EU Energy Policy Contents

4EU Electricity Market Design

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy and Industrial Strategy Committee

Document details

(a) Proposal for a Regulation on the internal market for electricity (recast); (b) Proposal for a Regulation establishing a European Agency for the Cooperation of Energy Regulators (recast); (c) Proposal for a Directive on common rules for the internal market in electricity; (d) Proposal for a Regulation on risk-preparedness in the electricity sector and repealing Directive 2005/89/EC.

Legal base

(a) Article 194(2) TFEU (b) Article 194(2) TFEU (c) Article 194(2) TFEU (d) Article 194 TFEU

Department

Business, Energy and Industrial Strategy

Document Numbers

(a) (38346), 15135/16 + ADDs 1–11, COM(16) 861; (b) (38347), 15149/16 + ADD 1, COM(16) 863; (c) (38348), 15150/16 + ADD 1, COM(16) 864; (d) (38349), 15151/16 + ADD 1, COM(16) 862

Summary and Committee’s conclusions

4.1Market design is the set of rules establishing the principles and details for participation in, and oversight of, the energy market. The European Commission considers that EU electricity market design needs to respond to the changing nature of the electricity market, notably the increasing volume of renewable energy. The Commission also observes that the wholesale electricity market does not always respond to demand and that, in most parts of the EU, electricity retail markets suffer from persistently low levels of competition and consumer engagement.

4.2The Commission summarises its response to these problems as follows:

“The present electricity market design initiative thus aims to adapt the current market rules to new market realities, by allowing electricity to move freely to where it is most needed when it is most needed via undistorted price signals, whilst empowering consumers, reaping maximum benefits for society from cross-border competition and providing the right signals and incentives to drive the necessary investments to decarbonise our energy system. It will also give priority to energy efficiency solutions, and contribute to the goal of becoming a world leader in energy production from renewable energy sources, thus contributing to the Union’s target to create jobs, growth and attract investments”.

4.3It has accordingly proposed amendments to the Regulation and Directive covering the internal electricity market as well as the Regulation governing ACER (the Agency for the Cooperation of Energy Regulators) and a new linked Regulation on risk-preparedness in the electricity sector. We consider these four proposals together in this Chapter.

4.4The Minister of State, (Baroness Neville-Rolfe), considers that the various proposals are largely in line with the direction of UK policy, although closer examination will be necessary for the UK to assess the full implications of the proposals. Across the four proposals, concerns include: the provisions on capacity mechanisms (i.e. the financial support that EU Member States grant to electricity producers to safeguard security of electricity supply); the arrangements for regional cooperation; the strengthened role of ACER; consumer price regulation; and the potentially prescriptive nature of rules on risk-preparedness plans.

4.5This is a complex set of proposals to which we expect to return once the Government has had a further opportunity to assess their full implications. We agree with the Minister’s initial concerns about the way in which the provisions on capacity markets and regional cooperation would function in practice.

4.6When the Minister reverts to us, we ask that she sets her response more clearly in the context of the UK’s departure from the European Union. Given that none of these proposals are being prioritised, it seems unlikely that the legislation will be in force by the time the UK has left the EU. The revised Regulation on the internal energy market will not enter into force until 2020. In that light, could the Minister explain the basis on which the UK is approaching the negotiations: is the UK approaching the negotiations purely in a business as usual manner, assuming that it will adopt the terms of the legislation? Alternatively, is the Government giving any consideration to approaching the negotiations from the perspective of a third country?

4.7We see little explicit provision in any of the legislation for third country access to the electricity market. The exception is in the ACER Regulation, where third countries would be allowed to participate in the Agency as long as they have concluded an agreement with the Union and have adopted and are applying Union law in the fields of energy, environment and competition. What is the Government’s view of this provision, which appears to be very broad? Should the UK wish to trade electricity with the EU post-Brexit, could it do so without participating in ACER and without participating in the internal energy market? These are factual questions to which we consider it is reasonable to expect an answer, although we accept that the ultimate nature of the energy relationship between the EU and the UK will need to be resolved as part of the withdrawal negotiations.

