““European Energy Policy: European Energy Policy: a Journey & a Tale”a Journey & a Tale”

S.Po ParisS.Po Paris

Jean-Michel GlachantJean-Michel GlachantDirector Florence School of Regulation

European University Institute (Florence, Italy)

Overview• 1/ Régulation des réseaux: pour “ouvrir les marchés?”;

européenne ou euro-compatible? (slides 1 à 6)

• 2/ La construction dun cadre européen de régulation; EU vs US (slides 7 à 12)

• 3/ Les briques de la régulation européenne (slides 13 à 22: les réseaux) (slides 23 à 28: les NRAs) (slides 29 à 31: les périphéries *DG COMP **Regions ***PCIs)

• 4/ La saga de “l’achèvement du Marché intérieur” (slides 32-35)

• 5/ La Commission Juncker et l’ “Union de l’énergie” (slides 36-42) 2

Why to regulate?I-1/ Because of the grid?•1.1 are electrical grids monopolies? Scale (if capacity of one line) and Scope (co-operation of several lines)

•1.2 Abuse of ‘Market’ Power? Why not to separate (transmission ownership) from (system operation)? > TO / ISO model

•1.3 are all electrical lines monopolies?‘Merchant lines’ Scale (size 1 Generator) and Scope (interconnector DC)

•1.4 Why not ‘merchant lines’ competing with grids?

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I-2/ Because of Markets (dominated by incumbents being former monopolies)?•If abuse of Market Power? Why not competition? What market rules (Power Pools? Mandatory UK Pool / Voluntary NordPool)

•Trade needs combination between grid operation & market operation as#Grid congestion (allocation of grid capacity? Of congestion energy costs?)#Balancing energy system (Electricity: no storage? / vs Gas Storage)#New players (Intermittent Gen. Wind & PV /Demand flexibility vs Plants)

•Then: liberalized markets require more ruling than former monopolies because guaranteeing fairness to new entrants; can slow down later? (as CCGT entry UK)

(I) Energy regulation: Overview Why? Whom? How?

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I-3/ Energy Regulation: Whom? How?Whom: higher level (federal) or lower level (the states)? How: sector regulator (energy) or market monitor (competition)?

• In the EU…• Whom? Level > European Commission or Member States? • How? Chanel > Energy Regulation vs Market Competition?

• In the US… • Whom? Level > Federal Agency or Local States? • How? Chanel > Energy Regulation vs Market Competition?

(I) Energy regulation: Why? Whom? How?

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I-4/ Why to regulate energy mix for pollution?•Coal very big pollutant (SO2 / CO2): is coal regulated? Why regulate electricity not coal? Or regulate oil?

•We can cap CO2 pollution: why not market for allowances for all users?•SO2 allowances: Typical US policy / rules of allowances allocation and trade >> hence market based on regulation•CO2 allowances: Typical EU policy / rules of allowances allocation and trade >> hence market based on regulation

•If pollution is capped: why adding renewable obligation? Is price of carbon too low and too variable to steer renewable investment?• Can 2050 ‘2°C threat’ deadline be postponed? Do we need to accelerate? Whom else does this outside the EU?

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Grid regulation Level: Member States or EU? 1996 1st Package: negociated or regulated at MS level2003 2nd Package: Regulator at MS level + EU crossborder2009 3d Package: Indep Regulator at MS + EU EN.TSO & ACER +

Grid Codes & Ten Year Development Plans & Gen. Adequacy

Grid regulation Channel: Regulator or Compet. Authority?2007 Sector Enquiry + “smoking guns” policy by DG COMP°Eon, RWE disinvest from grids°Swedish TSO reviews its congestion management scheme

(priority to Swedes vis à vis Foreigners)

Regulation building in the EU

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Regulation building in the EU

Market regulation Level: Member States or EU? 2003 2nd Package: open at MS level + EU crossborder rules2009 3d Package: more EU EN.TSO + ACER + Codes (Congestion –

Capacity allocation - Balancing energy ) + Regional Initiatives + ‘Market Target Model’ being market coupling with open balancing

Market regulation Channel: Energy Reg. or Compet. Authority?°2005 EU Court suppress LT priority access to elec interco°Basic market rules: free Merchant PX vs reg. Market Coupling°Loose market monitoring from financial regulation capped by

REMIT 2010 specific energy monitoring (ACER+ NRAs)

