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RE-POWERING MARKETS Market design and regulation during the transition to low-carbon power systems EC-IEA Roundtatble on electricity market design and regulation Brussels, 18 February 2016 © OECD/IEA 2016 Power markets must evolve to facilitate a low-carbon transition Competitive electricity markets are being challenged by the need to decarbonise A power market transformation is already underway Demand is stagnating in OECD Europe Renewables met 62% of growth in capacity in OECD Europe since 2000 New technologies progressing (smart grids, demand response, storage) Electricity security is becoming more critical The massive investments required call for an improved market framework: Low-carbon investments Integration of wind & solar power Capacity markets Network investments & regulation © OECD/IEA 2016 Competitive electricity markets are being challenged by the need to decarbonise Capacity additions in OECD Europe by technology, 1960-2014 Start of industry restructuring 60 000 MW 50 000 40 000 30 000 20 000 10 000 0 1960 1970 1980 1990 2000 2010 2014 Massive investments needed during the transition will take place in competitive markets. Their design is key for decarbonisation while ensuring electricity security. © OECD/IEA 2016 Current wholesale prices and long-term risks call for continuing support Year-ahead forward market prices (Real price 2015), 2008-15 120 France EUR/MWh 100 The Netherlands 80 Germany 60 40 20 0 02-01-2008 02-01-2009 02-01-2010 02-01-2011 02-01-2012 02-01-2013 02-01-2014 02-01-2015 Long-term arrangements are still needed to make up the difference in low-carbon generation costs, and keep financing costs low for capital-intensive investments. © OECD/IEA 2016 Integrating high shares of wind and solar New operational requirements with high shares of renewables (data for Germany using scaled wind data) 80 70 Load level (GW) Contribution to peak demand 60 Load 50 2energy in the generation mix Net load with 20% of wind Larger ramps 40 30 Forecast errors 20 Potential over-generation 10 0 1 10 20 30 40 50 60 70 80 Hours 90 100 110 120 130 140 Source: Adapted from IEA (2014) THE POWER OF TRANSFORMATION Short-term markets can unlock flexibility for efficient and secure system operations, and reap benefits of demand response, storage, flexible generation and networks. © OECD/IEA 2016 When and where to operate and invest? Markets prices with a high geographical and temporal “resolution” can provide incentives for efficient and secure coordination of more complex power resources. © OECD/IEA 2016 Capacity mechanisms: are they needed? Neighbouring capacity mechanisms in North-West Europe Getting scarcity prices right during capacity shortage is a pre-requisite, still capacity mechanisms are increasingly used to create a safety net during the transition. © OECD/IEA 2016 Low-carbon power and networks require the largest investment Power-sector cumulative investment by type, 450 Scenario, OECD Europe, 2015-2040 1 800 1 600 Other 98 Bioenergy 126 Hydro 143 Billion dollars (2014) 1 400 1 200 Solar 357 1 000 800 600 400 200 0 Wind 852 Oil 2 Gas 116 Coal 85 348 Fossil Fuels Nuclear Distribution 674 Transmission 184 Renewables T&D Source: WEO Decarbonisation involves both capital-intensive investments and a modernised regulatory framework for transmission and distribution networks. © OECD/IEA 2016 Modernizing retail tariffs Cost components and tariff structure of selected retail electricity prices (average for Paris, Berlin and Amsterdam) 100% 90% Fixed 7% VAT 21% 80% USD/kWh 70% 60% 50% 40% Levies and taxes 19% Network and metering 26% Variable 93% 30% 20% 10% 0% Energy 35% Costs components Tariff structure Prices have to better reflect the underlying costs level and structure in order to induce efficient investment in solar PV and batteries on the consumer side. © OECD/IEA 2016 Conclusion: Re-powering markets Decarbonisation of the power sector is forcing a rethinking of electricity market design Incremental changes – re-powering - can facilitate the transition: Short-term markets with detailed and transparent information on when and where to operate and invest Consistent framework for low carbon support, CO2 pricing and markets Electricity security requires reliability standards and pricing scarcity right, with capacity mechanisms providing an additional safety net A comprehensive market framework balances rules set by regulators and competitive markets Many recommendations are relevant outside Europe, including IEA partner countries © OECD/IEA 2016 Thank you http://www.iea.org/topics/electricity/publications/re-poweringmarkets/ © OECD/IEA 2016