Capping the European price of gas

The price of gas in Europe has increased manifold over the last year. Beyond several measures adopted at Member State level to cushion the impact of high energy prices on consumers, imposing a cap on the price of gas in the EU is now being discussed. This Policy Brief proposes a strategy for implementing a cap on the price of gas in the EU, in case this is decided at political level. The strategy is based on the assumption that the European gas market could be considered as composed of two segments: (i) the gas produced in the EU or imported into the EU through pipelines (also called ‘pipeline gas’) and (ii) the gas imported into the EU as liquefied natural gas (LNG). We also assume that external exporters of pipeline gas to the EU have limited opportunities to redirect this gas to the international LNG market. The strategy is composed of two main elements: (i) the adoption of measure(s) to reduce the price of pipeline gas traded in the EU and (ii) the sourcing, on the global market, of any additional LNG volumes required in the EU through auctions organised by a Single Buyer entity (or by TSOs). The reduction of the price of pipeline gas in the EU could be achieved by (a combination of) two measures. One is based on the use of the technical functionalities employed by gas exchanges, such as the Interval Price Limits of the Intercontinental Exchange. Regulation could be applied to these technical parameters to steer the prices on the gas platforms downwards. The other measure is based on the balancing role of the TSOs and a regulatory mandate to buy and sell any quantity of balancing gas at a predefined price or price range

Securing Gas for Europe : (a follow up to the policy brief on capping the European price of gas)

The imposition of a cap on the price of gas traded in the EU is increasingly the focus of the policy debate in Europe. In a previous Policy Brief, we outlined a possible approach to contain the price of gas in the EU, while safeguarding security of supply as much as possible. In this Policy Brief we explore two aspects related to the measures outlined in the previous one: (i) How would the gas imported as LNG by the TSOs or the Single Buyer entity be allocated to the different TSOs/Member States? (ii) How would the additional costs of importing LNG with respect to the price cap for pipeline gas in the EU be recovered? In the proposed mechanism, the gas volumes to be procured through the LNG auctions would be determined by aggregating the requests of the different TSOs. Therefore, at least as a first approximation, the allocations of the procured LNG volumes to the different TSOs could be based on their respective requests. We also explore additional aspects which would need to be considered if we move beyond this first approximation. We also propose that the additional costs of importing LNG with respect to the price cap for pipeline gas in the EU be recovered through an uplift charged on final consumption. We propose different approaches in terms of uplift levels and the base on which it is charged and we compare them with respect to two criteria: revenue adequacy and the ability to provide the correct price signals to consumers to promote efficient demand reduction

Distributed energy resources and electricity balancing : visions for future organisation

This Report discusses how electricity balancing may best be organised in a future with greater penetration of distributed energy resources (DERs). Increased DER penetration can pose challenges to electricity balancing, while, at the same time, DERs can also help to balance the system more cost-effectively. Currently, participation by DERs in electricity balancing markets, whether individually or aggregated, is still somewhat limited. In the debate among practitioners and academics, most attention has been devoted to reducing market entry barriers for DERs. In this Report, we go one step further: we analyse whether the current organisation of the balancing mechanism is future-proof. This Report comprises an introduction, four sections and conclusions. After the introduction, Section 2 explains the working of the balancing mechanism and introduces the relevant EU legislation. Section 3 shows that the current organisation of balancing mechanisms in the EU is a legacy rather than a well-thought-through design choice. We explain that alternative setups are possible in theory and that their performance in practice depends on the context. To assess different balancing setups, we introduce a multidimensional framework and illustrate it by comparing the current setups in the EU and the US. In Section 4, we highlight the challenges that the balancing mechanism in the EU is currently facing with increasing shares of DERs. We argue that, in the medium to long term, it will become increasingly challenging to operate the balancing mechanism cost-effectively without adjusting its organisation. In Section 5, we introduce two alternative ways of organising it in the future: the ‘Super SO model’ and the ‘Local SO model’. The key question is whether it would be easier to manage seams within a balancing area or seams between balancing areas. The main challenge with the Super SO model would be that a global optimum, considering all voltage levels and local issues, is difficult to achieve. Even though the Local SO model might be more pragmatic, the main challenge with this model would be implementing it in a way that limits fragmentation of balancing markets, which would have severe implications for efficiency and competition

An Inter-TSO Compensation Mechanism for renewable and low-carbon gases

The Hydrogen and Decarbonised Gas Markets Package, published in 2021, proposes amendments to the current regulatory gas framework, in order to promote the integration of renewable and low-carbon gases in the EU energy system. This Policy Brief focuses on one of the proposed measures on the transportation fees for renewable and low-carbon gases, which introduces a 100% discount at all interconnection points, entry points from and exit points to third countries and entry points from LNG terminals. Such a measure might call for the establishment of an Inter-TSO Compensation (ITC) mechanism enabling the TSOs hosting gas transits to be compensated for the revenues not collected through entry-exit fees. This Policy Brief assesses the extent to which the experience gained from the implementation of the ITC mechanism in the electricity sector could be relevant for an ITC mechanism for renewable and low-carbon gases. We conclude that the complexities encountered in the implementation of the electricity ITC mechanism were mostly due to the characteristics of electricity and the way in which it flows over the network, and therefore could not be expected to reoccur in the implementation of an ITC mechanism for renewable and low-carbon gases. Instead, other implications of the premises for the introduction of an ITC mechanism for renewable and low-carbon gases might require further consideration

Consumer protection mechanisms during the current and future periods of high and volatile energy prices

