Explanatory Memorandum to COM(2003)740 - Measures to safeguard security of electricity supply and infrastructure investment - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2003)740 - Measures to safeguard security of electricity supply and infrastructure investment. |
|---|---|
| source | COM(2003)740  |
| date | 10-12-2003 |
The European Union is in the process of creating the largest competitive market for electricity and gas in the world. This integration of energy markets will both lead to greater efficiency and contribute to security of supply. The internal market forms a key part of the Community strategy on security of supply, as discussed in the Green Paper 'Towards a European strategy for security of energy supply', COM(2000) 769. In order to do this, however, it is important that the correct incentives are in place on market participants and that a stable framework exists. This applies to generators, network operators and consumers. This Directive seeks to ensure that a stable framework exists.
A truly functioning, integrated electricity market requires significant investment in transmission networks., Interconnections between Member States are a particular priority in order to allow for a higher level of competition between existing companies. Without additional interconnectors, the principles of market opening may become meaningless as companies consolidate their position in particular regions of the European Union and the market becomes segmented. This was recognised in the conclusions of the Barcelona summit in March 2002 where, in response to the Commission's Communication on European Energy Infrastructure, COM(2001) 775, Heads of State and Governments endorsed the idea of a target for electricity interconnection equivalent to 10% of installed generation capacity. Investment in transmission networks is also needed to ensure that the network can cope with additional demand without European citizens and businesses falling victim to frequent interruptions in supply or blackouts. Although no system can be 100% reliable, the expectations of electricity consumers are that such incidents are minimised as far as possible.
Finally, a large proportion of new generation investment is expected to come from generation based on renewable energy sources and distributed generation based on CHP. This in turn requires new investment to allow electricity networks to be reconfigured. The spread of, for example, offshore wind generation will require new interconnections and reinforcement of the network to be made at various locations. Distributed generation will require the low voltage networks to be upgraded.
The internal market also needs to ensure that a balance between supply and demand is maintained. Current trends, whereby electricity consumption in the enlarged EU continues to grow unsustainably are unacceptable and a significant effort is required to deliver energy savings. However, the expected closure of a significant proportion of existing plant also means some investment in new generation is likely in the medium term. However both demand management and generation capacity require investment and any business or household making such investments need to know that a stable regulatory framework exists as to how electricity prices will be determined.
In this context, it is important to remember that electricity is unlike any other products. It has no real substitutes and cannot be stored. Furthermore, network security has some characteristics of a public good since failures in the supply of electricity tend to have a general effect on all consumers. There is therefore an ongoing need, now that the competitive market will soon be in place, to provide the correct framework for long term investment in the electricity sector both on the demand and the supply side in the EU.
Contents
The network has to be operated at all times within acceptable frequency, voltage and current limits. Due to the physical nature of electricity and the constantly changing pattern of production and consumption, it is very difficult to predict accurately the amount of flows at any given point in the network. Control of these critical energy infrastructures is, in turn, highly dependent on the security and reliability of the monitoring and controlling ICT infrastructures.
To deal with this uncertainty, network operators adopt rules to ensure that the network has enough spare capacity so that the grid can be operated safely in a variety of extreme circumstances. This affects, for example, how much capacity between one control area and another can be safely used.
Electricity network systems are made of a huge number of components. The system is designed to resist reasonably probable faults in the system. The general standard used for the operation of the electricity of the network is the so-called 'n-1' rule. This states that the network should continue to function in the event that any one individual failure has occurred in a specific part of the network. Not all contingencies are covered, since the costs associated in dealing with all possible events would be prohibitive.
These rules, as well as other requirements on information provision and scheduling timetables, are currently dealt with through voluntary guidelines between the Members of TSO organisations for example UCTE and Nordel. UCTE are currently preparing an update of their operational handbook which they intend to make contractually binding on their Members. There is also the possible scope for incorporating further technical rules into guidelines that will be agreed under the Regulation on Cross Border electricity exchanges.
As well as the operational rules discussed above, there is also scope for regulators to set performance targets on both transmission and distribution system operators. Such targets will encourage the companies concerned to continue to maintain the network and not to cut corners in on operation. Of course the actual level of targets should be set at the discretion of Member States. Specifically, regulatory authorities are expected to establish such targets as part of the process of approving the methodology for setting network access charges. Article 4, therefore gives Member States the duty to ensure that transmission and distribution companies comply with co-operation such as the UCTE initiative.
As already established in the Commission's Green Paper on Security of Supply i, this issue is also an ongoing concern for the EU. In spite of the fact that the demand of energy has been decoupled from the economic growth, energy demand is still expected to grow in the coming years.
Current trends however are unacceptable and, in this regard, the first priority for Member States should be to ensure that policies are in place to control growth in demand. Such an approach is cheaper, works faster and is in line with the commitments of the European Union relating to emissions of greenhouse gases. Demand management must, therefore, be at the centre of any Member State's policy to maintain security of supply. A policy of projecting demand on the assumption of 'business as usual' and then using this as a basis for forecast the additional generation requirement is not a policy that is sustainable, either at national or Community level.
