FSR Director Jean-Michel Glachant at the ESADE conference in Madrid, 5 November 2013

1. “A 3 Step Bumpy EU Energy Ride”
Jean – Michel Glachant
Holder Loyola de Palacio Chair in European Energy Policy
Director Florence School of Regulation
(European University Institute in Florence)

2. Intro 3 step: which ones?
• Step 1: getting an internal EU market for electricity? Roughly
Yes! Does it matter? Much less than expected…
• Step 2: getting an internal EU market for gas? More or less a
kind of! Does it matter? Not much…
• Step 3: do these markets interact with other pillars of EU
energy policy (Security of Supply; 20-20-20 targets)? Yes!
They do a lot: they do their job…. (but no more)…
www.florence-school.eu

3. STEP 1/ An EU internal market for
electricity… a journey from 1990 to 2015…
• Four “Yes” in four directions
• 1/ Short term Day ahead wholesale markets connected by
implicit access to physical interconnections
• 2/ Very short term balancing services crossing the borders of
“electrical zones”
• 3/ Retail competition blessed since a decade (2nd Package)
• 4/ Long Term Europeanization of grids operation and
investment going ahead (TYNDP – Grid Codes – PCIs)
www.florence-school.eu

4. Done?
• Not so sure?
• 1/ Price control still in place (see France or Spain) 10 years
after the official launching of retail competition…
• 2/ Wholesale access control (see again France or Spain)
www.florence-school.eu

5. Done? (2)
• Certainly not…
• 1/ New Wholesale revolution ignited by RES public push
• 2/ New retail revolution pushed by RES public push (millions
of “prosumers”) and smart retail grids
• 3/ But but: that comes more from EU “Out of the market”
energy policy than from the market … To be looked at latter
on…
www.florence-school.eu

6. Concl for elec internal market?
• 1/ Done in the EU and nowhere else in the world (notably not
in the US)
• 2/ Done our way (other exist as “Wholesale” mkt with no
retail; or centralized wholesale mkt as PJM or UK 1990 etc.)
• 3/ Does not matter that much: why? It is an internal market
conceived in the 90’ to spur a “CCGT wave & Dash for gas” all
over the EU.
• 4/ Alas today we have massive national RES public pushes…
and massive CCGT redundancy (Spanish LNG terminals
working only at 50% capacity)
• 5/ Will we soon destroy all our EU market or rebuild it before
the 2020 horizon?
www.florence-school.eu

7. STEP 2/ An EU internal market for gas…
much more difficult …
• Elec & Gas: both monopolies
• But: Elec has thousands of production units inside our EU
monopolies + a common multidirectional grid (= easy entry
with a small new CCGT plant);
• Gas: a handful of foreigner producers + “point to point”
grids… all tied with long term contracts (= hard to enter)
• Long way to go: to open new LNG terminals (big units) +
undo long term contract freezing of grids (Italy did 2 years
ago)
• BUT with help of economic crisis (-10% à to -20% gas
consumption) it suddenly worked: single price zone Denmark
to Italy; UK to Austria…
www.florence-school.eu

8. gas… more difficult … but
• BUT BUT: we are also starting implementing an harmonized &
open internal market
• HARMONIZATION of transmission products across countries
through existing interconnections: PRISMA trading platform
• More advanced: Entry-Exit zones suppressing “point to point”
• Even More Advanced : merger of trading zones keeping
different short term balancing services on each border
• Other more advanced tool: Market zones connected by
implicit access to physical interconnections (Market Coupling)
• Also starting: Long Term Europeanisation of grids operation
and investment (TYNDP –Grid Codes – PCIs)
www.florence-school.eu

9. Done?
• For 80% of EU gas it works… quasi single price
• But fragile… sensitive to low gas consumption (hence length
of economic crisis)
• …And short term price convergence (day ahead) >> Long
Term price of gas &capacity of physical transportation of gas
inside EU and
• …And quite high price level: EU short term price of gas = 3
times the reference gas price in the USA (imagine oil price x 3
times! !!)
www.florence-school.eu

10. Concl for gas internal market?
• 1/ Among big countries only EU and US have open gas
markets (but not of the same kind)
• 2/ US produces own cheap gas in an open architecture of
“long term contracted / fully booked / point to point “ gas
grid
• 3/ EU imports expensive gas from quasi cartel (Russia,
Algeria, Norway) + from other LNG providers in a regulated
frame of socialized “entry/exit” zones
• 4/ As Asia today sucks all LNG available & USA cannot flood
the entire world with shale gas
• 5/ EU cannot get the US low price while escaping the Asia
record price. For how long? Hum: let’s see…
www.florence-school.eu

