Retail market development – Fortum's views in light of the commission's upcoming retail market communication

Fortum's business operations in Europe cover electricity and heat generation and sales of related services and solutions in the Nordic countries, the Baltic countries and Poland.

The mitigation of climate change, the increased share of intermittent production and consumer expectations for modern and customer-driven markets with a view to managing their energy consumption and costs call for more focus on the retail markets and smarter use of energy.

Therefore we welcome the intention of the European Commission to prepare a policy communication on the development of the retail electricity market in the EU.

To complement Fortum's response to the Commission's on-line public consultation (link), we would like to highlight the following aspects in the development of the retail electricity market:

Signals from the wholesale market should be allowed to be reflected also in retail prices


• A well-functioning wholesale electricity market is a key prerequisite for the successful development of the retail electricity market. More effort should be put into finalising the implementation of the 3rd energy market liberalisation package, including the development of related market rules and network codes.

• Price signals from the wholesale market, including signals from policy measures, should be fully passed on to retail prices too. Hourly measurement and pricing of retail electricity would be effective tools for this.

• Regulated prices are in sharp contradiction to the above-mentioned principle; the EU Commission should use all available measures to remove price regulations still existing in member states.

• The starting point in the development of a retail market design should be in the interest of end consumers. A supplier-centric market design with clearly defined roles and responsibilities between suppliers and DSOs is the best approach from this perspective. These roles and responsibilities should be aligned at the EU level, but detailed EU regulation is not needed – at least for the time being.


Role of DSO as a neutral market facilitator


• DSOs representing regulated business should not participate in the competitive market. Otherwise there is the risk e.g. that DSOs are competing with the same market parties that are relying on the services of those same DSOs. In addition, the same rules (e.g. concerning unbundling) should apply to all companies within the same business segment, regardless of size or other characteristics. A level playing field for all players acting on the competitive market should be guaranteed.


Smart meters and hourly pricing promote market-based efficiency products and services as well as distributed generation


• The roll-out of smart meters and hourly based electricity pricing are effective tools to help end consumers to manage their energy consumption and carbon footprint. They also provide a good opportunity for innovative companies to develop new services and product offerings for end consumers. As this market is still very much under development, it is important to avoid over-regulation. Open competition is the best way to promote efficiency and the development of customer-driven solutions.

• The rapidly growing share of intermittent energy (mainly wind and solar) is creating pressure on system stability. New demand-side management tools and products for customers are needed, including services to help customers to adjust consumption based on short-term price incentives such as spot prices. These kinds of services (e.g. the Fortum Fiksu/"Fortum Smart" product family) are already in commercial use in Finland. A key enabler is the availability of smart metering that registers hourly values. A level playing field and the efficient exchange of consumption data between the stakeholders are also important prerequisites for developing and providing these services. Data hubs would support easy access to the data and thus boost new offerings.

• The traditional energy system and energy business landscape is changing rapidly with the increasing number of prosumers, i.e. consumers that are generating their own energy and/or heat. Therefore it is necessary to clarify also the roles and responsibilities of these new market actors. An important issue is the establishment of clear rules for the payment of network costs as well as taxation. In Fortum's view, it is key that there is no free-riding.

• If small-scale electricity generation needs to be supported, the least disruption to the electricity market is through direct investment subsidies or tax breaks, either in income taxes or through VAT reductions for the initial investment. Netting production and consumption over long time horizons (longer than one hour) is also to be considered as a subsidy.

• Regarding subsidies for renewable energy, Fortum supports the key principles presented by the Commission in the energy state aid guidelines (9.4.2014) – although, due to the extensive exemption framework and long transition times, the rules are not likely to impose any major changes in the market conditions before 2020.  Contrary to the state aid guidelines, Fortum's view is that the same market obligations (direct selling to the market, balancing responsibility) should apply to all energy producers, irrespective of the size of installation or production. Small-scale installations, such as single-house solar panels, also create challenges for the energy system, and these have to be taken into consideration.


Energy poverty to be addressed outside the energy market


• Increasing end-user energy costs, driven by renewable support costs, network costs and various taxes and levies, have brought the issue of energy poverty into the discussion. In Fortum's view, energy poverty is an important issue that needs to be addressed through social policy measures rather than through energy legislation. For example, regulated tariffs on social policy grounds effectively hinder the development of the retail market; hence they create barriers by deleting incentives for the development of various services and products that could help end consumers to better manage their energy consumption and bills