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Energy Mix Level: Member States or EU? °In EU “Energy Mix” sovereign right of Member States (See Nuclear –

prohibited in Austria / 80% in France)°big caveat: RES directives + EU ETS as “voluntarily” constraints for MS’s

Energy MixEnergy Mix Channel: Energy Regulator or Compet. Authority?° EU Court ruling: RES support “Environmental Public Policy” not

market-based BUT support to be notified to DG COMP as “State Aid” (14 Billion in 2010) > DG Comp Guidelines 2014

°Support Schemes (Gov. MS) + Dispatch priority (Ener. Reg)°Regulators involved (Connections; Congestion; Balancing; TSO

planning & incentives; Distribution grid regulation)

Regulation building in the EU

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Regulation building: EU vs US

Grids : °more comprehensive federal frame in EU but still enforced by MS regulators (no federal regulator FERC)°grid regulation more submitted to “market opening target” but still mainly state operated (no regional RTOs - ISOs)°EU mutualisation TSOs&Regulators: EN.TSOs &ACER (RTO/FERC proxies?)°Independence DG COMPMarkets: °EU Target Models + °Regional Initiatives + °ACER + °EN.TSOs + °REMIT: more comprehensive frame in the EUEnergy Mix: °EU RES scheme + °EU ETS = more comprehensive scheme

Institutions: °Strong US energy federal regulator in a smaller area; °No role for US Competition opposite to DG COMP; °US State regulators independent from federal as opposite to EU “ruling” MS regulators; °Strong US Environmental federal Regulator vs EU stronger directives>> US implementation stronger but Scope smaller (except Competition)

Reg.Building: EU vs US

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Legislation Changes with 3d Package

Electricity and Gas Directives

Full ownership unbundling (FOU)

… or Independent System Operator (ISO) … or 3rd Option (ITO)

1/3 country clause → non-EU investment in EU energy networks

Harmonization & strengthening of regulatory competences at national level

Gas Directives and Regulations Regulation of LNG & storage (connection, TPA, principle of capacity allocation)

Electricity and Gas Regulations TSOs enhanced cooperation (duties)

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Bones of EU Regulation for Grid Monopolies

Legislation Changes

Electricity and Gas Directives & Regulations

Creation of ACER (European Agency Regulators) and ENTSOsGuidelines, Framework Guidelines, Network Codes

Transparency requirements, record keeping

Creation of a regulatory framework for the development of regional markets

Level playing field (reciprocity between Member States)

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Comparison 2nd & 3rd Package: TSOs

2nd Package 3rd Package

•TSOs and DSOs have to be unbundled (functions and management) from other activities•Access to grid is regulated•Cooperation left at TSOs’ initiative. No obligation

• Unbundling (options)• Cooperation duties:

– At EU level: TSOs must create ENTSOs (as EU body). 4 main tasks #draft network codes as EU regulation#common network operation tools #non-binding TYNDP 10-year network development plan #Gen Adequacy study – At regional level: within the ENTSOs + publication of a regional investment plan + promotion of energy exchanges

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Comparison 2nd & 3rd Packages: NRAs

2nd Package 3rd Package

•Creation of NRAs independent from energy companies•Act individually to ensure compliance with Directives and Regulation, as well as to approve exemptions for interconnectors (under the supervision of the Commission).•Cooperation between NRAs only if they estimate it necessary

• Their independence, duties and powers are reinforced•Continue to act individually, but clear mandates now to act collectively:

–At EU level: through the Agency for the cooperation of Energy Regulators (ACER), which notably monitors the execution of ENTSOs’ tasks and has (limited) decision-making role (inc. Exemptions for interconnectors provided certain conditions are fulfiled)–At regional level, with regulators of other MS, notably to promote allocation of cross-border capacities

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EU regulatory framework

"REGULATION"

SECONDARY

LEGISLATION

PRIMARY

LEGISLATION

Treaty

(Art. 194)

DecisionsRegulation

(EC) 714/2009

GuidelinesNetwork

Codes

Directive

2009/72/EC

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Network Codes (Table in 2015)

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Network Codes process

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Requirements

for Generators

Comitology Process

(entered 2013)

Size-dependent, technical requirements for Power Generating Modules

Common framework of obligations for Network Operators to

appropriately make use of the Power Generating Facilities’ capabilities

Demand

Connection

Comitology Process

(entered 2014)

European rules on how demand interacts with the transmission system

Ensure effective contribution to the stability of the power system by all

distribution networks and demand facilities

Clarify the role that demand response will play in contributing to the

deployment of RES

HVDC

Connection

ACER

recommendation

submitted (2014)