11. STEP 3/ How internal markets interact with EU
energy policy … as they should… as markets…
• EU Elec market with 1/ “20-20-20 targets”; 2/ gas market; and 3/
“Security of Supply”
• 1/ “20-20-20 targets”: Angela Merkel (EU Council Berlin 2007) 20%
reduction GHG emissions + 20% Renewables + 20 % more energy
efficiency
• 20% GHG: automatic in the elec sector – elec cannot pollute more than
permits emitted – only unknown there: carbon market price
• 20% RES: not needed to reach GHG target – is an EU industrial policy (to
start a “Green Industrial Revolution”) - by substituting local energy
production to energy imports
• 20% Energy Efficiency: not needed to reach GHG target – is a second EU
industrial policy (to start a “Green Industrial Revolution”) - by substituting
higher quality goods to energy consumption
www.florence-school.eu

12. Elec market interacts… … but
• BUT: RES target (= percentage of non polluting energy) and
Energy Efficiency target (= volume of energy consumed)
influence C02 emissions; hence the demand for C02 permits;
hence: C02 price is an end result of the 2 other targets and
not a key driver for GHG emission reduction
• RES target takes the lead: pushed by feed-in tariffs both wind
and sun tak off (Germany 2006 23GW / 2011 53 GW)
• In a depressing market: German wholesale price down from
75 Euro MWh in 2008 to 36 Euro 2013
• But RES paid outside the market: German RES surcharge
2014 (64Euro MWh) Total Year2006 4Bn Euro - Year2013
20Bn Euro
www.florence-school.eu

13. Elec interacts… … but(2)
• BUT ”scissors effect” for consumers: German wholesale price
2008-2013 (– 40 Euro) MWh and Retail price (+ 40 Euro) <<UK
retail price x3 in 10 years>>
• Plus “squeeze” for thermal plants : Germ. wholesale market
price 36Eur vs total cost Coal gen. 55Eur / Gas 70 Eur
• Economic alternative to RES & to Fossil Fuel? Nuclear? UK
government recent contract with EDF & Chinese at 108 Eur
MWh… (German wind onshore 80 Eur)
• A kind of deadlock?
www.florence-school.eu

14. Gas interacts… … but
• Can gas “cleans” the energy mix? Yes by replacing coal (x 2
times more polluting with > 0.8 ton CO2 MWh). Ex: in USA
GHG emissions at their lowest since… 1994.
• In EU however coal ousts gas: German coal near to record
50% elec generation this year
• Why so much coal in EU? German wholesale price 36Eur
Total cost Coal gen. 55Eur (Only coal + CO2 = 28Eur)
Total cost Gas gen. 70Eur (Only gas +CO2 = 51Eur)
• For gas to come back against coal: x2 price of coal or /2 price
of gas; or x8 price of C02 – not for very soon…
www.florence-school.eu

15. RES target dominates GHG target and internal
energy market?
• Yes GHG target bypassed by RES (> carbon price does not
lead EU decarbonization)
• Yes RES evicts gas by reducing net demand in EU wholesale
market… but not coal (US Coal expulsed by US shale gas price
is welcome by EU gas price)
• Yes RES & Retail charges might start pushing consumers to
become prosumers (Germany retail price 250 Eur MWh vs
France 140)
• …And quite high EU price level: EU wholesale price of gas = 3
times the USA; EU elec price for large industry 124$ MWh vs
US 72$
www.florence-school.eu

16. Do RES dominate Security of Supply?
• 1/ RES reduce our Long Term dependence to imported fossil
fuel / in 2012 = (-23%) gas imported
• 2/ However production of RES equipment is
internationalizing fast (China already 1st manufacturer world
wide)
• 3/ RES ask for a new European grid operation and planning –
while waiting this upgrade our short term security
(“reliability”) is today lower
• 5/ RES dries up market revenue for thermal plants: long term
threat of unsustainable capacity investment
• 6/ EU Utilities suffer 2008-12 return (-10%) every year
www.florence-school.eu

17. Thank you for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant
Read the Journal I am chief-editor of: EEEP
“Economics of Energy & Environmental Policy”
My web site: http://www.florence-school.eu
www.florence-school.eu
17