FORATOM interviewed Jan-Horst Keppler, Chief Economist at the OECD’s Nuclear Energy Agency on the EU new energy market design on 28 June 2016 on the occasion of a Workshop organised by FORATOM, during which he was invited as a guest speaker.
What does the energy market need to be reformed for and how should it be revised?
Very clearly the electricity market needs to be reformed in a direction that will help the deployment of low-carbon technologies. Low-carbon technologies as you may know have this particularity that they have very high fixed costs, very high initial costs of investment and rather low variable costs that distinguishes them from fossil fuel technologies, which have rather low investment costs in particular gas fired technologies and rather high variable costs. So the market design for low-carbon technologies and the market design for fossil fuel technologies is not the same. Let me add one further thought that the current market design has been conceived for fossil fuel technologies in particular for gas-fired power plant. They were conceptualised and introduced in the 1980’s and 1990’s. We had combined cycle gas turbines coming in. We had big connections with Russia during that period, really bringing lots of gas to Europe. So that market design is really a sort of a gas-based power system market design and I’m not 100% sure whether nowadays when really climate change and the reduction of greenhouse gases is the number one policy priority the current market under those circumstances is still the optimal one.
All the low-carbon technologies are a little bit in the same boat. The renewables to some extent have an advantage that they get out of market support through feed-in-tariffs and so force, but in the long run all the supporters of renewables want them to be mature enough to stand on their own feet and then they will be exactly on the same boat as nuclear and hydro. What does that mean? I’d say it means three things:
- We do need some sort of visibility and stability in terms of prices that theses low-carbon technologies can earn on the electricity market. The advent of renewables has really brought down prices and has reduced the load factor for the other technologies that are on the market and there will not be any market-driven low-carbon investment under the current circumstances. So this price stability and visibility is a key point.
- A robust carbon price, so what is a robust carbon price? It is a carbon price that actually can drive investment and dispatch decisions. Decisions to invest either in fossil fuel technologies or in low-carbon technologies. On the dispatch side, it is particularly the switch between gas and coal that is of interest. And there we can say that once we have CO2 prices at 20 or even 30€ per MWh, then it can make a difference. So robust means 30€ per MWh or higher. To really drive, you probably need prices as high as 100€ per MWh. We will not reach that price in every European country in the next few years, but Sweden already has a carbon tax of 100€ per MWh. That’s the level when really low-carbon investments could be incentivised provided that price or tax is perceived as being sufficiently stable in time.
- The reform of the market flexibility: what happens when we reach pick capacity due to the intermittency of renewables (wind and solar)? There we do need the completion of the current market design to make this more efficient.