4.8We look forward to receiving the standard checklist for analysis identifying the potential costs and benefits of the proposal in the UK. We ask that, in writing to us, the Minister responds to the issues above and that she sets out any changes to the Government’s position. We ask too that she sets out any early indication as to whether the Government’s concerns might be shared by others.

4.9We retain the documents under scrutiny and draw them to the attention of the Business, Energy and Industrial Strategy Committee.

Full details of the documents

(a) Proposal for a Regulation on the internal market for electricity (recast): (38346), 15135/16 + ADDs 1–11, COM(16) 861; (b) Proposal for a Regulation establishing a European Agency for the Cooperation of Energy Regulators (recast): (38347), 15149/16 + ADD 1, COM(16) 863; (c) Proposal for a Directive on common rules for the internal market in electricity: (38348), 15150/16 + ADD 1, COM(16) 864; (d) Proposal for a Regulation on risk-preparedness in the electricity sector and repealing Directive 2005/89/EC: (38349), 15151/16 + ADD 1, COM(16) 862

Background

4.10The Commission observes that both the European Council and the European Parliament have repeatedly stressed that a well-functioning integrated energy market is the best tool to guarantee affordable energy prices, secure energy supplies and to allow for the integration and development of larger volumes of electricity produced from renewable sources in a cost efficient manner.

4.11The current electricity market design is based on the rules of the “Third Energy Package”, adopted in 2009. These rules have subsequently been complemented by legislation against market abuses and implementing legislation concerning electricity trade and grid operation rules. The EU internal energy market is built on well-established principles, such as the right of access for third parties to electricity grids, free choice of suppliers for consumers, robust unbundling rules, the removal of barriers to cross-border trade, market supervision by independent energy regulators, and the EU-wide cooperation of regulators and grid operators within the Agency for the Cooperation of Energy Regulators (ACER) and the European Network of Transmission System Operators for Electricity (ENTSO-E).

4.12New developments have led to fundamental changes in European electricity markets. The share of electricity generated from renewable energy sources has steeply increased. This shift towards renewable energy will continue as it is a key condition to fulfil the Union’s obligations under the Paris Agreement on climate. The physical nature of renewable energy—more variable, less predictable and decentralised than traditional generation—requires an adaptation of market and grid operation rules to the more flexible nature of the market. In parallel, argues the Commission, “state interventions, often designed in an uncoordinated manner, have led to distortions of the wholesale electricity market, with negative consequences for investments and cross-border trade”.

4.13Significant changes are also taking place on the technological side. Electricity is traded almost European-wide through so-called “market coupling”, jointly organised by power exchanges and transmission system operators. Digitalisation and the rapid development of internet-based metering and trading solutions enable industry, businesses and even households to generate and store electricity, as well as participate in electricity markets via so-called ‘demand response’ solutions. The electricity market of the next decade is likely to be characterised, argues the Commission, by more variable and decentralised electricity production, an increased interdependence between Member States and new technological opportunities for consumers to reduce their bills and actively participate in electricity markets through demand response, self-consumption or storage.

Commission proposals

Overview

4.14Measures are proposed to encourage the development of short-term markets to allow renewable energy to be traded more easily across borders. This is necessary as most generation from renewables can only be accurately predicted shortly before its production. The creation of short-term markets will improve the ability of market participants to balance the grid and provide back-up generation at times of high demand and shortfalls in renewable generation.

4.15Interventions undertaken by Member States to respond to the challenges posed by variable generation have prevented electricity prices from reflecting scarcity and have consequently reduced the incentive for future investment in generating capacity. National market rules which distort price signals, including price-caps, should be reviewed.

4.16Changes in technology, in particular the development of smart meters and smart grids, have also created opportunities for demand response potential to reduce the need for back-up generation, by enabling consumers to change their consumption in response to changing prices. Consumer access to fit-for-purpose smart technology and electricity supply contracts which are linked to wholesale electricity prices are essential to facilitate consumer participation in electricity markets. Consumers can also be encouraged to reduce their electricity bills by introducing common rules for self-generation. Finally, measures to encourage and facilitate switching between providers should also boost consumer engagement.

