Changes in the regulation of the internal electricity market of the European Union
On 5 June 2019, Directive (EU) 2019/944 of the European Parliament and of the Council and Regulation (EU) 2019/943 on the rules on the single European market for electricity were adopted.
The aim of the directive is to ensure affordable and transparent electricity prices for consumers and a smooth transition to a sustainable energy system with low CO2 emissions, taking advantage of the single electricity market of the Member States of the European Union. The aim of the regulation is to lay the foundations for the effective achievement of the European Union’s energy goals, and in particular the energy goals of the 2030 climate and energy framework, by providing market signals to increase efficiency, the share of renewable energy used, flexibility and sustainability of the electricity system, and to reduce CO2 emissions and foster innovation. While at the same time, ensuring adequate system security and reliability. The principles of the directive need to be transposed into national law by each Member State, which in the case of Estonia means making changes to the Electricity Market Act; these amendments should enter into force during 2021. At the same time, the regulation is directly applicable and the resulting requirements already entered into force in the summer of 2019.
According to the directive, the network operator must offer all the support services and reserves necessary for the system to operate using preferably market-based solutions. At the same time, the Competition Authority reviews and approves the technical conditions and specifications of services in order to ensure equal and technology-neutral treatment of market participants and to find the most economically efficient approach. Additionally, in the context of the new directive, both transmission and distribution system operators must ensure that they do not own electricity storage equipment (excluding integrated network elements) and, if so, sell this equipment through a transparent auction. The prohibition on owning storage equipment is due to the fact that storage equipment can provide reserves for the electricity system and the network; however, as the purchase of reserves must be market-based, the user of the reserve, being the transmission or distribution system operator, cannot own this equipment themselves. The reviewer and approver of the terms and conditions of the auction is the Competition Authority, which must ensure that the terms and conditions of the procurement are transparent and do not discriminate against market participants.
Like the prohibition on owning electrical storage devices, the directive also leads to a ban on larger distribution system operators owning charging points and infrastructure for electric vehicles. On the one hand, the reason for this is that the development of charging infrastructure would be market-based and barriers would not be created for entry of private companies to connect to the grid, and on the other hand, the charging network can be considered to be a storage network which, when using smart chargers, has a great potential to provide reserves for the power system. The hope is that charging network operators will also see sufficient business opportunity in the future to provide their resources to network operators and the transmission system operator as reserve capacity.
From the point of view of the development of the electricity market, the new directive requires the electricity markets to have a flexible electricity system. Flexibility refers to the management of both electricity consumption and distributed generation and the provision of its capacity to the electricity market before the calculation of the electricity market price. This means that flexibility offers and consumers’ ability to consume less when needed can affect the price of the electricity market. Bringing flexibility to markets will create greater opportunities for both household consumers and businesses to earn from their own electricity consumption. This provides an opportunity for new business models in the form of brokering and managing flexibility. In order to better involve flexibility, the directive introduces a new market participant, the independent aggregator. An independent aggregator is a pool of customer flexibility and an intermediary to the markets, which can operate across the portfolios of electricity sellers and balance providers, i.e. it is independent of them. At the same time, aggregation is certainly an activity in which more traditional market participants in the electricity market, such as electricity sellers and balance providers themselves, could and should see a new business model and opportunities to operate within their customer portfolio. On the one hand, bringing flexibility to the markets means providing consumers with more opportunities to participate in the market if they so wish and to earn on the flexibility of their consumption, thereby reducing electricity bills. On the other hand, this should increase the capacity of reserves in the electricity system and thus contribute to a more reliable system and, in addition, bring down electricity market prices by increasing supply to the market. However, the more complex market rules are a downside to all these positive aspects, these rules need to strike the best possible balance between new market participants, aggregators, and the existing market participants – electricity traders and balance providers – to ensure that new market participants can enter the market without undermining the business models of existing market participants or forcing those market participants to leave the market. The inclusion of flexibility in markets also requires an increase in consumer awareness and closer data exchange and communication between distribution system operators and the transmission system operator.
As another new topic, the directive introduces the possibility of creating energy communities. This approach encourages decentralised production and allows the creation of communities that can take on the role of different market players as a whole, such as the producer, the consumer, or the aforementioned aggregator. An energy community is not, by nature, a traditional electricity company, whose priority is to make high profits, but rather it aims to connect network customers (both producers and consumers) operating in one community, which gives network users in the area a certain advantage, such as a reduction in network charges in an amount of electricity produced that contributes to reducing the transmission of electricity to the area and thereby reducing network losses or providing any other environmental, economic, or social community benefits to its members.
