9 Public intervention and the internal
electricity market
| (35531)
15776/13
+ ADDs 1-5
C(13) 7243
| Commission Communication: Delivering the internal electricity market and making the most of public intervention
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| Legal base
| — |
| Document originated
| 5 November 2013
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| Deposited in Parliament
| 20 November 2013
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| Department
| Energy and Climate Change
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| Basis of consideration
| EM of 29 November 2013 and Minister's letter of 10 January 2014
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| Previous Committee Report
| None |
| Discussion in Council
| No date set
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| Committee's assessment
| Politically important
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| Committee's decision
| Cleared |
Background
9.1 According to the Commission, the
internal market is necessary to achieve the objectives of the
EU's policy on energy, which it says include secure and competitively
priced supplies, targets for renewable and climate change for
2020 and beyond, and a significant increase in energy efficiency.
It also notes that Member States have agreed to complete the internal
electricity market by 2014, and that it is widely accepted there
is a need for some public intervention, which it notes can take
different forms (such as state aid in the form of grants or tax
exemptions, the imposition of public service obligations, and
general regulation). It comments that, although such intervention
can be useful, it must be well designed and adapted to changes
in market functioning and technology over time, making it important
to define its role, level and nature, bearing in mind that some
Member States have announced significant public support for investment
in new generating capacity, which, if not properly designed, risks
distorting competition and investment signals.
The current document
9.2 The Commission has therefore produced
this Communication, which assesses the main features of public
intervention, and shows how these can be designed in order to
increase their effectiveness. It also says that it will adopt
in 2014 new Union guidelines on environmental and energy aid for
2014-20, on which it will soon launch a public consultation.
THE NEED FOR RE-THINKING PUBLIC INTERVENTION
9.3 The Commission suggests that, as
the internal electricity market has developed, a number of issues
have arisen which may justify public intervention. These include:
· the growing importance of
renewable energy, where the benefits are manifold, but
most current support schemes were designed when the technologies
were in their infancy and had negligible market shares;
· the need for a more active
demand-side response (through the use of smart distribution
networks, smart meters and appliances, and electricity storage),
and demand-response services (such as dynamic pricing,
interruptible load- or dynamic-load capping contracts for industry,
commercial businesses and households; participation in balancing
markets; services aggregating; and optimising demand for households),
which the Commission suggests can increase system flexibility,
enable users to shift consumption to cheaper periods, and reduce
the need for generation capacity;
· the key need to take into
account environmental externalities, arising (for example)
from a phasing out of subsidies for fossil fuels and increased
aid for renewable energy, including nuclear generation;
· the need for adequate
generating capacity, where market volatility has created uncertainty
for investors seeking to upgrade today's aging systems, which
has in turn led some Member States to consider public subsidies,
not only for new investment, but to enable existing plants to
remain operational; and
· the extent to which the creation
of the internal market means that public intervention in one
Member State can affect prices, not only nationally, but in neighbouring
markets, leading to both short term and long term distortions.
MORE EFFECTIVE AND EFFICIENT PUBLIC INTERVENTION
9.4 The Commission says that well-designed,
targeted and proportionate public intervention allows policy objectives
to be achieved without distorting markets more than necessary,
but that this must be properly coordinated within and between
Member States, in order to avoid higher costs for consumers and
taxpayers, reduced opportunities for cross-border trade, or subsidy
races.
9.5 It suggests that this involves:
· identifying the specific
problem to be addressed, and demonstrating that the functioning
of the internal market on the basis of the existing acquis
is unlikely to solve it without public intervention;
· assessing the potential interplay
with other policy objectives, in order to avoid a conflict between
them, and taking into account possible trade-offs, with the need
to ensure that prices reflect external costs being particularly
important;
· evaluating alternative options
to national intervention, taking into account both the European
dimension and demand side considerations, such as changing consumer
behaviour;
· minimising the impact on
electricity systems and competition, and removing hidden subsidies;
· keeping costs low by means
of auctions, competition across technologies, and exploiting efficiencies
at EU level and involving other Member States, particularly as
regards support for renewables, in order to ensure that intervention
is appropriate to the objective pursued and does not go beyond
what is necessary;
· considering the impact on
consumer costs, particularly in relation to the global competitiveness
of the EU's energy-intensive industries; and
· the monitoring, evaluation
and (where necessary) phasing out of support, whilst avoiding
retroactive changes which undermine investor confidence.