4.17Provisions to combat rising levels of fuel poverty form an important part of the Commission’s electricity market design proposals. Member states will be required to measure and regularly monitor energy poverty on principles designed at EU level.

4.18A coordinated assessment of the European energy system’s ability to provide sufficient generation is necessary to determine the measures that need to be taken to ensure security of supply. Security of supply can be managed more reliably and at a lower cost in an interconnected market than at a purely national level. In order to minimise distortions to the internal market, capacity mechanisms (i.e. the financial support that EU Member States grant to electricity producers to safeguard security of electricity supply) should only be introduced where this assessment shows them to be necessary.

4.19Greater coordination between Transmission System Operators (TSOs) (such as the UK’s National Grid) is proposed on the grounds that this can lead to significant improvements in market functioning and cost reductions. It is proposed to set up Regional Operation Centres in which TSOs would take decisions on issues which can be resolved more effectively at a regional rather than a national level, including capacity calculation for interconnectors and risk preparedness measures.

4.20In order to improve the effectiveness and speed of decision making on cross-border issues, the Commission proposes to strengthen the powers of the Agency for the Cooperation of Energy Regulators (ACER) for those cross-border issues that require a regional response.

Regulation on the internal energy market (document (a))

4.21The draft Regulation sets out the overarching legal principles to govern the market. All market participants would aim for system balance (i.e. sufficient energy of the necessary quality) and would be financially responsible for imbalances they cause in the system. Member States would be able to provide exceptions for small renewable generators and demonstration projects. All market participants would have access to the balancing market. Market operators would be required to allow market participants to trade energy as close to real time as possible. There are further provisions on pricing and dispatch, designed to increase flexibility in the market.

4.22The Commission proposes changes to bidding zones (areas within which electricity can be freely traded without capacity constraints) so that they would no longer be defined by national borders but by “long-term structural congestions” in the transmission network. The aim is to maximise economic efficiency and cross-border trading while maintaining security of supply.

4.23Capacity would be allocated only by auction. TSOs would not be able to limit the volume of interconnection capacity in order to solve congestion or to manage cross border flows, except where necessary for maintaining operational security or where it was beneficial to economic security at a national level.

4.24There are new principles and rules on “resource adequacy”. Member States would be required to monitor resource adequacy within their territory based on a European resource adequacy assessment. The European Network of Transmission System Operators for Electricity (ENTSO-E) would carry out this assessment annually for approval by ACER. Member States would be required to address any resource adequacy concerns revealed by this assessment, including by removing regulatory distortions, enabling shortage prices, developing interconnection, energy storage, demand side measures and energy efficiency. Member States would only be allowed to introduce capacity mechanisms where these measures cannot resolve the problem.

4.25Capacity mechanisms must not create unnecessary market distortions nor limit cross-border trade. Member States must ensure that foreign capacity has as equal an opportunity to participate in capacity mechanisms as domestic capacity. Member States should also not be allowed to prevent capacity located in their territory from participating in capacity mechanisms in other Member States. ACER would be responsible for the approval of technical parameters for the participation of capacities located in other Member States as well as operational rules for their participation. These conditions would apply to existing capacity mechanisms.

4.26All TSOs would be required to establish regional operational centres (ROCs) covering regions defined by ACER. Functions to be performed by ROCs would include: coordination of capacity calculation; security analysis; restoration plans; and outage planning. ROCs would also calculate the maximum entry capacity available for the participation of foreign capacity in capacity mechanisms. The Commission would be given a power to adopt delegated acts concerning the geographical area covered by each regional cooperation structure.

4.27Distribution System Operators (DSOs) (such as UK Power Networks) would be required to establish an EU DSO entity within 20 months of the Regulation entering into force. Tasks would include: coordination and planning of transmission and distribution networks; integration of renewable generation; and development of demand response.

