It’s been a comparatively slow and steady process: Since 1996, a number of directives have chipped away at monopolistic utilities, permitting new business models and new players to challenge incumbents. As most energy suppliers, including fossil fuel, nuclear and renewable, can attest, the electricity market is now all but unrecognizable. To take just a good example, industrial and commercial tariffs are almost fully deregulated with feedstock procurement now a market-based activity.

 

EU initiatives to grow competition, effectual price formation and, in return, more efficient use of electricity itself have largely paid off. However, the market is not without its technical problems. Regulators divided up the EU electricity market into bidding zones that assume limitless intra-zone trading opportunities. That has not proved to be the case, and the zonal design is recognized — at least by academics — as an obstacle to more efficient use of resources.

 

This system is progressively problematic, as the EU’s decarbonization agenda picks up the pace. More intermittent renewables along side the expectation that transport, heating, and industry will all experience more substantial electrification, requiring substantial new infrastructure. Considering how best to direct investment toward storage, demand response, more interconnection and distributed energy resources, exposes the cracks in the current scheme.

 

A Proposal for Change

 

Market redesign has therefore moved from academia and onto the political agenda in the form of the recently approved Electricity Regulation and Directives. These new power market provisions aim to how the EU plans to make energy markets more consumer-focused and reiterate its devotion to a well-functioning, competitive and undistorted market that is certainly primed for purpose.

 

The latest directive includes legal principles for price formation and for trading electricity on balancing, intraday, day-ahead, and forward markets. Certain measures allow at least 70 percent of trade size to cross borders, making it much easier to trade renewable energy.

 

There are also measures designed to promote more “prosumers”—energy users who also produce their own supply, which has implications for huge energy users who have developed their own generation capacity. In addition , they establish the means to phase out subsidies of fossil fuel-powered power stations that are kept on standby.

 

In the event all these measures reach their goals, then the market will be transformed once more: not just for utilities and energy suppliers, but for their domestic, commercial and industrial customers, too.

 

Caps, Carbon, and Capacity

 

However, success is far away from guaranteed. Market players, commentators, analysts and policymakers have weighed in, generating more heat than light. Partial breakdown of price caps, treatment of renewables under “priority dispatch” mechanisms, and TSO’s role in cross-border provision are all subject of debate. Nevertheless, it is capacity markets and strategic reserves which are proving particularly contentious.

 

Europe’s market, in essence, is recently energy only (an EoM). Absent regulatory or political interference, an EoM allows wholesale energy prices to increase when resources are scarce — reflecting the value society places on continuous supply.

 

However, several EU member states do not really trust the market to keep the lights on. They choose capacity mechanisms and strategic reserves to manage their political and technical issues. The schemes differ, but the idea is similar: paying for standby supply — just in case.

 

For every expert that highlights that capacity markets protect wholesale energy buyers from exposure to the true marginal cost of power, another cites the distorting effect on price signals and the negative impact on cross-border trade.

 

In these debates, experts regularly cite Texas’s ERCOT model as evidence of an EoM that can secure trustworthy supply without exposing customers to intolerable levels of volatility and risk. In Texas, suppliers enter into bilateral contracting to manipulate market risks and create a cushion between buyers and the market. Those buyers can then choose how and whether to manage their exposure to energy price volatility — including the use of CTRM systems.

 

However, the two issues are not directly comparable. The EU is attempting to integrate 28 disparate systems that depend on diverse energy sources and were already at different stages of deregulation and differing societal expectations.

 

In other words, it’s a political problem as much as anything else. Experts on the Nordic States, like for example, propose that balancing demand and supply without capacity markets is well possible because those countries have accepted that they are dependent on each other. The rest of the EU is not quite there.

 

You’re in the Market Now

 

All this means that forecasting the final outcome of the current regulatory upheaval is closer to spinning a roulette wheel than many would love to acknowledge — especially as the European Parliament goes to the polls in May and European Commission personnel will change from November. Nor is it very clear whether “pure” energy pricing is yet politically and socially viable.

 

This is maybe the most helpful method to view next-generation energy trading and risk management (ETRM) systems: as navigation tools that provide position visibility, risk management, controls, regulatory compliance and clarity when buying, selling, producing, using and accounting for electricity. Putting transparency, digitalization, data and advanced analytics in the hands of energy market participants enables prompt, compliant and informed decision making when it is needed most: as the EU energy market transforms itself once more. That’s the real power of next-generation ETRM systems.

 

This article is originally posted on tronserve.com