Regulations governing the EU wholesale electricity market have become so complex that the integration of the market is regressing instead of progressing, says Peter Styles, Chairman of the Electricity Committee of the European Federation of Energy Traders (EFET), in an interview with Energy Post. He notes TSOs (transmission system operators) on average now make less cross-border electricity transmission capacity available on the EU high voltage grid than in the late 1990s – before there had been any legislation forcing integration of national energy markets! Fortunately, the Clean Energy Package – the Commission’s proposed ambitious suite of revised legislation – can move the market back in the right direction, says Styles. If it is adopted with the right amendments …

“The high point of a good EU approach to creating an integrated, open market in power was in 2003, with the adoption of the so-called 2nd IEM (Internal Energy Market) Legislative Package. All the pieces were put in place then to allow objective, transparent, non-discriminatory grid access on a cross-border as well as national basis, and to ensure that markets would remain open through regulatory oversight. But after that, especially with the advent of the Third Energy Package, which came into force after 2009, things went downhill. The market architecture and governance became overly complex. The EU legislation explicitly excluded renewable electricity generation output from the disciplines of the IEM. The EU emissions trading system (ETS) began to fail as a mechanism for pricing carbon emissions. Governments introduced new national measures in the name of security of supply, unchecked by EU oversight.”

This sobering assessment comes from someone who is intimately familiar with the process of EU energy sector liberalisation and market integration. A soft-spoken Englishman, Peter Styles was, in the late 1990s, the EU representative of then-thriving Enron – the American company that became one of the largest energy trading houses in the world. After Enron collapsed into bankruptcy in late 2001, Styles was persuaded by fellow members of the Board of EFET, the association of European energy traders that he had helped found in 1999, to remain on the Board and become their retained electricity market specialist.

EFET members include large and small generators, independent traders, banks, and large energy users from all over Europe, who have one common goal: to help create a competitive, transparent, integrated energy market in the EU, based on objective and non-discriminatory access to power and gas grids. They are convinced that a well-functioning EU wholesale energy market will not only lead to lower prices for consumers, but is also key to a successful low-carbon energy transition. Efficiently functioning markets in energy commodities, carbon emission allowances and renewable attributes will enable the most efficient production, storage and distribution of renewable energy across Europe in the future, Styles believes.

Quasi-statutory role

Indeed, EU energy policy is fully aligned with this goal – in theory at least. In practice, says Styles, things don’t look so good. Initially, in the early 2000s great strides were made in opening up and connecting markets, especially after the 2nd Electricity and Gas Directives were adopted in 2003. “For the first time, EU electricity market regulation was directly applicable in each member state, to govern cross-border grid access, thereby facilitating exports and imports of power”, says Styles. In those heady days, some new entrants and large industrial consumers were even dreaming of turning Europe into a “single copper plate”. At least there was real hope of replacing national boundaries to energy markets with enlarged bidding zones.

But with the Third Energy Package, the EU took a wrong turn, according to Styles. One mistake, he says, was the conversion of ETSO, a voluntary association, into ENTSO-E, a compulsory grouping of European electricity TSOs (transmission system operators). Or rather, “the mistake was to give this organisation a quasi-statutory role. The European Commission entrusted the electricity TSOs jointly with the task to develop EU network codes setting out rules for the functioning of the market, or what we call market facing codes. In electricity, unlike in the gas sector, these draft codes were not a success at all.”

“Five years ago, I would have been severely reprimanded by [green MEP] Claude Turmes for even suggesting such a prohibition, but now even the renewables organisations like WindEurope and Solar Europe accept it”

The Commission was forced to acknowledge this, says Styles, and stopped short of adopting network codes directly applicable in the entire EU. Instead, the draft texts elaborated by ENTSO-E, but challenged by market participants and by ACER (the Agency for the Cooperation of Energy Regulators), were turned into binding Commission guidelines, to be implemented in effect in each member state. But as such, they are still meant to set market rules, notes Styles. “And they are terribly complex.”

For example, there are guidelines by which TSOs calculate available cross-border transmission capacity and how they should cooperate on balancing their systems. The result, says Styles, is that “we as traders feel they are withholding transmission capacity from the market. ACER agrees with us. But the TSOs claim they are up against their security limits.”

The situation is so bad, says Styles, that “back in the late 1990s, when there were no market integration rules and you had to make separate deals with each TSO, the allocation of capacity for cross-border trade was closer to the physical capacity of interconnection transmission lines than it is today”.

