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Europe's 70% rule may not come cheap

PowerPolicy

04 Nov 2020 07:56

Foto: Lisa S,Shutterstock.com

Foto: Lisa S,Shutterstock.com

Bonn

04 Nov 2020 07:56

(Montel) A European Commission goal to make 70% of countries’ cross-border transmission capacity available for trade with neighbours by 2025 may raise overall costs of electricity for the public, various observers told Montel.

The target, part of the EU’s so-called clean energy package, aims to better integrate European electricity markets, ensuring Europeans can access the cheapest sources of power across the bloc.

Some countries – like the EU’s biggest power market, Germany – have made less than 20% of their potential transmission capacity available to neighbours in recent years.

Yet forcing grid operators to make more capacity available is not without its costs – and the cure may be worse than the disease, according to critics like Gerard Doorman, a former professor of electric power engineering at Norway’s University of Science and Technology (NTNU).

“There are real physical constraints,” Doorman told Montel. “There is probably room for improvement, but in many places not anywhere close to 70% with the grid we have today.”

More congestion
An upcoming paper, presently under review, found the rule would likely raise the overall cost to the energy system in central western Europe by more than 6% relative to prevailing conditions. 

“In our analysis, we see the additional costs for remedial actions outweigh the savings through market coupling,” said lead author David Schoenheit, chair of energy economics at Dresden University of Technology. 

According to his study, compelling network operators to make more of their interconnections available to the market would widen a mismatch between the forecast use of a power line and its actual use.

“And that leads to greater congestion management volumes,” Schoenheit said. 

In Germany, the cost of dealing with congested power lines reached EUR 1.2bn last year – around double where it stood in 2016. It has surged in recent years due largely to the country’s more rapid expansion of renewable energy than the networks to transmit it.

These costs are borne by power consumers via taxes on their electricity bills. 

They stem from the compensation grid operators need to pay power producers when they order them to ramp up a power plant – also known as redispatch – or curtail a wind turbine’s output to relieve stress to the grid.

Big stick approach
However, the risk that the 70% rule could inflate the cost of congestion further is likely a feature, rather than a bug, according to some observers.

“It is a stick that might push [countries] towards something where, in the end…everybody will be better off,” said Tim Schittekatte, a research associate with the Florence School of Regulation. 

“But the transition will be costly – because if countries don’t want to change their bidding zones, they will have a lot of redispatch.”

One way countries could alleviate congestion would be to split their price zones, which historically follow national borders, along lines that better reflect network constraints. Scandinavian countries have pioneered this route.  

In Germany, this would likely produce a northern, cheaper price zone dominated by wind energy and a southern more expensive zone dominated by industrial demand.
  
So far Berlin has resisted pressure from neighbours and the European Commission to split its market this way, allowing only a split of its former single price zone with Austria in 2018.   

It is wary of raising electricity costs for its southern industry and argues the liquidity that comes with bigger price zones is something that should be cherished, not squandered – a view shared by the European Federation of Energy Traders.

Instead, Germany aims to solve its congestion problems through faster network expansion. 

Energy economist David Schoenheit said more networks would alleviate the added costs identified in his team’s paper.

However, if network expansion remains sluggish, the 70% rule will likely compound congestion costs – and that is without taking into account potential incentives among power producers to aggravate congestion in order to cash in on remedial measures, said Schittekatte.

“It is maybe an expensive way to get where I think we should go,” said Schittekatte. “But it is probably the only way.”

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