However, at the same time, a large number of power stations are due for closure over the next few years and some new investment in generation plant is likely to be required, if only to renew some of the existing stock . Must of the new generation plant to be constructed is expected to be renewable capacity or distributed generation based on CHP plant. The Renewables Directive i sets specific targets for Member States to increase the share of renewable generation. Similar measures for CHP generation are already being discussed at Council. The question is, therefore, whether any other measures are necessary in this context.
One of the favourable consequences of a competitive market is that it removes the inherent tendency to over-investment in generation capacity that is characteristic of a centralised planned electricity industry. This is particularly true where demand can be made more responsive to prices. Competition, however, also makes the maintenance of the balance between supply and demand more delicate.
In a liberalised market, as with other products, private investors are expected to ensure that sufficient capacity is available to meet demand. In general terms, the price mechanism is the way that this is expected to be achieved in the competitive market. As prices rise investment will become viable and either more capacity will come on stream, or demand will be constrained. In order for this mechanism to work properly, investors need to be certain about the scope for government intervention in the electricity market. If not, regulatory uncertainty may prevent investments taking place whether this is in generation capacity or demand management technology. A second issue however, is whether investors are prepared to invest in peaking capacity to cover the very highest periods of demand or incidents where a large proportion of other generation is not available. Some believe such investment will not occur because such events are infrequent and their occurrence is unpredictable. Accordingly there may be a case for governments to provide further measures, in addition to market mechanisms, to ensure adequate capacity is available. This may be achieved through a combination of setting targets for the level of reserve capacity or equivalent measures, for instance on the demand side, and by taking measures to ensure these targets are met, either through incentives or obligations on electricity undertakings. This issue is covered in Article 5 of the proposed Directive.
In a number of cases, the security of supply issue goes beyond national borders and requires careful co-ordination between the Member States concerned. Other than particular emergencies, the single market needs to function at all times. This means that firm capacity made available between Member States should never be interrupted for reasons other than 'force majeur'. For example, Member States should not be permitted to interrupt cross border flows due to trends in local wholesale prices. At the same time, however, Member States should exercise a degree of caution when evaluating the extent to which imported energy will be available at times of peak demand and they should take into account the development of the reserve capacity position in other Member States, especially those on whom it is expecting to rely on for imported energy.
A second consideration is that Member States need to adopt policies relating to security of supply which are reasonably consistent with each other. Reserve capacity can add significantly to the overall costs of electricity supply. There may therefore be a temptation for one Member State to adopt a very low target for reserve capacity and 'free-ride' from other countries with a more cautious approach. Similarly, any mechanisms used to support generation should be reasonably consistent to avoid distorting the electricity market.
Without new investment in interconnection between Member States, the internal market will not function properly and both security of supply and the efficiency of the industry will be affected. New infrastructure is increasingly important as the industry undergoes consolidation, particularly if concentration is high at Member States level. Increased interconnection also allows for the possibility of Member States to share reserve capacity since it is unlikely that peak levels of demand will occur at the same time in more than one Member State. This will improve the level of security of supply and potentially lead to reduced costs. However the main argument in favour of new interconnection is the need to complete the internal market and allow for greater competition.
Investors, in order to have the confidence to build new infrastructure, need to be faced with a clear regulatory regime. Therefore, although it is primarily the role of TSOs to put forward infrastructure projects, it is clear that the regulatory authority also needs to be involved in the planning process given that these authorities will have a clear jurisdication over the tariffs that network operators can charge. Likewise, regulators in neighbouring Member States need also to co-operate when deciding which investments should be approved.
National regulators need to ensure that TSOs are adequately rewarded for the investments that are made. The return on capital on new investments should at least be equal to the cost of capital of the company concerned, taking into account its financial structure. In some cases, a higher return for new infrastructure could be contemplated.
In the event that, for whatever reason, the TSO fails to make sufficiently rapid progress on important infrastructure projects, then the regulatory authority should have certain rights to ensure that work takes place. In the extreme, the regulatory authority should have the right to arrange for the work to be carried out by another party, and for the costs to be borne by the TSO. Article 6 of the proposed Directive sets out this process.
Investment in adequate transmission capacity is crucial for the future security and sustainability of electricity provision in the EU. New interconnections within Europe are also needed to foster competition, particularly where existing companies have a dominant position. Without such investments Member States may be inclined to take more interventionist measures such as divestment or capacity release. It is important, therefore, that decisions on investments are made, and this requires Member States to face up to the issues concerned rather than continuously postpone important investment decisions.
Action is also necessary on the issue of maintaining the balance between demand and supply. The first priority here is the need for the unacceptable trends in energy consumption to be constrained. Where new generation investment is necessary this should, to a large extent, come from renewables and co-generation facilities. However developers of such technologies, as well as any other investors in the sector, need to have a stable framework. Member States must therefore have a clearly defined approach to the supply demand issue which is published in advance and constant. If not, the position will continue to deteriorate and governments may be tempted by other interventionist measures, incompatible with competition with an undue bias in favour of increased generation capacity.
The attached draft Directive therefore proposes that Member States must adopt a stable regulatory framework in support of the necessary investment and that this should be reasonably consistent between Member States, while also respecting the need for subsidiarity.