The EU's Power Provisions: Is Texas a Reliable Indicator?

What does the 21st century power market look like? That is the question the European Union (EU) is attempting to answer with the new electricity regulation and revised electricity directive passed at the end of December (although not due for implementation by EU member states until June 2021). In short, the new market design is an attempt to encourage greater integration of renewable energy sources and enable greater electrification of transport, heating, and industry, while protecting consumers from price spikes and supply shortages.

Whether the EU will achieve all its goals is not yet clear. The official view is that decarbonization of the power sector requires a well-functioning internal market. However, energy policy inevitably touches upon political, economic, and societal concerns. Analysts, politicians, economists, operators, and academics have all weighed in, and there are as many opinions as there are players.

Lessons from ERCOT

While uncertainty will affect the EU market players, other deregulation experiments like ERCOT in Texas offer valuable insights to help them prepare. Similar to the EU’s directives, ERCOT is the result of thousands of working hours spent on careful planning and market design. ERCOT is an energy-only market (EoM) that relies on wholesale energy price signals and market demand to maintain supply, rather than strategic reserves or other capacity mechanisms. This is the same type of market the EU plans to adopt in 2021.

Approximately 85% of Texans can now choose their electricity provider in a competitive market. However, because regulated markets remain in San Antonio, Austin, San Marcos, and El Paso, there is a valid dataset to compare the deregulated and regulated markets.

That comparison shows that Texans in deregulated markets still pay more than those in the remaining regulated market areas—but both parties pay less than the U.S. national average. Recently the price gap between the Texas deregulated and regulated markets lessened, providing encouragement to the region’s regulators and consumers.

As to decarbonization, Texas certainly supports the EU’s confidence in an EoM. The proportion of renewable energy in the Texas energy mix grew from 1% to 8.5% between 2002 and 2011. Wind power increased tenfold and experts have suggested the EoM’s uniform, fair-price signal was a key factor in the wind power increase.

Nonetheless, Texas experienced brownouts in 2011, 2014, and 2015. Rolling blackouts in 2011 even led to the import of power from Mexico. And this is where the comparisons between Texas and the EU diverge. The EU’s goal is an energy union between (currently) 28 member states, making cross-border trade a benefit, not a bug. It is also seen as the principal mechanism for increasing renewable penetration across the entire region, not just in the member states.

Getting to an Energy-only Market

The energy union is an ambitious goal by any measure. The 28 member states bring different histories, cultural norms, economic expectations, and diverse energy systems to the table. The eventual goal is to create a competitive market in which price signals dictate where energy flows, but navigating conflicting political realities often requires compromise.

The debates about capacity mechanisms are the most obvious example. The technocrats of the European Commission are keen to eradicate capacity markets—and maintain a “pure” EoM. However, member state governments, mindful of their febrile electorates, are much less eager to rely solely on the market to keep the lights on.

To date, a substantial excess supply in Europe—often created by those very capacity mechanisms the EU wants to eradicate—means that the political and social acceptability of real wholesale price volatility remains untested. At least in the short term, the new market design may require support from capacity markets. The EU’s regulations state that a capacity market will only be justified if a member state can demonstrate a clear need for the necessary investment, which cannot be supported by the market. The member state must also detail a realistic exit strategy and program of market reform.

It’s far less clear what should happen to existing schemes, which are diverse and allow for various levels of cross-border participation. Moreover, plenty believe that the EU should have dispensed with capacity markets in a single sweep because they inevitably undermine the market-driven mechanisms for cross-border trade. Critics point to the Nordic region, which, in microcosm, has achieved what the EU ostensibly wants.

But despite all this, one thing is clear. The EU may be taking an incremental approach but its path is set: more markets, more deregulation, more price volatility, more participants, and more operating risks for all players. At this point in the EU’s deregulation history, a commodity trading and risk management system coupled with advanced energy analytics is the minimum requirement for market players.

The EU power market, in all its complexity, diversity, and ambition, is not an arena for the unwary or the poorly informed. Anyone buying, selling, or consuming power in the 21st century market needs to be tooled up. ■

Martin Steeger is the product manager for Europe, Middle East, and Africa power with Allegro Development.

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