Among other things, the regulation introduces a new approach to assessing the security of supply of a system from the point of view of system adequacy. To this end, a new parameter is introduced – the security of supply standard. The security of supply standard is broadly an economic indicator that assesses the socio-economic impact of possible system constraints on the electricity system and consequently signals the moment from which a Member State is socio-economically reasonable to reserve additional production (or consumption management) resources to ensure system adequacy.
The new European Union regulation thus creates new business opportunities, for example by introducing the role of aggregators and requiring the acquisition of all kinds of reserves on a market basis, and also by promoting the development of electric vehicle charging networks. On the other hand, the regulation envisages an increase in consumer awareness and greater opportunities for the average consumer to get involved and even earn in the electricity market, both by offering flexibility and by participating in energy communities. Not forgetting that a more flexible electricity system with a higher share of renewable energy and distributed generation also needs a more detailed and regulated approach to assessing security of supply. The security of supply of the system is ensured by using market-based solutions and considering the socio-economic effects.
Analysis of renewable energy subsidies
The Competition Authority analysed the renewable energy support schemes implemented in Estonia and their economic impact, as well as the profitability of solar power plants and the extent to which the renewable energy subsidy affects the financial position of these plants.
Renewable energy subsidies have been paid to producers in Estonia for over 20 years. The first support scheme was implemented in 1998, when network operators were obliged to purchase electricity produced from renewable energy sources at a fixed price. This scheme was in force for almost 10 years and was amended in 2007, when direct subsidies to producers started to be paid. With some modifications, this support scheme remained in force until the end of 2018. As of 2019, an auction system is implemented.
The renewable energy sector has grown exponentially, which is why the amount of subsidies for renewable energy has also rapidly increased. Since 2007, the renewable energy charge has increased 8 times. In other words, the tax burden on consumers has increased 8 times. Renewable energy subsidies have cost consumers a total of 827.9 million euros between 2007 and 2020. It is estimated that the total cost of subsidies to consumers for the period of 2007 to 2030, i.e. for a period of 23 years, could amount to 1.5 billion euros.
The Competition Authority examined the experience of neighbouring countries, which showed that it is also possible to build renewable energy plants with minimal subsidies for renewable energy. If we take as a basis the so-called ‘EU Clean Energy Package’, the objectives must be achieved with the least possible support and free competition. As the costs of renewable energy production become cheaper over time, it can be expected that in the future the majority of the plants will be possible be built without subsidies.
The Authority has also previously analysed renewable energy projects and found that support is provided for economically viable investment projects and that these subsidies impose an unreasonably high economic burden on electricity consumers. The Competition Authority analysed the projects of solar power plants in more detail and came to the conclusion that without the support scheme, these projects are not profitable. The Authority therefore considers that it is important to pay subsidies on the basis of the principle of competitive neutrality: certain types of production can already be competitive today, while solar power plants, for example, still need support in our latitude. From the consumer’s point of view, it is important to achieve climate neutrality at the lowest cost, i.e. implementing environmentally friendly technology, the consumer does not care which technology is used to achieve the aim.
The Competition Authority is of the opinion that the current support scheme imposes an unreasonably high tax burden on consumers and will continue for decades to come. Estonia has fulfilled its commitments on renewable energy, but this has not been cheap for the consumers. If we take consider the auction scheme implemented from 2019, the consumer will pay the renewable energy charge until 2045. It is the opinion of the Competition Authority that the renewable energy sector needs to move to a market-based solution and phase out renewable energy subsidies.
A new approach to security of supply analysis
When analysing security of supply from the point of view of system adequacy, it is important that security of supply in a tightly interconnected European electricity system is considered not only on a Member State basis but in the system as a whole. With this approach in mind, the Clean Energy Package adopted in 2019 as part of the EU Regulation 2019/943 on the internal market, introduced to Europe, among other things, a new approach to analysing security of supply. The main principle is to analyse security of supply in Europe with a single probabilistic system adequacy analysis and to introduce a socio-economic indicator – the security of supply standard. This should ensure that security of supply is guaranteed through free competition between Member States and taking into account the level of integration of electricity systems, and that the creation of additional system reserves or capacity mechanisms does not distort the market, but is indeed used as a last resort and with the permission of the European Commission.
Security of supply will therefore be further analysed in the light of the security of supply standard. The security of supply standard is an economic indicator aimed at ensuring a socio-economic balance between the possible need for additional system reserves and a market operating in the context of free competition. The security of supply standard includes two parameters: a socio-economically acceptable loss of load expectation (LOLE) and the socio-economically acceptable amount of expected energy not served (EENS). Additional parameters such as the value of lost load (VOLL) and the cost of new entry (CONE) are used to determine the corresponding parameters.
