COLUMN-Renewable power may reverse EU price convergence: Wynn

Thu Apr 11, 2013 6:19am EDT

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(The author is a Reuters market analyst. The views expressed are his own.)

By Gerard Wynn

LONDON, April 11 (Reuters) - Power prices diverged last year across central Europe for the first time since as far back as 2006 in further signs of a possible conflict between European Union goals for an internal energy market and more renewable power.

The European Commission wants an internal energy market achieved through more cross-border gas and power interconnections, liberalised prices and coupling of cross-border exchanges.

That should reduce the EU's reliance on imported energy, bolster security of supply, smooth price differences between member states and cut prices overall.

The project is meant to be achieved by 2014 but faces difficulties including the capital cost of and public opposition to upgrading cable connections and the headache of coordinating transmission operators across different countries.

The Central Western Europe (CWE) region has been a flagship for market coupling, which makes price divergence in the region last year a particular concern which goes against the narrative of closer integration.

A contributing factor was national circumstances which sent wholesale power prices in different directions: ample German wind, solar and coal-fired power contrasted with a shortage of nuclear power in France and Belgium.

That suggests a possible further knock-on effect, spilling across borders, of growing renewable power in Germany which has created a hiatus in national wholesale and retail power prices, undermining the economics of conventional power and inflating residential bills.

MARKET COUPLING

The Central Western Europe (CWE) power trading region comprises Austria, Belgium, Germany, France, the Netherlands, Switzerland and is a flagship for market coupling launched across the region in November 2010.

Market coupling replaced a two-step process for cross-border power trade comprising separate auctions for transmission capacity and power.

The market coupling approach instead integrates transmission allocation and power trades and so avoids accumulating un-used transmission capacity.

Critically for price convergence, it also ensures that electricity flows from cheaper to more expensive markets.

The European Commission shows how market coupling has eliminated adverse power flows (from expensive to cheaper wholesale markets) between Germany and the Netherlands and France since 2011. (See Chart 1)

The next planned step in the CWE region is to implement so-called flow-based (FB) market coupling.

That is seen as more efficient still because it optimises real capacity across a region's borders, rather than optimising available capacity after this is first calculated separately by each national transmission system operator (TSO), as at present.

"Under FB, interdependency of the cross-border exchanges is reflected from the beginning of the process for all the directions of the capacity space. This is in contrast to the current ... process where the first step (initial local TSO computation) is not coordinated," reported transmission operators in their "CWE Enhanced Flow-Based MC feasibility report" in 2011.

A go-live date for flow-based coupling in CWE has been repeatedly delayed. It should be "technically ready by the end of 2013", the grid operator TenneT said last month, put back from the end of 2012.

Price divergence was a particular feature of the CWE region.

The Nordic market comprising Norway, Sweden, Finland and Denmark is already fully coupled. Hungary joined the Czech-Slovak coupled market in September last year, forming a trilateral market coupling in the central east European (CEE) region, where there appears to have been an immediate benefit in a lower Hungarian wholesale power price premium to Slovakia.

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Chart 1: (page 26) goo.gl/Bf3S3

Chart 2: (page 13) goo.gl/Bf3S3

Chart 3: (page 25) goo.gl/Bf3S3

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DIVERGENCE

The European Commission's solution for an internal EU power market is liberalised pricing with market coupling combined with more physical cross-border interconnector cabling.

Price divergence last year in CWE underlined how more market coupling is not a panacea, in particular when different countries have contrasting fuel mixes, as is increasingly the case since Germany decided to phase out nuclear and ramp up renewables.

The ICE Endex exchange is one coupled day-ahead power market in the CWE region, and reported in January prices diverged last year across the whole region for the first time since 2006, falling to 46 percent from 66 percent the year before, referring to the proportion of hours identically priced.

The European Commission last month showed how price divergence accelerated in CWE from September, in its "Quarterly report on European electricity markets, Q3-Q4 2012". (See Chart 2)

The EU executive explained the divergence on national circumstances which sent wholesale prices in opposite directions.

It contrasted abundant wind and solar power generation and competitive coal-fired generation in Germany with the low level of nuclear availability in France and the disconnection of two nuclear plants from the Belgian grid in August.

"This provided an illustration of how developments at national level can counter the positive effects of market coupling on prices," it said in its quarterly report.

Certainly when national market conditions differ greatly prices cannot converge, although closer interconnection and market coupling will help.

The Commission cited data which showed gross exports from cheaper Germany to other CWE markets in the fourth quarter rose 38 percent, to 16.4 gigawatt hours from 10.1 GWh in the corresponding period in 2011, showing that market coupling was working.

The abrupt disconnection of two nuclear plants from the Belgian grid in August, following the discovery of cracks in their steel structure, was a one-off.

But swings in German wholesale power prices and lower peak prices as a result of more zero marginal cost wind and solar power are part of a new trend and possibly destabilising force.

More renewable power is a parallel goal of the European Commission which may conflict with its aim of closer market integration.

In another example of possible conflict, member states and in particular Britain are considering intervening in national wholesale power markets to ensure investment in flexible gas-fired back-up capacity.

That is intended to overcome declining returns to fossil fuel power as a result of competition with low marginal cost, subsidised renewables, but goes against the grain of a liberalised market approach.

Such conflicts underline how steps to address the unpredictability of renewables and in particular wind power must match their rising capacity, for example through a large and expensive upgrade in interconnectors; more market coupling; and improved wind and solar forecasting by transmission operators. (Editing by James Jukwey)

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