European market development
Electricity production from renewable energy sources increased strongly in 2013. The development is in line with EU climate and energy policy targets. Most of these production forms, however, rely on subsidies and require regulating power capacity to balance production fluctuations and to secure energy supply in situations when e.g. wind or solar energy is not available.
Subsidy mechanisms that were designed on a national basis and, in some cases, are oversized, have proved to be counterproductive to the functioning of European electricity market and emissions trading. In addition to a growing tax burden, they have led to an increase in the end-users’ energy bill – even though the wholesale market price of electricity has decreased. Meanwhile, the competitiveness of market-driven, unsubsidised production has weakened, and very few, if any, investments decisions based on the wholesale market price are being made.
The situation has sparked a discussion on the need to reassess renewable energy support schemes and to develop the EU electricity market model so that it better rewards flexible power and reserve power through capacity mechanisms. Renewable generation energy costs for member states are expected to rise to a total of 330 billion euros by 2020; this is an economic burden for member states and the entire EU, and it weakens competitiveness.
In November 2013, the European Commission published the first extensive guidance that aims to help member states to choose support mechanisms that are least detrimental to the functioning and development of the EU energy market. The guidelines focus on renewable energy support schemes and capacity mechanisms and on the possibilities to utilise elasticity of demand.
Building on these non-binding guidelines, the European Commission will adopt legally binding EU’s guidelines for State aid for the energy sector in 2014.
The situation has sparked a discussion on the need to reassess renewable energy support schemes and to develop the EU electricity market model.
Balanced development of the EU energy market requires renewable energy support schemes and capacity mechanisms to be megawatt-neutral, i.e. they must give equal treatment to the different production forms and to production capacities of varying ages. As the need for flexible energy production grows, it is essential to change
the current market model so that flexibility of energy production would also be better rewarded than it is today.
Balanced development of the EU energy market requires renewable energy support schemes and capacity mechanisms to be megawatt-neutral.
Price development of electricity and emission allowances
While market development has not been totally satisfactory at the EU level, the situation in the Nordic countries is better. The Nordic wholesale market has developed further, and in June 2013 Latvia became the last Baltic country to join the Nord Pool power exchange. Because of the
exceptionally good hydrological situation in 2012, area price differences between Finland and Sweden were big. In 2013 the prices became more aligned.
The average system spot price of electricity in 2013 was 38.1 (31.2) euros per megawatt-hour. The average area price in Finland was 41.2 (36.6) euros per megawatt-hour and in Sweden (SE3) 39.4 (32.3) euros per megawatt-hour. In Germany, the average spot price was 37.8 (42.6) euros per megawatt-hour.
In January-December 2013, CO2 emission allowances traded at a price of 2.8-6.7 euros per tonne.
Heat market development
The implementation of the Energy Efficiency Directive (EED) continued in 2013. According to the directive, district heating and combined heat and power production can offer solutions to reach the energy-efficiency targets set for EU member states.
District heating has been included in the national energy strategies in the Nordic and Baltic countries and in Poland. Heat-related legislation is currently (end of January 2014) under governmental consideration in Poland (proposal on renewable energy act) and in Estonia (amendments to heat legislation). In Latvia and Lithuania, similar legislative amendments are expected to be introduced in the near future.
Europe needs major investments in production plants and transmission infrastructure
European energy production plants are aging. Despite regional overproduction of renewable energy, significant investments must be made in low-carbon production over the next decade in Europe in order to achieve the tightened legislative requirements and the EU emissions targets for 2050. It is estimated that investments of about 5-7 trillion, i.e. 5,000-7,000 billion euros, in electricity generation capacity are needed in Europe by 2050. Implementing the investments requires a supporting market model and reasonable return potential from wholesale markets.
Europe’s energy infrastructure development has not kept pace with increasing renewable energy production.
The permit processes required to build transnational power lines have become the most significant bottleneck. In 2013, the EU adopted a new energy infrastructure regulation that was linked to a special financing instrument. This is expected to advance the construction of priority transmission networks by accelerating permit processes and offering additional funding.