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ANNEX: The Czech Republic´s comments on the Discussion Paper of the Federal Ministry for Economic Affairs and Energy (Green Paper) February 2015 The Czech Republic appreciates the German Green Paper´s effort to provide all the relevant stakeholders with a first insight into the future reform of German electricity market. We support the market-based approach of the Green Paper and would welcome preservation of this approach in the upcoming White Paper as well. Following the Green Paper call, we would like to present our views and suggestions in 6 areas: Design of the electricity market, Capacity remuneration mechanisms, Flexibility, No-regret measures, European Cooperation and Issue of a single price zone (not in order of priority). I. Future design of the electricity market The Czech Republic agrees with the Green Paper´s (GP) statement, that the undistorted Energy Only Market (EoM) can provide sufficient price signals for future investment through existence of balancing groups and related imbalance settlement. We agree the proper EoM functioning has to enable scarcity pricing, which provides incentives for capital-intensive investments in order to secure sufficient capacity to cover peak demand. External studies also confirmed that an optimised electricity market, which allows undistorted price signals to reach all market participants, is sufficient to ensure security of supply without creating additional capacity market. We would like to point out some causes of EoM failures as we think they are not properly addressed in the GP. In the Czech Republic´s view, following market distortions deserve closer attention (not in order of priority): o fragmented and distorted national subsidy policies and distortive national capacity remuneration mechanisms o state regulated electricity prices for some customer groups o missing cross-border allocation mechanisms at some borders o state determined bidding zones o differentiated grid access o uneven participation on balancing services provision o inadequate pricing of system imbalances (including extensive use of system services instead of market signals based on non-discriminative balancing responsibility) o price caps and missing scarcity pricing, including future pricing of electricity storage in a way that will inhibit demand side response An important element of the EoM is the existence of scarcity pricing. The Czech Republic completely agrees with the Green Paper that price spikes at the wholesale electricity market, leading to higher price volatility and thus providing sufficient investment incentives even for peak power plants as well as investment in load management measures on customer side, have to be fully accepted. All relevant markets including intraday and balancing market should allow bids without any limitation. At the same time, the enforcement of transparency at wholesale markets should not be misused for price regulation under specific circumstances. In this respect, clear and detailed rules under the 1 REMIT are necessary in order to provide long-term guarantees for investors that regulatory bodies will accept scarcity pricing as standard market phenomenon and not unduly penalize it. Furthermore, we think that the effects of renewable energy sources´ subsidies that are causing substantial market distortions are not properly addressed. In addition to direct feed-in tariffs subsidies which deform wholesale market price, RES cause further market distortions by having priority network access, priority dispatch and because they currently do not assume responsibility for imbalances. We appreciate that the reform of the EEG suggests more market-friendly price guarantees for new RES installations combined with the tendering procedure and not their automatic dispatch. Price volatility is naturally exacerbated by increased intermittent RES generation. Yet, only market-based price formation will lead to rational and efficient electricity pricing (including pricing of intermittent sources; with these sources we must take into account the need to back them up with flexible conventional sources or other technologies or sufficient flexible demand has to be found in the market). High price volatility enables effective use of flexible sources, which gain profit from price differential on both the production and demand side of the market. Price of flexibility on the electricity market without participation of any support schemes or regulated activities should be the only driver for building future energy storages. This will also give the right price signals for demand response and support energy savings and management. In this connection, we welcome the 2014 amendment of the Renewable Energy Sources Act, which aims for greater RES inclusion in the market. Since there is deep investors´ mistrust in the market rules and long-term legislation stability, the proposed set of measures intended to support Energy Only Market “restart” should be designed as a long-termed and very clearly guaranteed at the top political level. II. Capacity remuneration mechanisms As already stated above, we think that reformed Energy Only Market provides a good basis for securing short and mid-term system safety and long-term generation adequacy. From our perspective, capacity remuneration mechanisms represent unnecessary market intervention, cause further market distortion and might pose a significant risk to the security of supply if there are errors in the system setting. As stated in the r2b report, they could even lead to increase in CO2 emissions and thus might be contradictory with the binding European climate goals. Germany currently possesses sufficient amount of capacity available (the GP even states overcapacities); the grid reserve regulation will maintain critical capacity needed in locations where nuclear power plants are scheduled phase-out and even gives TSOs the power to instruct direct construction of new power plants if needed. Public opinion on further regulatory intervention presented by introduction of capacity remuneration mechanisms should also be taken into account. If capacity remuneration mechanisms will be adopted and price volatility at the electricity market further decreased, it would also be more difficult to induce any demand side response. Due to its inherent characteristics, demand response is always less “firm” than generation or storage capacity, and capacity remuneration mechanisms could have a difficulty to properly take this into account. Capacity markets, if being introduced, must be coordinated at the European level. An uncoordinated approach in different Member States would inevitably further hamper integration of electricity markets in Europe. It should be guaranteed that the foreign capacity is factored into national 2 mechanisms and can participate in them from the very beginning. Such a market should be market- based and non-discriminatory. The Czech Republic is of an opinion that in case the capacity remuneration mechanism is introduced in Germany, it should not be the centralised one as it disadvantages capacity based on the criteria of availability. It would also be in breach with the Guidelines on State aid for environmental protection and energy 2014-2020. III. Flexibility Flexibility, in the Green Paper´s understanding, is the feasibility to balance power generation and power consumption. Germany´s goal is to create efficient power system where flexible producers, flexible consumers and storage systems respond to the intermittent supply of wind and solar power. The Czech Republic would like to express support for this approach; we think that if the measures are introduced wisely, they may bring significant benefits such as lowering peaks and efficient use of all the available capacities. For cost-efficiency reasons, it is necessary to enable technology-neutral competition among all the flexibility options. In each case, the financial perspective of a transmission grid transformation1 towards more flexibility could be more elaborated upon. We agree that nowadays there is no special need to specifically support and promote individual technologies beyond the parameters of research funding. Market must provide incentives from both static and dynamic perspective to develop and deploy flexibility options. The Czech Republic fully agrees that the level and volatility of the wholesale prices, prices on the balancing markets and opportunity costs in the heating and transport sectors provide sufficient incentives for the future investment. We would like to stress that market-based approach should be applied in all the sectors of the electricity market. In connection to the renewable energy sources, according to the EEG reform, Germany plans to ensure that new renewable energy facilities will need to accept the same responsibility for the overall system balance as conventional power plants. The Czech Republic welcomes this proposal and suggests gradually extending this measure to already built renewable power plants (i.e. for those exceeding certain generation capacity threshold). This could significantly increase the overall system flexibility. Another possibility would be to remotely control wind and PV installations and thus use their balancing capacity when needed in a cost-efficient manner. The other technology mentioned in the Green Paper is pumped-hydroelectric storage plants. This is by all means a climate-friendly technology and its potential should be fully utilized, yet on purely market-based terms; avoiding socialisation of the costs in the system services