If a Member State finds that, in the future, the existing production capacity in the region is insufficient to meet the security of supply standard, it is justified for the system operator to acquire additional production capacity under market conditions (through a public tender), i.e. to implement a capacity mechanism. As the capacity mechanism constitutes state aid, the Member State must consider very carefully whether the derogation from free competition and the implementation of the capacity mechanism are still justified. EU legislation therefore provides very precise guidance to Member States on when it is possible and necessary to raise reserves in the system as state aid.
Due to the adoption of the approach of the 2019 EU Regulation on the internal market, an analysis was performed in Estonia at the end of 2019 / beginning of 2020, at the request of Elering AS and in cooperation with the Competition Authority and the Ministry of Economic Affairs and Communications in order to find the optimal level of security of supply for society with the help of a foreign consultant. The results of the analysis are available on Elering’s website. As a result of the analysis, the Competition Authority submitted a proposal for a security of supply standard to the Ministry of Economic Affairs and Communications in accordance with Article 25 (2) of the EU Regulation on the internal market. The standard will enter into force if it is approved by the Government of the Republic, most likely in 2021. Based on the analysis, the Authority proposed to approve a two-level indicator as the Estonian security of supply standard – 9 hours/year and 6 GWh/year (0.07% of annual consumption). Such a standard certainly does not mean that in reality power outages of this volume are planned in Estonia. It is an economic indicator calculated in accordance with EU regulations. This provides a framework in which case, based on the results of the security of supply analysis, there is a basis for undertaking the process of implementing the capacity mechanism in Estonia.
A precondition for determining the security of supply standard was also to determine the value of lost load (VOLL) for Estonia. VOLL is determined on the basis of the EU Regulation on the internal market by a decision of the national regulatory authority (Estonian Competition Authority) in accordance with Article 11 of the Regulation, based on the methodology of Article 23 (6). According to the decision No. 7-26/2020-007 of the Competition Authority of 3 July 2020, the value of lost load in the territory of Estonia is 7,287 €/MWh.
The VOLL and CONE values have to be recalculated every five years, thus necessitating a review of the security of supply standard at five-year intervals.
The report of the Competition Authority on the electricity and gas market examines the indicator of the security of supply standard in more detail and explains its components and how to determine it.
The report of the Competition Authority on the electricity and gas market also examines in more detail the analyses of security of supply performed for Estonia during the last year, both the European-based and national scenarios. In summary, the following conclusions characterising Estonia’s security of supply can be highlighted:
1. Estonia is an electricity import system, the import dependence of which is growing year by year. However, there is enough external interconnection capacity to ensure security of supply by 2030 as required.
2. The common European probabilistic system adequacy analysis indicates the probable LOLE values of Estonia to be 0.33 h/year by 2025 and 0.79 h/year by 2030. The probabilistic EENS values for the respective time periods are 0.04 GWh/year and 0.14 GWh/year – thus well below the values of the proposed security of supply standard.
3. In addition, a fixed capacity of 1,000 MW has been guaranteed until 2030, the necessity of which has been pointed out by the system operator Elering in its security of supply analysis.
4. The situation after 2030 shows slight shortcomings in the adequacy of the system. However, a common European probabilistic analysis of system adequacy in 2021 must be awaited before more precise conclusions can be drawn.
5. From an economic point of view, there is no need to create a strategic reserve (capacity mechanism) until 2030. A strategic reserve can only be created if analyses show a risk of breaching the national security of supply standard.
6. Since the synchronization of the Baltic electricity system with the Central European electricity system will take place at the end of 2025, we are a so-called ‘synchronized tail’ in terms of network construction from 2026, which is heavily dependent on DC connections and EU solidarity due to the import needs of the entire Baltic region, the so-called ‘special scenarios’ have also been analysed for Estonia in order to consider additional risks. However, all specific scenarios show an adequate level of security of supply until 2030:
a. Sufficiency of the Baltic synchronous area scenario (probability <10 %) is covered until 2030.
b. Baltic emergency scenario (probability < 1%) where DC connections (with Finland and Sweden) are not available. The quality of electricity supply is severely disrupted, there are not enough reserves, and it is necessary to limit industrial consumption; business and public service and household consumption are covered.
c. Estonian emergency scenario (probability <0.1 %), where there are no imports and the Estonian electricity system operates alone. Strong deficit. Vital services and services of general interest are covered.