4.28The Commission may adopt delegated acts relating to the establishment of network codes or guidelines in a number of areas including curtailment of generation, re-dispatch of generation and demand, distribution tariff structures and cyber security.

Directive on the internal energy market (document (c))

4.29A number of new arrangements for pricing are proposed. Member States would be prevented from regulating the level of retail electricity prices and would have to ensure the protection of energy poor or vulnerable consumers by means other than price-setting. As an exception, Member States would be allowed to intervene in price setting for the energy poor or vulnerable customers for a period of five years after the entry into force of the Directive. Member States would be able to set prices after this time for vulnerable customers for reasons of extreme urgency. All customers would be entitled, on request, to dynamic electricity price contracts (contracts between a supplier and final customer that reflect the price on the wholesale market or day ahead market).

4.30Amendments are made to boost and facilitate switching between energy suppliers. Customers would be able to change supplier within three weeks without having to pay any switching-related fees. Member States would be able to choose to permit suppliers to charge contract termination fees but these would have to be proportionate. Customers would have access, free of charge, to at least one price comparison tool which meets criteria set by the Commission.

4.31Customers would be entitled to generate, store and consume energy without being subject to disproportionate procedures and charges that are not cost reflective. Local energy communities would be entitled to own, establish or lease community energy networks and demand-side response providers would be able to participate in the electricity market in a non-discriminatory manner.

4.32Smart meters would be rolled-out to at least 80% of consumers within eight years of a positive cost-benefit assessment by Member States or by 2020 for those Member States that have initiated deployment before the entry into force of the Directive. Smart meters would be required to meet European standards. Information from smart meters would be available to customers at no additional cost and at near-real time.

4.33Member States would be required to measure and monitor energy poverty and report to the Commission on measures taken to prevent it every two years.

4.34Member States would ensure that their regulatory frameworks allow and incentivise Distribution System Operators (DSOs) to procure services to improve the efficiency of distribution systems. These services would include renewable energy sources, demand response and aggregators. DSOs would be required to:

4.35Each TSO would be required to cooperate closely with neighbouring TSOs as part of its responsibility to ensure that demand is met for the transmission of electricity reliably and efficiently. They would also be required to adopt a framework of cooperation between regional operational centres. Member States would be able to assign certain responsibilities to TSOs other than the one that owns the transmission system concerned.

4.36 National regulatory authorities would be required to consult closely with regulatory authorities in neighbouring countries in carrying out the tasks specified in the Directive. Their objectives would include measuring the performance of TSOs and DSOs in relation to the development of a smart grid that promotes energy efficiency and integration of electricity from renewable sources.

4.37National regulatory authorities in the geographical area where a regional operational centre is established would be required to discharge, in close coordination with each other, a number of duties including approval of procedures and budgets, as well as monitoring activity.

4.38The Commission would be empowered to adopt delegated acts, subject to consultation with Member States, in a number of policy areas covered by the Directive. These would include the geographical area covered by each regional cooperation structure and the establishment and amendment of network codes.

ACER (Agency for the Cooperation of Energy Regulators) (document (b))

4.39The proposed changes to the role and responsibilities of ACER largely reflect the proposed amendments to electricity market design. The Commission proposes that the role and responsibilities of ACER be strengthened in the following ways:

4.40The Commission also proposes some administrative changes, including:

4.41The Agency is open to the participation of third countries “which have concluded agreements with the Union and which have adopted and are applying Union law in the field of energy and in the fields of environment and competition.” In those circumstances, arrangements shall be made to specify the nature, scope and procedural aspects of the involvement of those countries in the work of the Agency, including provisions relating to financial contributions and to staff.

Risk-preparedness Regulation (document (d))

4.42The proposed Regulation sets out what Member States should do to prevent and manage crisis situations and how they should cooperate with each other to this end, especially by providing common methods for assessing risks, by bringing more comparability and transparency to the preparation phase and during an electricity crisis, and by ensuring that even in the crisis electricity is delivered where is it needed most. It also provides a framework for a more systematic monitoring of security of supply issues via the Electricity Coordination Group. It contributes to the Electricity Market Design package by ensuring that, even in crisis situations, priority is given to market-based measures and that markets can work as long as possible.

