Is the European Commission Waking up to Electricity Consumer Pain?

Specialists have long known that the system management cost of even medium and certainly higher levels of non-despatchable renewable electricity, such as wind and solar, was no less important in magnitude than the income support subsidies required to motivate capital investment in the generating equipment. General awareness of this fact is now rising, and the wisdom of socializing those costs is under question (See for example, Jonathan Ford, “The Hidden Costs of Renewable Power” Financial Times (21.08.17)). When a problem of this nature is socialized it becomes nobody’s problem, and no one will address it, with all parties quite rationally preferring to sit on their hands and allow the consumer to bear the cost.

A very good example of this problem is found in the “constraint payments” to wind power in the United Kingdom, a subject that has been simmering away in the press since 2011, and has even stimulated the GMB, the energy workers’ union to issue a statement calling for reform ('Renewables Should Be Funded Through Taxation').In fact such payments to wind are only the tip of the iceberg. – Payments to conventional power sources to start generating south of a constraint when wind is told top, general balancing costs, and grid expansion costs are all relevant. Uncontrollable generators introduce a substantial random element, an additional stochastic factor, into the grid balancing equation, and balancing costs are absolutely certain to rise as a consequence.In fairness to renewable generators it is probably true to say that because of policies such balancing costs are much higher than they need to be. However, the renewables industry is in large part to blame for this fact, since they have done nothing to encourage regulatory changes that produce a market environment likely reduce those costs. Indeed the industry has resisted such changes.That was a tactical error. Pressure is now growing to force these changes through, with even the European Commission recognizing that something has to change. A recent communication from the EC to the European Parliament, “Clean Energy for All Europeans” (30.11.2016, COM(2016) 860) suggests, obliquely as is ever the case the EU, that renewable generators will no longer be treated with kid gloves, and must expect increasingly to operate by the same rules that bind other generators. The statements require interpretation. When the Commission writes that “market rules will be adapted to allow renewable producers to fully participate and earn revenue in all market segments, including system services markets” (p. 8) they mean renewables can no longer expect to be shielded from the rough and tumble of the market place. When they write that “Priority dispatch will remain in place for existing installations, small-scale renewable installations, demonstration projects” (p. 8) they mean that new installations will not have priority dispatch, and must bid like any other generator. And when the Commission writes that “curtailment of renewables should be kept to a strict minimum” this remark must be seen in the context of the previous observations, and so interpreted as meaning that compensated curtailments within the market must be minimized and renewable generators must be increasingly responsible for their own presence in the market.All this is very sensible, in so far as it goes, but whether any of it will be carried through into practice remains to be seen. One has to assume that the industries concerned are, lobbying strongly in Brussels to ensure that these reforms are introduced as slowly as possible and in as weak a form as may be. They will almost certainly have some degree of success.Rapid progress is, unfortunately, not be expected, but there will be progress because there must. The European Commission’s own press release was entitled “Commission proposes new rules for consumer centred clean energy transition” [https://ec.europa.eu/energy/en/news/commission-proposes-new-rules-consumer-centred-clean-energy-transition]. The Commissions idea of a “consumer centred” energy market is probably not quite Milton Friedman's, but it would be obtuse and ungrateful not to acknowledge that even the modest degree of rebalancing probably implied here is a step in the right direction. Producer interests have simply had it too easy for far too long.Politicians know this: the Commission's statement is itself evidence, but  British readers will also recall that the then Secretary of State, Amber Rudd, announced in her very promising reset speech of November 2015, that renewables would have to bear their system costs. And industry regulators, who have understood these problems from the start, have not been slow to seize the opportunity. In a joint statement published in response to the Commission’s paper the Agency for the Cooperation of Energy Regulators (ACER) and Council of European Energy Regulators (CEER), made three recommendations that spell out what the Commission must ultimately do to deliver on their commitment to the consumer. I quote them in full:

• Remove priority dispatch for existing RES [i.e. Renewable Energy Sources]

1. European Energy Regulators recommend changes to Article 11 of the Electricity Regulation to apply the prohibition of priority dispatch to existing (as well as new) RES plants, so that all technologies complete fairly in the market to deliver the lowest possible cost to consumers.

• Avoid non-market approach to redispatch and RES curtailment

2. European Energy Regulators recommend changes to Article 12 of the Electricity Regulation, particularly removing the 90% compensation for RES curtailment, to make the redispatch and curtailment approach less prescriptive. European Energy Regulators support redispatching markets – where feasible and efficient – being the mechanism for Transmission System Operators (TSOs) to perform market-based (rather than technology- based) curtailments.

• Avoid net metering and ensure fair cost allocation

3. European Energy Regulators recommend changes to Article 15 of the Electricity Directive and to Article 21 of the RES Directive to emphasise that self-generators pay their fair share of network and system costs and that, for similar reasons, net metering is avoided.

This is the writing on the wall. Priority access will have to be denied to all renewable generators, not just new entrants. Renewable generators will have to take a large part of the risk of curtailment, and cannot expect non-market compensation. In summary, renewables will have to pay “their fair share of network and system costs”. The special terms on which renewables have hitherto operated are coming to an end, slowly but surely. The cost of managing their uncontrolled output is about to become their problem, not something that can be silently shuffled on to electricity bills.