Merit-order effect . Decrease in revenue for CCGTs (€MW/month) . Utilisation rate for gas-fired power plants in Europe . Electricity market puzzle - Rise of renewables - Collaps of carbon prices - Cheap U.S. coal - Economic downturn (vs. optimistic expectations) = many of Europe´s conventional generation assets uneconomic = wasted investments (24 GW mothballed, 7 GW decomissioned) = generators needed to provide energy security (generation capacity adequacy + balancing and flexibility adequacy). Solution 1: Energy-only market • Generators paid solely on the basis of the volume of power that they produce • No remuneration for being available during peak hours when intermittent sources aren´t producing • Peak loading pricing theory = capacity adequacy is maintained because prices will rise if market players anticipate an impending shortage and invest accordingly • Political constraints • Boom and bust cycle • Limited ability of the system to store electricity, supply and demand uncertainty, inelastic demand, steepness of the supply curve = high price volatility when reserve margins are low Solution 2: Capacity mechanisms/payments Environmental dimension of the EEP Filip Černoch cernoch@mail.muni.cz Energy policy of the EU Environmental dimension of EEP • Energy sector (extraction, transport, processing and combustion) harms the environment significantly • Climate change (regional/global level) – measures to reduce GHG emissions • EU ETS, GHGs outside of the EU ETS • RES • Energy Efficiency • Research and development, new technologies (CCS) • Local environment protection – covered mainly by Environmental policy • Air, land and water pollution, noice, light pollution • Industrial (energy) waste • Protection of biodiversity • Extraction of non-conventional sources of energy Greenhouse gas effect Period between 1985 - 2000 New incentives for energy on the EC level • Weak competitiveness of European industry – first proposals to create the internal energy market. Competition and transparency instead of national monopolies and closed markets. • Climate change – tools to prevent impact of usage of energy on local and global level. (to reduce the amount of emissions produced in the EU) • Disintegration of Soviet block – proposals to manage relations between producents and consumers (EU MS) of energy Environmental dimension of EEP Two interlinked (but not identical) processes: • International regime of climate change mitigation (EU plays a significant role) • Independent climate policy of the EU (part of Energy policy) International climate regime • Intergovernmental Panel on Climate Change – 1988 • Rio Summit on Earth – 1992 (UN Conference on Environment and Development) → UNFCCC • Kyoto protocol • 1997, in force 2005 = Existence of a generally accepted consensus on the climate change as well as the contribution of human activities to this process Kyoto protocol • 4 GHG (carbon dioxide, methane, nitrous oxide, sulphur haxafluoride) + hydrofluorocarbons and pefluorocarbons • Annex I. parties (37 industrialized countries + EU15), Non-annex I. parties • Reducing of GHG emissions by 5,2 % for the period of 2008-2012. (4,2 % after USA left). Base year 1990 • Flexible mechanisms – Emission trading, CDM, JI • Art. 4 – burden sharing agreement of European Community • Common but differenciated responsibility 17 EU and climate change • Environmental awareness • Preemptive environmental measures • Common market • Raison d'être 130r (TEU) „…Community policy on the environment…shall be based on the precautionary principle and on the principles that preventive action should be taken, that environmental damage should as a priority be rectified as source and that the polluter should pay“ EU and climate change: carbon tax Emission trading • EU firstly sceptical about international emission trading • See it morally wrong – trading authorizes pollution, turning it into commodity to be bought and sold • Questionable with regard to equity – that the richer industrialized countries can buy their way out of their obligations instead of lowering their disproportionate consumption of scarce sources • But – change in the possition of the U.S. placed the EU in the forefront of the climate change movement EU and climate change: emission trading ET: Central authority … sets a limit …on the amount of pollutant to be emitted … the cap is sold/allocated …. as permits ….companies are required to hold those permits …if they need to increase this volume…have to buy those premits = the buyer is paying a charge for polution = he is motivated to invest in less-poluting technologies How the system works? • It creates a dynamic monetary incentive so companies can sell their allowances to other producers and make profit • This incentives are based on real needs (scarcity) of allowances and on adequate monitoring and enforcement • This system (at least in theory) offer certainity of emission reduction corresponding to the stringency of the cap • Unlike domestic schemes effective international systems are more difficult to establish • Even a well-designed system is not to work if it is not implemented correctly by the participants in the system (MS) Sources • Linklaters (2014): Capacity mechanisms. Reigniting Europe´s energy markets. Generation adequacy • Aging generation fleet (20% of coal and oil-fired plants constructed 40-50 years ago. Almost half nuclear capacities run 30-40 years) • During 2016-2025 thermal installed capacity of around 150GW is expected to retire • IEA concludes that „…generation adequacy at the EU-wide system level can be met in most situations but adequacy margins are considerably decreasing until 2025“ Generation adequacy Capacity mechanisms = capacity remuneration • To solve problem of weaken investment incentives • But they replace market-driven investment with central planning – considerable regulatory risk and cost for investors and consumers Sources • IEA (2014): Energy Policies of IEA Countries – The European Union.