4.43The European Network of Transmission System Operators (ENTSO-E) must submit to ACER a proposal for a methodology for identifying the most relevant crisis scenarios at regional level, after consultation with stakeholders. These scenarios must be based on risks such as rare and extreme natural hazards, consequential hazards including fuel shortages and malicious attacks and include elements such as the interaction and correlation of risks across borders and the ranking of risks according to their impact and probability.

4.44On the basis of that methodology, once approved, ENTSO-E must identify the most relevant crisis scenarios for each region and submit them to the Electricity Coordination Group (a committee of Member State officials) for consultation. Member States must identify the most relevant crisis scenarios at national level and these must be consistent with the regional scenarios.

4.45ENTSO-E must submit to ACER a proposal for a methodology for assessing short-term adequacy, after consultation with stakeholders. This must cover elements such as the probability of the occurrence of a crisis.

4.46The competent authority in each Member State must establish a risk- preparedness plan, after consulting stakeholders. Before adopting a plan, the competent authority must submit a draft to the competent authorities of the other Member States in the region and to the Electricity Coordination Group for consultation. Each national plan must also include regional measures to ensure that crises with cross-border impact are properly prevented and managed. These measures must be agreed within the region and include measures such as mechanisms to share information and cooperate within the region and regional load shedding plans.

4.47Where there is reliable information that an event may occur that is likely to result in a significant deterioration of the electricity supply in a Member State, the competent authority must give an early warning to the Commission and the Electricity Coordination Group, and provide information on the measures planned or taken to prevent a crisis and the possible need for assistance from other Member States. Where a crisis occurs, the competent authority must inform the Commission and the Electricity Coordination Group. In both cases, the actions set out in the risk preparedness plan must be followed as far as possible. Non-market measures may be activated in a crisis only if all market-based options have been exhausted. Where necessary and possible, Member States must offer each other assistance to prevent or mitigate a crisis and be compensated for any assistance provided.

Minister’s Explanatory Memoranda of 20 December 2016

4.48The Government submitted separate Explanatory Memoranda on each of the four proposals covered in this Chapter. In each instance, the Government promises to submit to the Committees in due course its standard checklist for analysis identifying the potential costs and benefits of each proposal in the UK. It is also noted that negotiations are not expected to begin until the Estonian Presidency in the second half of 2017.

Legal base

4.49The Explanatory Memorandum for document (d) indicates that the legal base of that proposal is Article 194(2) whereas the proposal itself cites Article 194. We understand that the more general citation of Article 194 alone is a mistake on the part of the Commission and no doubt this proposal will be brought into line with the others in the course of the legislative procedure.

Regulation on the internal energy market (document (a))

4.50The Minister notes that a number of the Commission’s proposals accord with UK policy but closer examination, in collaboration with stakeholders, will be necessary for the UK to assess the full implications of the proposal. She identifies the Commission’s intention for Distribution System Operators to play a more active role in network planning as being consistent with UK policy for Distribution Network Operators (DNOs).

4.51On capacity mechanisms, the Minister says:

“The proposals concerning capacity mechanisms will require detailed scrutiny; in particular we will need to assess the implications of the proposed emissions limits. We support the participation of interconnectors in capacity mechanisms, but will have to further consider the practicalities of extending this to the participation of cross-border generating capacity. We would need to consider very carefully any transfer of decision making on aspects of management of capacity mechanisms from the UK to ENTSO-E and ACER.”

4.52The Government also has concerns about the proposals for Regional Cooperation Centres for transmission operation, nothing that they will require careful consideration. While the Government agrees that regional cooperation is important, the Government “would want to carefully assess options for the most effective means in which it would be undertaken.”