The recent surge in energy prices has prompted many governments to introduce emergency measures to reduce the impact on consumers’ electricity and gas bills. In its REPowerEU Communication of 8 March 2022, the European Commission confirmed that price regulation can be used to mitigate the effect of higher energy prices on consumers’ bills. However, most government interventions and what the Commission refers to are measures to reduce the energy prices facing consumers. This type of measures weakens the incentives to save energy, and therefore runs counter to the more general energy policy objectives of sustainability and security of supply, including the reduction of the European Union’s dependence on Russia. In this Policy Brief, a more targeted approach, based on lump-sum rebate payments, which protects energy-poor consumers from unaffordable energy bills, while maintaining the incentives to save energy, is proposed

Recent energy price dynamics and market enhancements for the future energy transition

EU gas and electricity prices have increased rapidly over the last few months and reached unprecedented levels. While the recent energy price dynamics reflect current market conditions and have little to do with the future energy transition, they provide an opportunity to reflect on the most appropriate electricity market design to support this transition. As a reaction to the recent price surges, calls have been made by different stakeholders, including some national governments, to introduce changes in the electricity market design. Some of these proposals could be interpreted as calling for the ‘pay-as-cleared’ pricing approach in the wholesale day-ahead electricity market to be replaced by some version of the ‘pay-as-bid’ method. This is not the first time that ‘pay-as-bid’ has been proposed to replace ‘pay-as-cleared’ as the remuneration rule in the day-ahead electricity market and every time the conclusion is the same: ‘pay-as-cleared’ is a superior pricing method for the day-ahead electricity market. ‘Pay-as-bid’ pricing would not necessarily result in lower overall payments to resources selling electricity on the market, while possibly having a negative impact on the efficiency of the generation mix used to serve demand. This Policy Brief also assesses how consumers could be protected from the impact of wholesale price volatility on their energy bills and how best to protect vulnerable consumers from higher energy prices without depriving them of the opportunity to participate in electricity markets to offer their valuable flexibility, and which instruments can best ensure resource adequacy in the context of the future energy transition

The 5th EU electricity market reform : a renewable jackpot for all Europeans package?

We think that the electricity markets that were developed over the last two decades did what they were supposed to do during this crisis: through higher prices, they convey the message that energy is scarce. “Shooting the messenger” is not going to remove the problem. However, we also learned a lot during this crisis on how electricity markets can be completed and complemented with regulatory instruments, which is why we have three recommendations: First recommendation: Enable and incentivize consumers and suppliers to hedge via well-functioning forward markets (which would complete the sequence of electricity markets). Second recommendation: Give consumers access to cheap renewables with Contracts for Difference (CfDs) and Power Purchase Agreements (PPAs) that are compatible with short-term markets. Third recommendation: De-risk the investments in energy resources AND mitigate affordability concerns for consumers by redesigning Capacity Remuneration Mechanisms (CRMs) or by complementing these mechanisms with other regulatory tools. We finally observe that a broader reform could also aim at accelerating the innovations on the consumers’ side envisioned by the Clean Energy Package. These innovations can bring the much-needed flexibility in decarbonized energy systems

Review of different national approaches to supporting renewable energy development

To increase the share of RES-E, governments have designed and implemented promotional policies which provide direct and indirect financial aid to RES-E adapters and developers. These promotional policies include several instruments and support schemes. Different countries, and in some cases different governments in a country, use different combinations of these support schemes to promote different renewable technologies. In this work, we study support schemes that have been implemented since the late 1990s or early 2000s in five countries: the UK, Germany, Italy, Spain and Australia. We provide an overview of these schemes and their timelines for the following RES-E technologies: onshore wind, offshore wind, utility-scale solar PV, rooftop solar PV and solar thermal. In addition, it is important to evaluate the effectiveness and efficiency of support schemes in promoting these RES-E technologies. We tackle these two values and provide specific discussions on each country, support scheme and technology

Energy policy ideas for the next European Commission : from targets to investments

Energy (and climate) will be high on the agenda of the next European Commission. EU citizens and industry expect a supply of energy that is affordable, secure, and sustainable. The National Energy and Climate Plans suggest that there is a widening gap between what Member States are willing to commit to at the national level, and what they think the European Union should achieve collectively for investments in energy efficiency and renewable energy. We run the same risk for the EU targets for clean tech manufacturing, and for critical raw materials extraction, processing and recycling. To address the gap, the next European Commission could: make Member States more accountable to live up to their national investment potential for energy efficiency and renewable energy; promote multilateral cooperation (and solidarity) among Member States for network infrastructure, resource adequacy and flexibility; strengthen the management of our global dependencies; and reinforce the EU institutional setup. Ideas to achieve these objectives include: an EU Energy and Climate Plan with investment progress tracking and recommendations for Member States; the modernization and Europeanization of capacity mechanisms; an upgraded European Resource Adequacy Assessment exercise beyond electricity and adequacy; a top-down EU networks vision; more EU funding and more powers for EU entities to allocate costs among Member States; more capacity building for national administrations; a reinforced ACER; a merger of the ENTSOs and ENNOH (and the EU DSO Entity) into a EU Energy Networks Entity; the creation of an EU Energy Agency (and an EU framework for national energy agencies). At FSR, we think these ideas merit a more thorough discussion, and we look forward to contributing to that discussion in the coming months

The importance of a sound bidding-zone review for the efficient functioning of the internal electricity market

An inadequate bidding zone configuration for the EU electricity market risks jeopardising the benefits of market integration for energy consumers, by increasing the need for costly remedial actions. According to the CACM Regulation, liquidity is one of the criteria for assessing different possible configurations in a bidding-zone review. The available evidence from Europe and the US does not seem to support the claim, often made, that larger bidding zones promote liquidity. While liquidity is important for the well-functioning of markets, it cannot promote competition if not supported by the capability of the physical network to transport flows within a bidding- zone. Therefore, what seems to be more relevant is the structure (concentration) of the sector with respect to the structure (congestions) of the network