Identification pin : Energy regulation : a bridge to 2025 Answers of GDF SUEZ on the ACER preconsultation

Transcription

1 Energy regulation : a bridge to 2025 Answers of GDF SUEZ on the ACER preconsultation

2 Overarching paper Context Question 1 : Do you agree with this overall approach? Would your emphasis be any different? Regarding ACER general approach we would like to highlight some issues : European electricity and gas market designs need to ensure viability for operators and investors, integrate the recent changes in the energy system and ensure secure electricity and gas supplies at all times. This approach should clarify the existing European legislation and propose only new elements that help to design a truly European competitive, single and integrated energy market with sufficient commercial freedom for its participants. The Third Package has to be fully implemented in order to protect the developing Internal Energy Market. The aim is to fight against tendencies to re-nationalise energy policy and trade, to ensure that cost and economically efficient interconnections are developed, and that Member states comply with the Energy market rules both at wholesale and retail levels. The network codes represent a dynamic framework which may be subject to changes. We agree with it but the implementation of network codes is a difficult task for TSOs and represents huge costs for both TSOs and suppliers. Consequently it must not be changed too often. We agree we need a European market design that should be prepared robust for further predictable developments. Some developments could be made now but unfortunately the essential decisions are lacking (e.g. regarding ETS) and even if some decisions seem to be made, in practice there is a lack of progress (cross-border and intra-day in the electricity market as an example, no ambitious move towards integrated electric balancing markets, ) while they are essential to integrate massive amounts of RES (already today) in the markets. The pillars of the energy policy are clear (competitiveness, sustainability, security of supply), however the objectives are not set equally and influence each other. Moreover, the targets relating to the sustainability pillar (CO2 target, RES target and Energy Efficiency targets) are affecting each other. It is predictable that more RES will have an investment cost that has to be paid by society (the customers that are strongly in the focus of ACER/CEER), while it will push out of the market the plants at the end of the merit order, creating problems for security of supply ( SOS ) and system stability. Additional investments to be made by TSOs and DSOs will be needed to transport and better integrate the RES in order to cope with the SOS. If these investments are realized subject to a positive outlook for gas on the long term, and an appropriate regulatory framework - this would add more fixed costs to the grid users. It is

3 thus predictable that we could go for more fixed (capital) costs in the system and less variable costs. The Foundations of the policy to Bridge to 2025 Question 2 : Do you agree with this broad analysis and/or do you have further suggestions? GDF SUEZ is convinced that gas has a key role to play now and in the future. There are many reasons for which gas and gas infrastructure are key for a competitive low carbon economy (for more details refer to answer to question G1) : They secure electricity supply. They enable gaseous renewable energy sources. They enable innovative technologies at the cross-roads between the electricity and gas markets. They contribute to the decarbonisation of transport. But, for this to happen, it is essential that EU officials confirm the key role of gas now, but also in the medium and long term, that is to say until If investors do not have confidence in the long term role of gas, the infrastructure operators will not invest, there will be no innovation, and the positive contribution described above will not materialize. Indeed, gas fired power plants are ones of the most flexible tools to cope with the intermittency production of RES. Furthermore, new usage for gas like in transportation (LNG or Compressed Natural Gas CNG for vehicles) could compensate a stagnation in the demand of households due to energy efficiency (e.g. insulation, ). The European Commission is developing a 2030 framework for EU climate change and energy policies which should provide more certainty to investors, stimulate innovation and demand for lowcarbon technologies. The environmental targets which may be defined in this 2030 framework may have a great impact on gas uses and consumption. We fully support that the process of electricity market integration towards the defined target models for day ahead, intraday and balancing should be continued, and even accelerated. However, it is important to realize that the benefits of integration have their limits, mainly set by the difference between marginal cost levels and by the the cross-border capacities. We agree that flexibility has to be further fostered by demand side participation with the help of smart meters, new market actors (aggregators for electricity), but this has also some volume limits and it has substantial costs and needs time to be developed (e.g. smart meters, adding storage tools (cold, heat) to customers, adapting their processes, customer behavior, ). Regarding power, one should ensure the availability of flexible power plants in the market to keep sufficient resources available for providing the flexibility, reactive power, grid stability and black start services. Moreover, reliable power plants are also needed to backup intermittent sources when they are not available : in our opinion, the first concern is to have plants (i.e. the capacity ) available, the second concern is to dispatch them optimally together and in competition with all other flex sources (including demand further facilitated by new market actors like aggregators) to keep the system in balance.

