EU Pivots Away From Distorted Energy Markets Toward Gas

The European Union seeks to tackle energy market distortions with policies that will eliminate coal and favor natural gas-fired and renewable power while reducing the cost of lowering emissions.

The European Commission plan to limit the use of high-emissions generation to secure supply will hurt coal plants starting in 2020, but not modern gas units, according to the Oxford Institute for Energy Studies. Gas may displace biomass, which will lose its priority dispatch status for new projects. That mechanism, which also applies to solar and wind, is the biggest distortion to day-ahead power markets, according to an EU assessment published last month.

Addressing criticism made this year by utilities including Enel SpA and Acciona SA that its system is too complex, the region is seeking to scale back renewable subsidies and grid-balancing payments while letting power prices surge when there are shortages. The risk is that emissions may rise at times, with one scenario showing an 11 percent jump in 2030 versus the base case.

“There’s a path and it’s somewhat clear,” said Bruno Brunetti, senior director of electricity at Pira Energy. “It’s too early to say it completely simplifies the picture and creates a more stable framework, but I’m impressed by how the commission plans to use market forces to drive renewables and natural gas into the system, while removing coal.”

The plan is another policy instrument to boost the region’s emissions market. Last week, the region began making progress in bolstering carbon prices after the EU parliament’s environment panel agreed to remove supply from the market at a faster pace than proposed. The commission’s modeling shows carbon prices of about 30 euros ($31) a metric ton by 2030, more than six times current levels.

That will increase usage of natural gas in power plants, which requires about half the allowances versus coal. Removing the priority dispatch for renewables is also good news for gas, potentially boosting use of combined-cycle gas plants in 2030 by 25 percent versus a base case, according to the commission’s assessment, which sees wholesale supply costs dropping by about 50 billion euros under its “improved energy market” model. 

Priority Redundant

“We need to progressively submit wind and solar producers to the same market rules and obligations as conventional players in the future market design,” said Anna-Kaisa Itkonen, a spokeswoman for the European Commission in Brussels, said. “Priority dispatch is not really needed and does not make much sense in this new world.”

Gas’s share in power generation will be fairly stable near its current rate of 13 percent through 2030 and rise after that.

New biomass plants may be financially unattractive versus gas as subsidies wane and priority dispatch is lost, said Trevor Sikorski, an analyst in London for Energy Aspects Ltd. “They’ll struggle in a competitive landscape,” he said.

The commission’s inclusion at the “last minute” of a measure to limit emissions for back-up plants shows the regulator believes it has clout to boost competition while ensuring secure supply, David Buchan and Malcolm Keay of the Oxford Institute, said in a report.

The policy will probably hurt companies which bought coal plants to provide that so-called capacity market service, while favoring gas, according to Brunetti.

“This would be a major regulatory setback for a number of coal units that have seen these capacity payments as a lifeline,” he said.

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