although the historical Western European and Eastern European markets remained formally un-coupled.

At the same time, increasing share of renewable generation typically financed through non-market feed-in-tariffs both hampered the functioning of the market by favoring some assets and investors over others and created a greater need for more predictable generation capacity waiting to ramp up at times of low wind and sunshine.

The need of more predictable generation capacity, that would be flexibly available at times of scarcity, lead to the proposals of introducing capacity markets in several Member States. Their aim is to value and remunerate available capacity separately from paying for electricity delivered.  However, as these market design adjustments are done purely on national levels, they lead to a new wave of internal energy market fragmentation.

The EU should thus reflect this situation and strive to adopt a harmonized framework to maintain the single European energy market. A significant consideration should be given to the parameters of the market design changes. Uncoordinated introduction of capacity markets in the current setting may be costly and distort the market, if not designed and implemented in an appropriate manner.

The following principles should be assured:

  • Find a regional solution, not national

- Capacity markets should not lead to abandoning the original goal of a harmonized European energy market.

- Hence, it is crucial that the plan of market-coupling across Europe is finished before additional markets are introduced (for example Germany and Czech Republic form naturally a single price zone, yet are not formally coupled, a situation that could lead to different approach to capacity markets).

- Subsequently, when developing energy policies and adjusting energy markets, Member States should coordinate and cooperate with their neighbors.

- Setting clear regional coordination procedures as well as empowering regional authorities, including those solving security of supply for critical situations, should be an integral part of the market design from the very beginning. Among others, clear rules on cross-border participation should be developed.

  • Make the energy markets investable

- Investors should be motivated for both: operating and maintaining existing assets as well as building new generation plants when needed.

- Introducing “capacity markets” for 3 time horizons should accommodate all types of investment needs of the energy sector:

          I.   3-year-horizon for maintaining existing assets,                                                                 

         II.   5-10-year-horizon for technologies that require more significant investments

          III.   15-20-year-horizon for brand new assets with high upfront investment costs

  • Set technology neutral rules and minimize negative interference with wholesale market

- Achieving technology neutral will not be ensured if only all types of energy generation are formally admitted in the market.  Instead, all the individual market rules such as duration of the capacity remuneration from a single auction (see previous paragraph), output balancing obligation, reliability requirements and many others should be designed in a fair manner to all types of generation sources.

Concluding, should Europe choose to establish a new market design for its single energy market, it should target similar goals as the current single European energy market.  Moreover, the entire design should be first developed, tested and reviewed and only then implementation should be launched.