SPECIFIC MEASURES
9.6 The Communication also seeks to
provide guidance relating to specific forms of public intervention,
noting that, in order to meet the requirements of the Electricity
Directive (2009/72/EC), these need to be clearly defined, transparent,
non-discriminatory, verifiable, and guarantee equality of access
for electricity undertakings, with Member States having to show
that, where public service obligations are imposed, there are
necessary, proportionate and transitional in nature (and consistent
with the provisions of the Electricity Directive). It also says
that, where such intervention is not compliant with the acquis,
and in particular state aid rules, it will launch infringement
proceedings.
9.7 The Commission then addresses the
following four areas:
Provision of adequate generation
9.8 The Commission comments that guaranteeing
security of supply is a key public policy objective, and that
the reliability of Member States' systems in inter-connected markets
is interdependent. It nevertheless believes that the prevention
of supply disruption should not go beyond what is strictly necessary,
and that a comprehensive, facts-based assessment is needed prior
to public intervention, with any such assessments being notified
to the Commission. It adds that, where an assessment shows that
inadequate generation is a serious problem, Member States should
assess the alternative measures available, and properly identify
why the problem cannot be remedied by the market alone. It also
suggests that, if alternative measures do not solve the identified
problem, a strategic reserve, a credibly one-off tendering procedure,
or even a market-wide capacity mechanism, are possible options,
subject to the caveat that Member States should take into account
the objective of phasing out subsidies for fossil fuel generation
by 2020.
9.9 The Commission says the mechanisms
to ensure adequate generation should be open to all capacity —
including that from other Member States — which can contribute
effectively. It encourages Member States considering public intervention
in this area to cooperate with others in their region to examine
the potential of cross-border mechanisms, whilst also stressing
that, in order to minimise market distortions, there should be
no export charges or procedures to reserve capacity for the domestic
market. It also suggests that distortions of competition and trade
can be reduced by regularly reviewing the need for intervention,
and it warns that, where it is called upon to examine public interventions
in relation to either state aid rules or internal market legislation,
it will require a thorough generation adequacy assessment from
the Member State concerned. Finally, the Commission says that
these interventions should not compensate for the negative impact
of other subsidies or poor implementation of internal market rules.
Support schemes for renewables
9.10 The Commission notes that the Treaty
requires EU policy to promote the development of new and renewable
forms of energy, which it observes is also important for achieving
environmental and climate objectives, but it recognises that,
as markets are unlikely to deliver the desirable level of renewables
in the near future, governments may want to intervene to support
"infant industry". It says that this should be done
in a stable, transparent, credible, cost-efficient and market
integrating way, avoiding damaging retroactive changes, but adds
that, as the sector and technologies mature and grow (and costs
decline), production and investment decisions should be driven
increasingly by the market, and not by guaranteed price levels
determined by public authorities. In practice, it says that this
means phasing out feed-in tariffs which shield producers from
market price signals, and designing support which is more consistent
with the Emissions Trading System (with support declining as ETS
carbon prices increase). It also points out that renewables can
require the use of equipment produced outside the EU and of biomass
as feedstock, and it reminds Member States that "local content
rules" might not be in line with the acquis.
9.11 The Commission draws attention
to the crucial need to focus public intervention on research and
development for emerging technologies, and for supporting non-commercial,
decentralised production from individual households in specific
ways: and it notes that, in addition to public intervention to
promote electricity from renewables, balancing obligations, the
design of balancing markets, the use interconnections, grid connection
charges and grid use rules can be designed in a technology-neutral
manner and allow appropriate cost signals to be passed on to all
major producers and users.
Development of renewables
9.12 The Commission points out that
the Renewable Energy Directive (2009/28/EC) provides for three
kinds of cooperation mechanisms between Member States, which help
them to achieve national targets most effectively, but regrets
that little or no use has been made of these so far. It has therefore
provided in an accompanying Staff Working Document more detailed
guidance on the use of such mechanisms.
