EU new energy package 'another step in a work in progress': OIES

The package's main themes are decarbonisation, with the aim to adapt market and regulatory structures to make them fit for the decarbonised energy system of the future; and Europeanisation, with “a move away from national approaches to energy towards regional and EU-wide frameworks.”
“Both these themes are of course central to the Energy Union project” OIES's David Buchan and Malcolm Keay noted.

However, despite its ambitious goals, the package “goes only a relatively short way towards the ultimate objectives” given the introduction of cross border support schemes is “cautious and incremental”, regulatory coordination is “still on the basis of cooperation between national regulators rather than via a European regulator” and the market reforms “amount to little more than a sticking plaster on a fundamentally broken design” they objected.

Electricity price signal issue remains
The paper noted reforming how electricity markets work in order to promote a shift to free market prices away from the distortions caused by subsidies to renewables, as well as government-imposed price caps, remains a key objective at European level.
In that respect “scarcity pricing is central to the Commission’s thinking because it could potentially be a triple win, encouraging investment, enabling demand response and lessening the need for capacity mechanisms” which are “disliked in Brussels as another distortion.”

Nevertheless “the Commission has not really addressed the underlying issues” they argued. The first being the “missing money” problem or the “the risk that prices will not in practice rise to the level needed to remunerate investment because governments will intervene to hold them down.”
“The difficulty here is that ‘scarcity pricing’ can be, both in principle and in practice, indistinguishable from abuse of a dominant position” the two analysts underlined.
The second issue is that “Brussels also has to contend with the popularity of price controls with populists.”

Capacity markets controversy continues
Another issue that remains unresolved is that of capacity markets, with Brussels having so far approved those introduced in the UK, Germany and France.
“However, countries seeking approval for a new capacity scheme will have to show henceforth that they have implemented market reforms that might make a capacity mechanism unnecessary, and that if a capacity mechanism is still considered necessary, then it should be based on 'a European adequacy assessment' that incorporates some reliance on neighbouring countries’ resources” the OIES paper explained.

Moreover, “it is a measure of the clout that the Commission has (…) that at the last minute it decided to impose an emission performance standard of 550 grams per kilowatt hour on any new generation plant initiated after 2020 and included in a capacity mechanism and on any generation plant, new or old, included in a capacity mechanism after 2025” they pointed out.
“The provision for a performance standard seems to have been a sop to the environmental lobby, which tends to regard capacity payments as a cloak for providing subsidies to fossil sources” the paper said, adding that “it was not in earlier versions of the measure and it does not really make much sense in isolation as “plants in capacity mechanisms, depending on the precise form of the mechanism, are generally there to be used as back up” and “will not therefore create significant emissions.”

All in all, “it may be that even the limited capacity market version of the proposal will prove impossible to agree, given that it has no real logic” OIES said.

'Another package likely to come along'
The winter package overall “represents a set of mainly useful but still tentative steps towards the Energy Union” however “it also indicates that Europe is not yet ready to deal with some of the more sensitive issues raised by the process” such as the decarbonisation of heat, the energy performance of existing buildings, the fundamental redesign of wholesale electricity markets, the phasing out of coal and moving to a Europe wide approach on policy issues, OIES concluded.

“Another package is likely to come along before too many years have elapsed, at least for those who remain within the EU” it said.