European market development
Development of the European electricity market
The weak economic situation, mild weather and better energy efficiency contributed to decreased electricity demand in several European countries. The demand decreased by 2% in the Nordic countries. However, due to growth in electricity exports, Nordic electricity production was 1% higher than in 2013. Economic development in Estonia, Lithuania
and Poland was better than in the Nordic countries, and the demand for electricity was up.
The share of renewable energy in Europe’s electricity production continued to grow, and subsidy mechanisms in many countries were developed to be more market-driven. With the exception of the joint certificate system of Sweden and Norway, subsidy mechanisms are still based on national, divergent solutions. New renewable electricity production forms are gradually becoming commercially profitable, which will boost their share in electricity production. At the same time it is possible to give up separate subsidies for renewable energy, particularly if the price for carbon emissions rises.
According to the Commission’s January 2014 report on energy prices and costs, the difference between wholesale and retail prices will grow even further. In recent years, energy retail prices have increased significantly in the EU. The reasons for this include various taxes, fees and subsidies. At the same time, wholesale prices for electricity have decreased, and wholesale prices for gas have remained unchanged. Prices also vary substantially among
EU countries: some consumers pay as much as several times more for energy than other.
At the beginning of 2014, Finnish retail markets were the first in the world to start using smart meters to measure and bill hourly electricity consumption. If consumption-measuring smart meters and the related services become more common on a European level, customers can optimise their electricity use.
Aiming for an integrated market
Significant progress was made in the integration of the European electricity market in early 2014 when Western Europe’s electricity exchanges adopted a price coupling algorithm in spot trading. The goal is also to approve common network codes that are under review during 2015. Implementation of the REMIT initiative increasing energy market transparency continued (Regulation (EU) No. 1227/2011 of the European Parliament and of the Council on
wholesale energy market integrity and transparency). In terms of the EMIR initiative related to electricity price hedging products, market players continued discussions on allowing the use of bank guarantees also after the transition period ending 2016 (Regulation (EU) No. 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories). This would enable price hedging with financial products cost-efficiently also in the future.
In autumn 2014 the European Commission published a communication on internal energy markets. The communication highlighted the favourable development of market integration and the need to increase grid investments, develop retail markets, continue regional collaboration and limit government regulation.
Despite the goals related to the common market principles, preparation of national capacity remuneration mechanisms
(CRM) continued in a few EU countries. The first capacity auction was held in Great Britain in December, securing power plant capacity availability for winter 2018-2019. Great Britain’s government also promised a guaranteed price for the electricity produced by the new nuclear power plant project. The government in Germany published a green paper on market development alternatives; it proposes either the development of the current energy-based trade or the adoption of capacity markets. Proposals for the capacity mechanism’s target model are expected from the Commission by mid-2015.
Market price development
There was a clear drop in the global market prices of fuels in 2014. The price of carbon allowances in the EU emissions trading scheme increased somewhat and was 7.3 euros/tonne at the end of the year.
The mild winter and low fuel prices contributed to the decrease in the price of electricity in the Nordic market from
2013. The year’s average system price was 29.6 (2013: 38.1) euros/MWh. The average area price was 36.0 (2013: 41.2) euros/MWh in Finland and 31.6 (2013: 39.4) euros/MWh in Sweden in the SE3 area (Stockholm).
The average spot price in Germany was 32.8 (2013: 37.8) euros/MWh. The average spot price in Poland increased to 43.1 (2013: 36.7) euros/MWh.
The flat electricity price level does not encourage investments in new production capacity. In fact, the majority of new investments in many countries are based on subsidies.
Electricity transmission connections
In October 2014 the EU Summit emphasised the importance of new electricity transmission connections and set a goal to increase each EU country’s cross-border transmission capacity to at least 15% of power plant capacity by 2030.
According to the TYNDP 2014 grid plan published by the European Network of Transmission System Operators for Electricity (ENTSO-E), European cross-border transmission capacity must be doubled by 2030. This requires investments of EUR 150 billion at the EU level to promote the optimisation of electricity production, the reduction of emissions, and an increase in the share of renewable energy.
Upon realisation of current projects, the transmission capacity between the Nordic countries and the rest of Europe will double already by 2020. New connections are planned also for the next decade. This enables the use of Nordic hydropower to cover fluctuations in Europe’s wind and solar power production. Respectively, electricity can be imported to the Nordic countries in years with low precipitation and in cold winters.
The transmission capacity between Finland and Sweden has been almost in full use. The Finnish electricity network also serves transmission from Sweden to the Baltic countries
and, starting in 2016, further from the Baltic countries to Poland, so more transmission capacity from Sweden to Finland is needed. Construction of a new interconnection planned between northern Sweden and northern Finland should be started as soon as possible. This would enable power transits through the Finnish network also to southern Sweden when Sweden’s internal network is in full use.
Energy market models
Current market model
- Wholesale prices are determined in the power exchange, but cross-border transmission links are inadequate
- Intra-day and operational hour trading is not functional at all borders
- Renewable energy is subsidised with various country-specific mechanisms
- Hourly energy consumption metering or alternative products are not available to electricity users in many countries
- Electricity producers are paid for power plant capacity and for the produced energy
- Strong, country-specific regulation and overall costs may increase
- Weakened position of power exchange trading
- Electricity trading between countries may become more difficult
- Fossil electricity production may benefit, but renewables and demand flexibility may suffer
Advanced energy markets
- Pan-European markets
- Renewable energy growth is based on steering from emissions trading
- Building interconnectors reduces price differences and increases security of electricity supply
- Grid companies are responsible for operational hour’s balancing reserve capacity
- Abundant array of flexible products and services available to electricity users
Nordic electricity market structure
Development of Europe’s heat markets
Implementation of the Energy Efficiency Directive continued in 2014. The updated national regulations of the EU member states are expected to take effect mostly in 2015. The directive aims, among other things, to increase the share of energy-efficient district heating and cooling and the share of combined heat and power production (CHP) in energy production as part of the energy-efficiency and climate targets. The directive requires member states to submit to the Commission by the end of 2015 an estimate on the development potential of district heat, CHP, and industrial waste heat up to 2030.
At the EU level, consideration is also being given to whether the heat markets need stronger EU guidance and target-setting; they do, in fact, account for over half of the EU’s energy consumption.
Two-way, open district heat networks are quickly developing and give companies and consumers an opportunity to sell the surplus heat to the network. Utilising waste heat reduces energy costs and the carbon footprint.
Mainly due to national legislation, markets and energy company operations can be impacted in a very country-specific manner through legislation. National legislation proposals related to district heat advanced quite slowly in 2014. Ratification of Poland’s legislation regarding renewable energy forms and the draft of Estonia’s district heating act are expected in 2015.