Manage HVDC lines and connections:

Determine contribution to system security

Promote coordinated development of the infrastructure

Operational

Security

ACER

recommendation

submitted (2013)

Framework for maintaining a secure interconnected European electricity

transmission system: common, legally binding principles and rules for

operating electricity transmission networks

Operational Security requirements and principles; Data exchange;

provisions for training of System Operator Employees

Network Codes (Content Overview 2015)

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Network Codes (Overview in 2015)

Operational

Planning &

Scheduling

ACER

recommendation

submitted (2013)

Common time horizons, methodologies and principles allowing to carry out

coordinated Operational Security Analysis and Adequacy analysis to maintain

Operational Security and support the efficient functioning of the European

internal electricity marketLoad

Frequency

Control &

Reserves

ACER

recommendation

submitted (2013)

Formalised harmonised system frequency quality targets

Objective and harmonised requirements regarding Load-Frequency-

Control (LFC) and Reserves

Emergency &

Restoration

Submission to ACER

(2015)

Procedures and remedial actions to be applied in the Emergency, Blackout and

Restoration states

Capacity

Allocation &

Congestion

Management

Definitive adoption

expected in 2015

Rules that will introduce an EU Target Model: single approach to cross-border

electricity trading

for cross-border capacity allocation in day-ahead and intraday timescales.

Outlines the way in which capacity will be calculated across the different zones

for congestion management

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Network Codes (Overview in 2015)

Forward

Capacity

Allocation

ACER

recommendation

submitted (2014)

Design and operation of the markets in which the right to use cross-border

capacity is sold in advance

Electricity

Balancing

Resubmission to

ACER (2014)

Steps for transforming balancing markets to a set of regional markets and later

a pan-European market

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• 2nd Package: NRA submitted the tariff or the methodology for formal approval to the relevant body of the Member State and that relevant body could approve or reject the draft NRA decision

• 3rd Package: 4 options (include balancing, connection fees…)– NRA fixes the tariffs– NRA fixes the methodology– NRA approves the tariffs – NRA approves the methodology

• Member State can set general policy guidelines, but not set e.g. profit margin in cost-plus tariff

NRAs in EU regulation

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NRA has also a duty to ensure general compliance with EU law

• Article 37.1 (b) ED and Article 40.1 (b) GD: NRA is granted a general competence as regards ensuring compliance with EU law– The « entire acquis communautaire » relevant for the internal

energy market– Not only vis-a-vis the TSOs but any electricty or gas undertaking– Without prejudice to the powers of the Commission

NRAs in EU regulation

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NRAs monitoring duties

• May be carried out by other authority than NRA, but NRA shall have a specific access to all the data of the monitoring exercise (except in case of derogation), also confidential information

• Moreover, NRA has power to engage in monitoring activities on all of its core duties – include monitoring of wholesale and retail markets (also PXs, contractual practices), GEN investment, TSO behavior, congestion management…

• Important: e.g. German regulator who focused mainly on grid issues did get monitoring of market more broadly

NRAs in EU regulation

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NRAs important powers

1. To issue binding decisions on electricity undertakings2. To carry out investigations (in spite of mere inspections) into the

functioning of the energy markets, and to decide upon and impose and impose any necessary and proportionate measure to promote effective competition and ensure the proper functioning of the market

3. To require any information from electricity undertakings relevant to the fulfilment of its tasks

4. To impose effective, proportionate and dissuasive penalties on electricity and gas issues

List not exhaustive: Member State must grant NRA the powers enabling them to carry out taks in efficient and expeditious manner

NRAs in EU regulation

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NRAs Powers for enforcing compliance with network codes

• Art 37(1)b ED and Art 41(1)b GD:NRA to ensure compliance with obligations under Directives and other relevant EU legislation:– When codes are adopted through comitology– Becomes part of acquis– Therefore: NRA is empowered to engage in investigations and to

impose fines

NRAs in EU regulation

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Increased accountability of NRAs

• NRA must be transparent on way it takes decisions + way it spends budget

• Basis: more powers = more accountability• Annual reporting to MS, ACER, Commission

– Must include and assessment of the TSO investment plan and consitency of national plan with community-wide ten-year investment plan

• Legal accountability = appeal

NRAs in EU regulation

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Regulation of Market Dominance

• Competition Policy concept (2raise price & gain profit)• HHI: 1000 non / > 1800 highly concentrated• ‘significant’ Market Power (not Monopolistic Competition)

