The challenges of the European Internal Market

The dynamics in the energy markets reflect the everyday complexity. In the EU markets, the challenges are remarkable being a region highly energy dependent on other ones that he’s competing with. Under this premise, the EU has worked for years in the development of a model that ensures the three pillars:

Security of supply in the whole EU area
Competitiveness in prices
Environmental sustainability

The European situation obliges to lead the development of renewable energy and a sustainable economy and low impact on carbon footprint in order to reduce its high level of dependence. For this purpose, each of the countries in the EU have established their own development policies and are facing their own challenges of the growing integration of renewable production in the market.Thus, steps have been clear: Internal Energy Market integration process, leadership in the integration of renewable energy sources and major efforts to make more efficient and rational our energy consumption through energy efficiency policies.

In particular, in the case of the wholesale electricity market it has implemented a unique mechanism for daily market price where differences between zones is justified only by the congestion level among interconnection capacities. However, substantial price differences between national markets in Europe are still observed.

As regards the wholesale gas market, the target model is based on creating hubs with enough liquidity and transparency in daily trading, interconnected and with

a progressive convergence of prices as interconnection capacities are being developed. However, the level of development of these hubs is still incipient.

In relation to retail markets today, both in the case of gas and the electricity they remain closed to competition from outside and is dominated by local suppliers. The fact that, in most Member States there are still some regulated prices, does not favor out this situation. However, regulators should ensure that price liberalization is accompanied by effective levels of competitiveness.

Where do we come from?

It has been almost 20 years that we have been making important steps, from a vertically integrated model that sustained our systems over the previous 100 years to a single market project today.

We’ve reached the market coupling with the implementation of the Third Legislative Energy Package. This has harmonized the market rules and networks among the 27 participating countries. Competitiveness has been strengthened with the entry of many new participants. We continue to face infrastructure development projects (interconnection). The entry into the free market and the allocation of control entities strengthened the rights of end consumers.

However, the European Union does not have a common energy policy; indeed, in the treaties it is understood that the aspects related to the conditions of exploitation of natural resources, the choice of supply sources and the general structure of supply (energy mix) are the exclusive competence of each Member State.

Major challenges lie ahead?

However, despite what has already gone, we face the most important and difficult challenges. The integration of the increasing contribution of renewables, the demand management and how to continue encouraging investment in an environment of falling prices pose challenges, and today, raises more questions than certainties.

Integration of renewables: We still have no clear what will be the integration model in markets and especially how they will be financed. What is certain is that investment should be guided by the market and not by regulated prices. The aid must complete the market, not to replace it. Experts advise to abandon the model Feed-in-tariffs and go to the feed-in premiums model.

Incentives to investment: To date each country has faced this chapter individually and this has led us to different energy policies in a common integration framework. Not always faced with appropriate calculation methods that caused distorted price signals (CAPs). Persist the idea to establish market investment mechanisms including both international interconnections as active demand management.

Incorporating active demand: The Commission supports the deployment of intelligent tools and control systems, as well as the introduction of applications for Energy Efficiency. The aim is to encourage the consumer to participate in the market. This requires that tariffs should be eliminated and the consumer should pay based on market prices rather than consumer profiles.

Energy transition plan is missing: By doing nothing, we will create a more robust and competitive market, but will continue to have a heavy reliance on fossil fuels and therefore keep the historic dependence on fuel based economies.

For all the above, the proposed model is feasible?

In market terms the different participating countries should harmonize their regulations and tax bases, often against their own local interests. For correct operation, the free market should not have price limits, government intervention must be avoided. This would jeopardize the single energy market. Will member states be able to give in on their current autonomy?

The current Emission Trading System remains a failure and will not achieve the objectives despite constant revisions. In addition, we continue to set subsidiary schemes for the promotion of renewable generation without coordinating them with the objectives of the ETS. Will Europe be able to take on the extra cost of decarbonization in an environment of global competitiveness?

Adding to this, raise concerns about how to adapt the growing generation sources and the difficulties they face system operators. Companies have already abandoned reactive position to demand. Processes and systems have evolved to meet the needs of a more demanding system. However, the EU target scenario will require a much more complex model. Will the distributed generation put at risk the safety of the markets?

That complexity will encourage the active participation of demand and new technologies for network management will be developed. This will open a new field in the age of digitization within the energy sector.

The future remains uncertain, especially when UK has taken an important step against the project of a common European market, pushing further the ability to respond to many uncertainties.

Alejandro de Roca | Operations Director