European workshop on drifting apart? costs, prices and tariffs in eu electricity markets

Abstract

Summary
The costs of generating electricity in Europe are increasingly de-correlated from wholesale prices in European power markets. The costs of thermal generation are stable or increasing and while d renewable technologies have seen some decline in their capital costs they are still not cost competitive. However due to massive subsidisation mainly in the form of feed-in tariffs, wind and solar PV now provide increasing amounts of electricity, which due to their low marginal costs exerts downward pressure on prices in electricity wholesale markets. Average prices in the Franco-German EPEX Spot day-ahead market are now 50 % below their level in 2008. This has serious impacts on investment, security of supply and plant availability. During the past two years, around 30 GW of gas-fired generation capacity have shut down as wholesale prices no longer cover fixed operating costs, let alone financing charges.
Electricity retail prices which include the cost of electricity production, the added costs for RES-E support as well as the costs for new investments in transportation and distribution grids, have the increasingly difficult task to provide electricity companies with the revenues they need while remaining at socially and politically sustainable levels. In general, retail tariffs are today significantly above wholesale market prices but significantly below the full costs of electricity generation. This is the result of a distorted wholesale market as well as of politics, as several European countries, including France, have maintained regulated tariffs below costs for political reasons. Facts, however, are tenacious. One can hide rising costs only for so long. Either generators revenues will have to rise or European electricity systems will have to learn to live with permanently lower levels of investment and hence decreased security of supply. The situation is further complicated by a number of factors:

• Long lead-times for investment and the long lifetimes of generation equipment make cost accounting difficult. So investment short-falls resulting from too low wholesale prices may display their full effects only with a lag of several years.

• The subsidised costs of renewable energy do not show up in wholesale prices but are borne by certain customer groups through an out-of-market levy. This can cause important distributional effects between different industries and households.

• The intermittency of wind and solar PV causes a number of additional costs at the system level for investment in distribution, transport, and new back-up equipment as well as for balancing in the operation of the system. These costs are currently borne by TSOs, DSOs and consumers, but not by the producers of variable electricity who generate them.

• Current carbon prices do not promote investment in low carbon equipment. Currently, the only manner to trigger investment in capital-intensive low-carbon technologies is through feed-in tariffs or long term contracts such as the proposed CfDs in the UK electricity market. This further weakens the price signal of wholesale market for adequate levels of capacity.

In this situation, the Chaire European Electricity Markets (CEEM) is organising an international workshop on the costs, wholesale prices and retail tariffs for electricity. It will bring together experts from academe, industry, regulators and international organisations to discuss the potential dangers of the current disconnect between energy prices, operators’ revenues and costs as well as some possible solutions, which include capacity remuneration mechanisms (CRM) to complement the revenues of generators and ensure security of supply.