RES collision course

One reason the TSOs tend to withhold capacity from the market, Styles notes, is to allow for – often unpredictable – flows induced by solar and wind power generation, which in effect get “priority access” to the grid. On this point, EFET sympathizes with the TSOs.

“This is another reason why I argue that EU legislation has taken a wrong turn”, says Styles. “Successive renewable energy directives have been developed in isolation from the internal energy market directives. I warned in 2008 at the Florence Forum [a high-level talking shop on the EU electricity market, ed.] that the second Renewable Energy Directive and the rest of the Third Energy Package were on a collision course. That’s how it has turned out to be.”

All member states have programmes in place to support renewable energy. But “each scheme is different, each is contained within its national borders. They don’t take into account the needs and possibilities of cross-border transactions.”

Rrenewables, if they need support, should be supported financially, not by giving them special privileges

What is more, adds Styles, “they rely not just on financial support, but also on regulations that give them priority on the grid. This has constrained and distorted the market.” These measures taken together even have the effect of totally blocking borders at times, for example between Germany and Poland and Germany and Denmark.

The result has been a suboptimal system, says Styles. “This is not just bad for trade. It’s bad for consumers, because it drives up costs, and it’s bad for the energy transition. We could have a balanced, low-carbon European electricity mix, with hydropower in the Nordic countries and central Europe, wind power in North West Europe, solar power in Southern Europe and remaining nuclear, if we had open borders. But we have witnessed a closing of borders rather than further opening them.”

Styles stresses that he is not against renewable energy. “I can’t be. My members, including the large generators, are all getting into renewable power generation and supply. Even those who do not own renewable generation, are active in commercially managing renewable assets and doing the bidding for the owners of them.”

But renewables, if they need support, should be supported financially, not by giving them special privileges. “The way to do it is to have a completely level playing field across the EU, and if renewables then still need support, they should receive that in monetised form, ideally based on an international, market based scheme.”

The good news, says Styles, is that the Clean Energy Package – the legislative proposals presented by the European Commission on 30 November 2016 – is “going in the right direction. It is trying to re-orchestrate the provisions for renewable energy and the internal market, bringing them more into alignment with each other.”

“If the DSOs need access to storage capacity, there is nothing to keep them from buying it – by procuring storage services in the market”

For example, for new renewables projects, the proposed Electricity Market Regulation would prohibit priority dispatch. “This is a major victory for us,” says Styles. “Five years ago, I would have been severely reprimanded by [green MEP] Claude Turmes for even suggesting such a prohibition, but now even the renewables organisations like WindEurope and Solar Europe accept it.”

New renewable generation units must also be “balance responsible”, if the Commission has its way. “Again, a major step forward”, notes Styles, although he is concerned that the new rules will not apply to smaller existing projects as things stand. “We believe there should be a phase-out period, so that within a few years all generation, no matter of what size or type or when installed, competes according to the same dispatch and imbalance regime. We are afraid otherwise there will be a rush to build new projects before 2019, when the new Regulation will probably take effect.”

Storage facilities

Meanwhile, another threat to the market is looming, in the view of EFET, namely the possibility that distribution system operators (DSOs) will be allowed to operate and own power storage facilities. Storage is more and more becoming a key asset in the emerging energy market, dominated by intermittent renewables. DSOs argue that they need storage to ensure the energy system will continue to function smoothly.

But according to Styles, a core market principle is “strict unbundling” between network operators and market players. “Storage should be part of the market, just like generation. If the DSOs need access to storage capacity, there is nothing to keep them from buying it – by procuring storage services in the market.”

“If we could start from scratch, I would tear up all the market facing electricity guidelines and re-create an EU legal framework based on principles rather than detailed rules”

Styles notes that “many of our members are getting involved in decentralized services. They have affiliates which are active in aggregation, demand response and other small-scale services for customers. There is nothing to stop this from progressing as long as distribution tariffs are correctly structured and DSOs don’t steal their business.”

He mentions the example of the Netherlands, where DSOs are taking more and more market activities for themselves, such as offering to manage charging and discharging of electric car batteries.

Nevertheless, Styles is optimistic about the future. “We are learning the lessons of what went wrong with the Third Energy Package. I credit DG Energy with trying to get the renewable energy track aligned with the internal market track. Let’s keep going and let’s get it done.”

He adds that “some of the best EU thinking on energy markets also takes place in DG COMP”, the EU’s competition directorate-general. “If it were up to me”, he says, “and we could start from scratch, I would tear up all the market facing electricity guidelines and re-create an EU legal framework based on principles rather than detailed rules.”