Demand response measures
9.13 The Commission suggests that the
internal electricity market involves, not just producers and network
operators, but consumers as well, who — with the help of
supporting technologies — can play a significant role in
making the system more flexible. It says that this requires an
appropriate organisation of the retail market, which triggers
investments in innovative products and services, as well as clear
rules on data exchange and protocols, removing tariff elements
which hamper active market participation, and the development
of dynamic pricing. It says that it is currently analysing the
smart metering roll-out plans received from Member States, and
that further policy and regulatory work may be necessary at both
Member State and EU level, including appropriate tariff design,
removing price controls, strengthening price signals, and developing
further rules for coordination, complemented by bringing enabling
technology into the market.
The Government's view
9.14 In his Explanatory Memorandum
of 29 November 2013, the Minister of State at the Department of
Energy and Climate Change (Michael Fallon) says that the Government
is supportive of a well-functioning internal energy market, and
welcomes this non-binding Communication and the guidance it provides
on public intervention. It also agrees that well-designed interventions
do not disproportionately distort markets and may be necessary
to ensure security of supply.
9.15 The Minister adds that the guidance
set out in the Communication is acceptable to the UK, and should
allow the implementation of existing and proposed support schemes,
with the Government working with the Commission to ensure that
the latter are developed in line with the general principles in
the guidance. He also expects some of those principles to be included
in the Commission's forthcoming energy and environment state aid
guidelines, and says that the Government is keen for these to
be aligned.
9.16 When we considered this document
on 11 December 2013, we took the view that its contents were unexceptionable,
but we also noted that the material circulated by the Commission
runs to nearly 180 pages, involving considerable resource costs,
not only in its production and printing, but also in its subsequent
digestion by officials (and others) in 28 Member States. Given
also that much of its content seemed to consist of statements
of the obvious in areas in which Member States presumably possessed
as much expertise and knowledge as the Commission itself, we found
it difficult to see what useful purpose it served. Our Chairman
therefore wrote to the Minister, asking him to comment on this,
and to cite examples where the guidance says anything which competent
authorities in Member States would not already be aware of, and
to explain how the course of events in this area would be materially
different, even if the guidance had not been issued.
9.17 He has now sent us the following
reply:
"You asked why I welcomed this
Commission Communication, noting that, in your view, it consists
largely of statements of the obvious of which Member States ought
to be aware already. As you know, the UK is a strong supporter
of the objective of completing the single market in energy and
we have always developed any market interventions in line with
this aim. While the Commission accepts that some public intervention
in energy markets is needed, there is a risk of Member States
taking action which potentially undermines the functioning of
the single market. To mitigate this risk, the Commission considers
it appropriate to set out clearly their views on how public interventions
should be designed to avoid distorting markets beyond what is
necessary. The Communication and its Staff Working Documents usefully
includes a 'check list' for all Member States to consider ahead
of intervening in the electricity sector. Interventions that can
demonstrate they are in line with the Communication may assist
in any state aid notification process. This is particularly helpful
for the UK as we have a large number of state aid cases in the
pipeline.
"You also asked for examples
of where the guidance says anything Member States are not already
aware of and to what extent the course of events in this area
is likely to have been materially different in the absence of
the guidance. As mentioned above, the guidance aims to ensure
that Member State interventions respect the principles of the
single market as far as possible and the UK has been the first
Member State to design innovative schemes that do that. For instance,
we have committed in principle to open our new capacity market
to foreign generation provided the conditions are right, and we
are developing arrangements, in cooperation with the Commission
and relevant stakeholders, to facilitate this. We have also signed
a Memorandum of Understanding with the Republic of Ireland to
jointly explore how Irish renewables might be developed to our
mutual benefit, by making use of the cooperation mechanisms in
the Renewables Directive. In both cases, we are developing innovative
arrangements which might, moreover, subsequently be used by other
Member States. Without the Commission's guidance it would be much
more difficult to devise mechanisms which we can be sure the Commission
will consider to be compatible with the development of the single
market.
Conclusion
9.18 We are grateful to the Minister
for his explanation, and, although it strikes us as unduly charitable,
we would not wish to argue the issue further, other than to observe
that, if this guidance really is necessary, it could, in our view,
have been conveyed in a much shorter and simpler — and hence
more effective — manner. Having said that, we remain of
the view that the document does not raise any other issues requiring
further consideration, and we are therefore clearing it.
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