4.53Finally, the Minister identifies the greater use of delegated acts by the Commission as another matter requiring close examination “given the reduced influence of Member States in this procedure.” She notes that this concern is shared by a number of other Member States.

Directive on the internal energy market (document (c))

4.54The Minister confirms that the proposed amendments to the Directive are substantially in alignment with the UK’s policy direction. Nevertheless, the Government will need to scrutinise the detail of the proposed changes closely in consultation with stakeholders. For the negotiations, she says, a key element will be the extent to which it is appropriate for the Commission and the other EU institutions to act in the area of retail and distribution and how much should be the responsibility of Member States.

4.55The Minister observes that many of the proposed measures, particularly relating to active participation by consumers in electricity markets, are already being taken forward in the UK. She adds that enabling more active, informed and empowered energy consumers is a key objective of the UK’s strategy to drive suppliers to improve their consumer offers.

4.56On smart metering, the Minister says:

“We are already making substantial progress in rolling out smart meters, with an objective of providing all domestic consumers and small businesses with smart meters by the end of 2020. Smart meters will enable consumers to switch energy suppliers more easily and quickly and take more control of their energy consumption. However, after assessing the costs and benefits of a smart meter rollout in Northern Ireland, the Northern Ireland Executive has decided not to proceed. We therefore have concerns about the cost implications for Northern Ireland of ensuring that every customer can have a smart meter upon request”.

4.57The Minister identifies in the following terms a number of areas where the UK requires clarification and may have concerns:

“These include the proposals for limiting the use of regulated prices. For example, the CMA has identified a significant consumer detriment in the GB energy market and recommended a price cap for Pre-Payment Meter (PPM) customers, who are among those least able to bear the cost of energy and have less access to competitive prices. We note that the proposal allows for the protection of vulnerable consumers by a transitional price regulation. We also note that Member States would still be able to apply public intervention in price setting for vulnerable household customers for reason of extreme urgency. We would like to understand further how the Commission will define extreme urgency. The implications would also have to be carefully considered for Northern Ireland which has regulated end consumer prices in view of the lack of competition due to the natural constraints of its small retail market”.

4.58Finally, the Minister identifies the greater use of delegated acts by the Commission as another matter requiring close examination “given the reduced influence of Member States in this procedure”. She notes that this concern is shared by a number of other Member States.

Agency for the Cooperation of Energy Regulators (ACER) (document (b))

4.59The Minister indicates that the UK needs to consider the revisions to the Regulation carefully, in collaboration with stakeholders, in order to assess the full implications.

4.60She notes that the proposed approach would give ACER additional competence on issues of cross-border relevance, in particular monitoring the performance of regional operational centres and approving the methodologies and calculations in relation to European resource adequacy assessments carried out by ENTSO-E. She adds:

“ACER would also play a more active role in the agreement of network codes which are currently concluded between national regulators. This more coordinated regional approach could lead to efficiencies and greater security of supply but we will need to consider carefully the proposed decision-making framework to ensure that national transmission system operators retain sufficient influence over regional decisions”.

4.61On the proposed administrative changes, she says:

“Similarly, the proposals concerning ACER’s organisational structure could lead to efficiencies and faster decision making, but we will need to consider closely any changes which could constrain the influence of national regulatory authorities. For example, we have concerns that the proposed change from a two-thirds majority to a simple majority for decision making by ACER’s Board of Regulators could reduce the influence of national regulatory authorities”.

Risk-preparedness Regulation (document (d))

4.62The Minister considers the requirements in this draft Regulation to be broadly consistent with the UK’s existing resilience arrangements. The impact on the UK is therefore expected to be “relatively modest.” She adds:

“The strengthening of obligations on the management of regional security risks could benefit the UK if future investment in interconnection takes place as planned. As interconnection increases, so will the potential for incidents in mainland Europe having an impact on the UK. However, we would not want the Regulation to prescribe the risk preparedness plans in detail, but rather keep the requirements at the level of principles. This would enable us broadly to maintain our existing and well-developed national approach”.

Previous Committee Reports

None.





27 January 2017