Gence-Creux, ACER: EU power market reform to minimize price volatility for consumers

Electricity market design reform is currently one of the hottest topics in the energy sector in Europe. With the negotiations underway, we spoke with Christophe Gence-Creux, head of the Department for Electricity at the Agency for the Cooperation of Energy Regulators (ACER), about the reform, but also his concerns related to the process.

Christophe Gence-Creux expects the market design reform to minimize the price volatility for consumers by promoting various instruments like power purchase agreements (PPAs), contracts for difference (CfD), and flexibility. The European Union’s power market integration, in his words, is to be credited for the security of supply and limiting price volatility. Gence-Creux stressed that the biggest mistake a country can make is to play alone during an energy crisis and energy transition.

The EU intends to use measures like PPAs, CfDs, and flexibility to reform the electricity market design. What improvements would the mechanisms introduce?

The main difficulty we’re being confronted with during this crisis is that consumers haven’t hedged against extreme price volatility. They were exposed to high price volatility, and the reason is that we don’t have long-term fixed price contracts, but also the consumers aren’t used to signing them.

So the first thing is to raise awareness about the availability of these long-term hedging instruments and then to have some tools, like PPAs, the purpose of which is to have fixed price contracts. The problem with PPAs is that they are not fit for small consumers, but CfDs could play a role here.

The purpose of this market design reform is to promote these instruments because they exist, but we need to raise awareness of their importance, and existence, and we need to facilitate their utilization.

Why are they not used enough?

Because there are some barriers. For example, in the case of PPAs there is an issue of guarantees. And, of course, end consumers expect, because power is an essential good, that the price will not go too high and that the state will intervene. So they are not necessarily incentivized to negotiate fixed-price contracts for a long period of time.

What about flexibility?

With the massive development of renewables, particularly if these renewables are intermittent, we need more and more flexibility in the power system, and for that again we need price signals. Paradoxically the energy crisis gave these signals, but they were so high that it was not politically sustainable. However, price signals are the best mechanism to develop flexibility in the system.

But because the high price volatility is too politically sensitive, member states would prefer to have more security, more visibility, and to have, for example, fixed price contracts, which is a bit at odds with the objective of developing more flexibility.

So the first step is to assess the need for flexibility. This has not been done so far. It will be the job of all national regulators.

We won’t have any excuse not to develop flexibility

Yes, and ACER’s job, because we have to compile all their data. There are many things we can do to remove some barriers to the entry of small market participants, like in storage and demand response, and all these tools should be added to increase the flexibility of the power system.

And for those member states which are still a bit reluctant to rely on the market signals, market design reform opens the door to support schemes to develop these flexibility resources.

With this assessment of the flexibility needs, with all these tools, with this network code dedicated to demand response, with monitoring of the barriers, with the option for support schemes, we won’t have any excuse not to develop flexibility.

You said earlier that you have some fears regarding market design reform. What are they?

The energy transition is very challenging and very costly, and in this situation of energy crisis, I could understand the temptation of some member states to play alone. But this would be a big, big mistake.

I am confident that in five or ten years when we look back on this energy crisis, we will realize how resilient our system, or market design was. How all these achievements in terms of market integration, market coupling, the integration of day-ahead and intraday markets were important to ensure the security of supply and to limit the price volatility in Europe.

There will be a temptation to play alone, and this will be extremely dangerous

Maybe it will take time, but we will acknowledge this. Until this happens, there will be a temptation to play alone, and this will be extremely dangerous.

For example, we saw Norway considering limiting the cross-border capacity with Europe for alleged security of supply issues. They feared their hydropower would be completely exhausted. Again, there is a risk. But this is not the solution.

This is where I think ACER has a role to play. We need to highlight, to repeat all the benefits of cross-border trade – this is a main source of flexibility in Europe, and we have to build on it. This is the only way to make the European electricity system more resilient and more efficient.

When you say to do it alone, do you mean when the country decides to stop exporting electricity to save it for domestic consumers?

That has already happened, I think, in Romania and Bulgaria. It is the biggest mistake they could make. They don’t realize all the benefits and importance of cross-border trade to adequacy, to the flexibility of the European system.

We have to emphasize, and repeat all these benefits.

Last year ACER assessed the benefits of cross-border trade with the help of the nominated electricity market operators (NEMOs). In the future, we have in mind to obtain access to their tools to perform this kind of analysis ourselves, and on a more regular basis.

You mentioned affordability as a problem.

I have no doubt that we will manage the energy transition, and we can achieve it. The key question is at which cost. If we fully rely on regulatory intervention to complete the transition, to achieve targets in terms of flexibility, we can do it, but it might be extremely costly.

So we have to find the right balance between regulatory intervention and the market, so the cost isn’t too high.

The level of market integration Europe has achieved is unprecedented in the world

I believe that the market integration process, the fact that we have a well-integrated and connected market will help member states to discipline themselves, to take into account the cross-border dimension to avoid overinvestment in adequacy, for instance. Because they know that if they overinvest in generation, in adequacy, this will benefit the neighboring countries, because of the cross-border trade.

This is the reason why I insist on the importance of preserving market integration and its further development, and there are many ongoing projects. The level of market integration Europe has achieved is unprecedented in the world. I cannot think of another similar market. Of course, there is a lot to be done.

Could state intervention make the energy transition more expensive than in a situation when market forces are leading?

Of course, there is a risk. The benefit of regulatory intervention will maybe lower the volatility. But again, at what cost? The risk of price volatility will not disappear because there is some regulatory intervention. It just means that the cost will be borne by the member state instead of the market. Again, we must find the right balance.

Indeed, there is a risk that with regulatory intervention, there will be overinvestment in a generation. But maybe with this crisis, the energy transition, this is not the biggest risk today. Maybe we need to overinvest, but going forward we’ll be careful because these investments will have a cost.

This is where the market integration process could reintroduce this efficiency component because member states will have to consider, when deciding on the national level, the impact on the neighboring countries. Why? Because they are interconnected.- Like it or not, they are interdependent.

The grid is also one of the major obstacles to the further development of renewables. How to speed up investments in grids? Is it a financing problem?

No, I don’t think it is a financial issue. Maybe for a few member states. ACER is reporting on the issue every year, and the main obstacle is permitting. Half of the grid projects are delayed because of permitting.

Like with renewables projects?

Yes. It is not in the hands of the national regulatory authorities. However, they have the possibility to design some incentive schemes for grid investments of transmission system operators (TSOs) if they ask for it, but they don’t ask for this because they don’t need it. It is not a financing issue; it is a permitting issue. There is strong local opposition most of the time against building new grid infrastructure.

For example, we have a problem with Germany regarding its obligation to ensure 70% of cross-border power line capacity is open for electricity trading, because of the structural congestion on their networks. They have a problem strengthening their internal grid due to strong local opposition.

It is a big challenge, but it is a job for member states.