>40% Market Share • 25-30% &Withholding; Pivotal firm & inelastic demand• Dominant >50% – Super Dominant (>Sustainability &fast

Entry) ~BUT~ ’joint Dominance’: Horizontal; Vertical• Definition ‘relevant market’ (‘Balancing Market’ in Spain)• Definition ‘• Case: ‘Nuclear Assets’ in France• EU affair? Or national? #Size #Cross-border

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Regional Electricity Markets

• ERGEG (2nd Package) 2006: 7 ERI (initiatives) Baltic – CentralEast – CentralSouth- CentralWest- Northern- SouthWest- France UK Ireland

• 8th: South East• Regulators + TSOs + Companies + MS + Commission• Congestion management• Capacity calculation & allocation• EU Power Target Model (FB Market Coupling + Open Bal)• Grid Codes• IntraDay & Balancing integration

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Projects of Common Interest

• Internal Market with ‘No Seams’, delivering 2020/2050, with SoS, Solidarity + Old ‘Council Barcelone’ 10% interco

• Regulation 347/2013 ‘Trans-European Energy Infrastructure’ with ‘priority corridor’ & ‘Connecting Europe Facility’ fond Euro 50bn

• Hardware part of Internal Market achievment: where ‘market’ won’t deliver, EU ‘planning push’ could help

• October 2013: 132 power PCIs ¤several MS (non MS on top) ¤several criteria (monetized) ¤NRAs agreeing on cost allocation (ACER appeal) ¤End 2014 13 cases (12 NRAs; 1 ACER) > See Florence School Policy Brief 2015/01 for review

• ACER Threshold (10% net benefits); Net Costs > revenues; only net losers or not? Binding contract or not? Interactions between PCIs?

• ABC of CBA Florence School Policy Brief 2013/03

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• First Package in 1996: a 20 year journey so far– Getting an internal EU market for electricity?

… roughly yes– Getting an internal EU market for gas?

… more or less a kind of

Key 1: If we fully implement enforce the 3Key 1: If we fully implement enforce the 3rdrd Package and related Package and related regulationsregulations

• But: “unforeseen” shifts from initial power sector reform draft

Key 2: We have to respond to new challengesKey 2: We have to respond to new challenges

• And: markets interact with all pillars of EU energy policy Key 3: We should check policy consistencyKey 3: We should check policy consistency

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#1 – Implement and enforce 3rd Package

The architecture for the IEM is laid down in the 3rd Package and related regulations it has to be fully implemented

•European market(s) need(s) a European grid to allow the flow of energy without barriers at national borders

Reinforcement of the existing infrastructure through the implementation of the Trans-European network regulation

Finalisation and implementation of the Network Codes being key: • Needed grid harmonisation to be provided through the NC• Full implementation and reinforcement of European target models for gas and

electricity through the NC

•Room to improve competition Markets to be better monitored, once REMIT is fully implemented Again, finalization and implementation of Network Codes being key

What else?What else?33

#2 – Respond to new challenges

“Unforeseen” shifts from initial power sector reform draft:

•Large-scale deployment of intermittent RES kept out of the market (priority dispatch, FIT or FIP)

Increasing gap between wholesale market prices and consumer bills

•Most RES not flexible due to: zero MC & dependence on resource availability

Pricing at times of scarcity (price caps) & at times of abundance (negative prices) becomes keyFiner spatial and temporal granularity?

•Flexible back-up resources must get their return while running less hours (at lower prices?) [Wholesale price 36€/MWh vs. total generation cost for coal 55€, for gas 70€]

Can scarcity pricing in an “energy-only” market deliver adequate returns? Long-term adequacy / short-term flexibility do not match!34

#3 – Policy consistency

• Objective of achieving an internal energy market… but risk of a definitive fragmentation of the European electricity market due to

uncoordinated national policy initiatives (RES support, capacity payments)

• Interacting policy targets undermining CO2 price signal

… 20% RES and 20% energy efficiency not needed to reach GHG target, are EU industrial policy

BUT: RES target (= percentage of non polluting energy) and energy efficiency target (= volume of energy consumed) influence C02 emissions; hence the demand for C02 permits; hence: C02 price is an end

result of the 2 other targets and not a key driver for GHG emission reduction

• RES did evict gas by reducing net demand in EU wholesale market… but not coal: German coal was near to record 50% elec generation in 2014

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More?

