© OECD/IEA 2016

RE-POWERING MARKETSMarket design and regulationduring the transition to low-carbon power systems

RE-POWERING MARKETSMarket design and regulationduring the transition to low-carbon power systems

EC-IEA Roundtatble on electricity market design and regulationBrussels, 18 February 2016

© OECD/IEA 2016

Power markets must evolve to facilitate a low-carbon transition Power markets must evolve to facilitate a low-carbon transition Competitive electricity markets are being challenged by the

need to decarbonise

A power market transformation is already underway

Demand is stagnating in OECD Europe

Renewables met 62% of growth in capacity in OECD Europe since 2000

New technologies progressing (smart grids, demand response, storage)

Electricity security is becoming more critical

The massive investments required call for an improved market framework:

Low-carbon investments

Integration of wind & solar power

Capacity markets

Network investments & regulation

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Massive investments needed during the transition will take place in competitive markets. Their design is key for decarbonisation while ensuring electricity security.

Competitive electricity markets are being challenged by the need to decarboniseCompetitive electricity markets are being challenged by the need to decarbonise

Capacity additions in OECD Europe by technology, 1960-2014

0

10 000

20 000

30 000

40 000

50 000

60 000

1960 1970 1980 1990 0

10 000

20 000

30 000

40 000

50 000

60 000

1960 1970 1980 1990 2000 2010 2014

MW

Start of industry restructuring

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Current wholesale prices and long-term risks call for continuing supportCurrent wholesale prices and long-term risks call for continuing support

Long-term arrangements are still needed to make up the difference in low-carbon generation costs, and keep financing costs low for capital-intensive investments.

Year-ahead forward market prices (Real price 2015), 2008-15

0

20

40

60

80

100

120

02-01-2008 02-01-2009 02-01-2010 02-01-2011 02-01-2012 02-01-2013 02-01-2014 02-01-2015

EUR/MW

h

France

The Netherlands

Germany

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Integrating high shares of wind and solarIntegrating high shares of wind and solar

Short-term markets can unlock flexibility for efficient and secure system operations, and reap benefits of demand response, storage, flexible generation and networks.

New operational requirements with high shares of renewables(data for Germany using scaled wind data)

Source: Adapted from IEA (2014) THE POWER OF TRANSFORMATION

0

10

20

30

40

50

60

70

80

1 10 20 30 40 50 60 70 80 90 100 110 120 130 140

Load

leve

l (G

W)

Hours

Potentialover-generation

2Net load with 20% of wind energy in the generation mix

Load

Contribution to peak demand

Forecasterrors

Largerramps

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Markets prices with a high geographical and temporal “resolution” can provide incentives for efficient and secure coordination of more complex power resources.

When and where to operate and invest?When and where to operate and invest?

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Capacity mechanisms: are they needed?Capacity mechanisms: are they needed?

Getting scarcity prices right during capacity shortage is a pre-requisite, still capacity mechanisms are increasingly used to create a safety net during the transition.

Neighbouring capacity mechanisms in North-West Europe

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Power-sector cumulative investment by type,450 Scenario, OECD Europe, 2015-2040

Low-carbon power and networks require the largest investmentLow-carbon power and networks require the largest investment

Source: WEO

Coal 85Gas 116Oil 2

348

Wind 852

Solar 357

Hydro 143Bioenergy 126

Other 98

Transmission 184

Distribution 674

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

Fossil Fuels Nuclear Renewables T&D

Billio

n do

llars

(2014

)

Decarbonisation involves both capital-intensive investments and a modernisedregulatory framework for transmission and distribution networks.

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Modernizing retail tariffsModernizing retail tariffs

Prices have to better reflect the underlying costs level and structure in order to induce efficient investment in solar PV and batteries on the consumer side.

Cost components and tariff structure of selected retail electricity prices(average for Paris, Berlin and Amsterdam)

Variable93%

Fixed 7%

Energy35%

Network and metering

26%

Levies and taxes 19%

VAT 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Costs components Tariff structure

USD

/kW

h

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Conclusion: Re-powering marketsConclusion: Re-powering markets

Decarbonisation of the power sector is forcing a rethinking of electricity market design

Incremental changes – re-powering - can facilitate the transition:

Short-term markets with detailed and transparent information on when and where to operate and invest

Consistent framework for low carbon support, CO2 pricing and markets

Electricity security requires reliability standards and pricing scarcity right, with capacity mechanisms providing an additional safety net

A comprehensive market framework balances rules set by regulators and competitive markets

Many recommendations are relevant outside Europe,including IEA partner countries

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Thank youThank youhttp://www.iea.org/topics/electricity/publications/re-poweringmarkets/