Fortum's response on the new energy market design for the EU

17 September 2015, 15:33 EEST

A more efficient energy market in the EU will benefit consumers, energy producers and societies alike.

Fortum welcomes the European Commission’s Summer package, published on 15 July 2015, as an important milestone in developing the European Energy Union. In that respect, the European Commission’s launch of a public consultation on the new EU energy market design is extremely important. In our view, which aligns with the European Commission’s consultation document, a more efficient market will benefit consumers, energy producers and societies alike.

Before decisions are made, it is crucial to study a broad range of key elements in the current internal electricity market design and how they could be further developed. There is no single solution that will solve the current challenges, not even the much-debated capacity mechanisms. However, more market-orientated energy policies, improved internal energy market (IEM) governance and harmonised processes on security of supply should play a significant role going forward.

Other key issues should include no-regret options for both wholesale and retail markets, removal of subsidies to mature renewable energy sources, market integration of renewable energy sources, including decentralised generation, as well as political will to decrease the impact of the non-energy components in the end-consumer’s bill.

Fortum’s key messages relating to the various elements covered by the consultation questions can be summarised as follows:

  • Scarcity prices that are transferred to all market participants are essential for the future market design, enabling efficient balancing of supply and demand in all situations. Political acceptability of scarcity prices during tight market situations can be secured by further market integration guaranteeing efficient competition and by developing different products available for hedging against both price and volume risks.
  • The level of ambition concerning the integration of the fragmented balancing market should be scaled up and enforced, if necessary, through legal measures. Similarly, more emphasis must be placed on the swift implementation of the agreed EU-wide intraday platform, with the Commission taking the political lead.
  • A stable and predictable energy policy is a key prerequisite for long-term investment certainty. Long-term contracts can play a certain role, but they don’t solve the overall credibility issue of energy policies.
  • The CO2 price should be allowed to work as the only driver of investments in the ETS sector.  However, in the non-ETS sector, additional support measures could be justified. Furthermore, a more coordinated approach between member states to renewable energy (RES) subsidies should be developed, including opening the current schemes for cross-border participation to allow more cost-efficient RES investments during the transition phase to pure CO2 price incentives.
  • Success in integrating renewable energy, including decentralised energy, in the market will be the key for the success of the future market design development. The still-existing privileges for RES/DES should be abolished, making all generators, irrespective of size, subject to the same market obligations (balancing responsibility, market price reflection etc.).
  • For customer empowerment and to kick-start demand response it is essential that the wholesale market prices are passed on to final consumers, regulated end-user prices are removed, there is a smart infrastructure in place, and energy bills are stripped of constantly increasing add-ons (taxes, subsidy costs etc.).
  • For retail energy market development it is important that responsibilities between market parties are clearly allocated. Distribution System Operators (DSOs) should act as neutral market facilitators, whereas the role of suppliers and service providers should be to handle the customer interface (in line with a supplier-centric retail market model). DSOs should not be able to participate in the energy services market under current unbundling regulation.
  • The regional Transmission System Operator (TSO) cooperation should be enhanced from operational cooperation to truly strategic cooperation so that TSOs, in practice, work as one towards the market. TSOs should adopt at least a regional market perspective (if not European) in infrastructure development and not only focus on domestic bottlenecks.
  • The structure, governance and independence of the Agency for the Cooperation of Energy Regulators (ACER) should be improved so that it can act more decisively on European regulatory issues. For example, ACER could take a more pro-active role with a European mind-set in cross-border disputes as well as in the implementation and adaptation of network codes.

A European approach to distribution tariffs would increase the efficiency of the IEM, as the steering between the investments into centralised generation and self-generation would not depend on the tariff structure of a certain country but on the market signals. The components of the distribution tariffs should reflect a fair coverage of the costs.

  • Power exchanges, both physical and financial, play a vital role in the functioning of the power market. Some degree of regulatory oversight and transparency on governance rules would be welcome. There should also be a clear division between tasks that are a “natural monopoly” (such as the operation of the algorithm) and tasks that should or could be placed under competition between power exchanges.
  • For assessing power system adequacy, a harmonised EU-level methodology is needed, including a common understanding of relevant geographical areas. The relevant regions need to be defined based on an appropriate power market interconnectivity analysis. Without a common methodology it is difficult to have aligned approaches towards sufficient capacity adequacy in an integrated European internal energy market. Although the methodology should be common, the criteria could vary between regions/countries. A decision to introduce a capacity mechanism should always be based on a regional generation adequacy assessment.
  • Establishing a common European framework for cross-border participation in capacity mechanisms as well as defining a reference model for capacity mechanisms would help to mitigate the current distortions in the internal market brought by the different national capacity mechanisms. Cross-border participation could be based on the principle of direct participation of the cross-border capacity into a national capacity market. Decentralised trading with reliability options could offer a basis for a reference model.

For more information, please contact:
Merja Paavola, Vice President, Corporate Relations, Fortum
Tel. +358 1045 29255, merja [dot] paavola [at] fortum [dot] com