WhyNot…

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Energy Union is / isn’t…•Is’nt new Institution for EU energy policy: NO institution created•is political “novelty” Commission Juncker with ‘Vice-President EnerUnion’ Sefcovic > Comm. Canete who >> both Climate&Energy•~ unveiled 25th Feb. 2015 Hardly foreseen @Barroso Commission (2013-14) // EnerUnion = about 25 proposals of action •~ in touch with EU Council March 2015 EU Council (Heads of State & Gov.) agreed EC go ahead with EnerUnion•~ nevertheless a gamble No institution created: Council of ministers &Parliament have to agree any legislative proposal…•NB: Ener.Union Manifesto don’t strictly tie anybody: even Commission can change having seen what blocks / what goes37

Energy Union only <mini> to boost Internal Market >> Eurelectric, Eurogas new tag on (existing institutions + BAU) = let’s call it Ener.Un: it targets ’Only’ ‘Internal Market’ extended to RES & Capacity Mechanism made fully ‘market based’ & ‘technology neutral’.

However such EnergyUnion-BAU ends a bit undefined: ¤ MS have strong powers to take ‘outside the market’ initiatives #Germany: Off-shore & RES exemptions (finally agreed Commission) + Energy Efficiency push #UK: SoS being Capacity mechanism + LT contrat with UK Nuclear or tidal + Off-shore + ISO Grid +? ¤ >> Then: at what speeed Commission could follow or catch-up MS?For ex. Action against ‘MS’ capacity mechanisms via ‘State Aid’ enquiry

Alternative Energy Union(s)? ~1 / EU Internal Market BAU?

Commission 25 Feb. proposals? ~2 / >BAU for Internal Market & Governance?

EnergyUnion (not 4th Pack.) BUT big Upgrade for Internal Market & Governance: Programme from February 2015

#Market *Legislation 2016; retail & wholesale; integrating RES; phasing out non market based support; coordinating Capacity Mechanisms .**Legislation 2018 Electricity security of supply (= ‘recall’ of national SoS)

#Governance***Review framework from 3d Package notably for ACER (to ++power of Europeanizing regulation) & ENTSOs (to ++ as regional operational entities to create)****Propose guidance for ‘regional cooperation for market integration’ and to act at regional level wih regu. Bodies, MS and stakeholders*****Create ‘Energy Infrastructure Forum’ with MS, Regional coop. Groups, and EU institutions (ACER? Banks?) by late 2015

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Commission 25 Feb. proposals ~3 / Not BAU for SoS & “External” Governance?

2- EU actions for Security of Supply#SoS *Legislation: Revision Gas Regulation by 2015-2016**Legislation 2018 Electricity security of supply (= ‘recall’ of national SoS)*** Implementation of existing PCIs with adequate financing** **Strategy for LNG an its storage** ***Council 19-20 March : feasibility of gas joint-buying mechanism

#Ext. Energy Governance ** ***Legislation: Revision Decision International Agreement for Commission to intervene ex ante before signature of agreements with 1/3 countries** ** **Coordination Commission / HR-VP / MS to create international diplomacy for energy & climate issues; for international treaties (as TTIP) or within WTO, and launch new initiatives (as agreement with India, with China ;etc) in field RES, Ener.eff, etc.40

Commission 25 Feb. proposals? ~4 / Not BAU for Sustainability

Fields of EU actions for sustainability: *Legislation to revise EnerEff directive &make proposals to meet 2030target**RES package by 2016-17 incl.sustainable &cost-effective biomass, biofuels*** Legislation to achieve Oct2014GHG target in ETS & non-ETS sectors** **Legislation ‘Full Road Transport Package’ covering efficient pricing of infrastructures; rool-out of intelligent transport; enhancing ener.eff-------------------------------------------------------------------------------------------------------** ***Strategy to facilitate Investment in efficient ‘Heating & Cooling’** ** **Create Smart financing for smart buildings fund** ** ***To push MS & regions to use more the funds to renovate housings-------------------------------------------------------------------------------------------------------**** **** Strategy for transport research & innovation agenda**** **** *Revision ‘Strategic Energy Technology Plan’

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How to conclude? #I don’t know! # To be seen in 2017-19…

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www.florence-school.eu 43

Thank you for your attentionEmail contact: jean-michel.glachant@eui.eu

Follow me on Twitter: @JMGlachant already 21 000+ tweets

Read the IAEE Journal I am chief-editor of: EEEP “Economics of Energy & Environmental Policy”

My web site: http://www.florence-school.eu