4 A bridge to 2025 Question 3 : Do you think the list of suggested measures is complete or do you have further suggestions? Do you think that the requirements for infrastructure investment in gas are the same as in electricity? What further ideas do you have on the future role of consumers? The requirements for infrastructure investments in gas are different than in electricity although some issues are the same. On one hand most gas consumed in EU is imported from distant countries which is not the case in electricity which is locally produced. Investments in gas pipelines to transport it to European customers need huge expenditures to be paid upfront; investors hence require guarantees via long term bookings from suppliers. On the other hand both energies need interconnections in order to have a liquid market between hubs. But in both energies investors need to have a stable regulatory framework and a fair remuneration of their assets. Regarding gas they need positive signals for the long term role of gas, otherwise investments in gas infrastructures will be hampered. Regarding retail markets GDF SUEZ considers that once the network codes will be in place competition in retail sales will further develop accordingly. Enhanced competition is already effective in the most advanced markets. Regarding the retail market and distribution GDF SUEZ considers that no more regulation should be added. It would lead to an increase of the costs and finally of the energy bill for the final consumer. As explained in the document smarter demand side and smarter grids have in the future a great potential to make final customers more proactive about their energy consumption. At last, we consider that the ACER paper on the consumers and distribution network relates more to electricity than gas. The roles of electricity and gas DSOs are not the same, this is the reason why GDF SUEZ has the following specific comments for each energy. As regards electricity : With regard to the recommendation bullets in section 3.1: We agree with the different bullets, in particular we believe that CRM can be designed to be fully market based in order to avoid cross-border competition distortion. With regard to the recommendation bullets in section 3.2 : We agree with ACER s statement that transmission charging arrangements have to reflect new network usage arrangements, but at the same level, if transmission charging arrangements might be subject to review, also market contracts might need to be reviewed if the cost structure of the market is profoundly changing (i.e. from a high variable cost driven generation park to a much more fixed cost driven generation park). With regard to the section 3.3 Complementary to the view expressed by ACER, GDF SUEZ would like to stress that the role of DSO should remain a network operator role, a DSO should facilitate the smart grid and its functioning, and a DSO should remain a neutral actor when it comes to market operation without any commercial activities: flexibility offers should be offered to the DSO by local

5 generation, by local customers, directly or via aggregators or via their Balancing Responsible Party ( BRP )/ suppliers, and DSO should compare the cost of this offered flexibility with other solutions to manage the distribution grid. DSOs or TSOs should not oblige grid users to supply them ancillary services at regulated prices or should not themselves invest in or operate flexible assets, because this would lead to competition and market distortion and would hide the real value of flexibility. As regards gas : Flexibility and skills of European gas DSOs are likely to evolve significantly over the next decades. Some innovative projects based on new technology or technical improvements should help them strengthening their role of market facilitator.

6 Discussion paper on energy regulation : a bridge to Gas Strategic context G1 : Do stakeholders agree with our view of the gas specific strategic context and in particular with our views on: Declining demand for gas, and in which sectors such decline is seen; Increasing role of imported gas and uncertainty surrounding unconventional gas supplies in Europe; and Increasing role for a flexible gas supply to support growth of renewable electricity generation. GDF SUEZ is convinced that gas has a key role to play now and in the future. There are many reasons for which gas and gas infrastructure are key for a competitive low carbon economy : They secure electricity supply, which increasingly relies on intermittent energy sources; They enable gaseous renewable energy sources such as biomethane, whose potential is huge; They enable innovative technologies at the cross-roads between the electricity and gas markets : power to gas or Compressed Air Energy Storage ( CAES ) provide an effective solution for excess electricity storage while using existing infrastructures; They contribute to the decarbonisation of transport : using gas in transport (in the form of LNG, biocng or Compressed Natural Gas ( CNG)) offers huge environmental benefits, because there are far less emissions of sulphur oxides and nitrogen oxides, but, more importantly, no emission of fine particles at all. But, for this to happen, it is essential that EU officials confirm the key role of gas now, but also in the medium and long term, that is to say until The infrastructures invested today are depreciated over a long term period, they can be used for 50 years. If investors do not have confidence in the long term role of gas, the infrastructure operators will not invest, there will be no innovation, and the positive contribution described above will not materialize. To conclude, provided we have the right regulatory framework, together with positive signals from EU officials, we are of the opinion that the decline in gas demand is not irreversible. Gas will follow some cycles resulting from the confrontation between supply and demand and from the unknown unknowns mentioned by ACER (such as, currently, the cheap US coal due to the production of shale gas in America, the Fukushima which has some significant impacts on LNG flows, the CO2 price). It is quite difficult to foresee a scenario for It is however possible that a higher CO2 price resulting from the structural review of ETS and the ongoing nuclear phase out in some Member States will lead to an increase of the use of gas for power, with reference to base year Indeed, gas fired power plants are ones of the most flexible tools to cope with the intermittency production of RES. Furthermore, new usage for gas like in transportation (LNG or Compressed Natural Gas CNG for vehicles) could compensate a stagnation in the demand of households due to the energy efficiency directive.

7 The share of imported gas will rise, as the production of indigenous conventional gas declines, but this is not in itself a problem and should not be presented as such. Diversity of supplies and routes to Europe has been developed in the past and this effort should continue. GDF SUEZ agrees with ACER views on the Increasing role for a flexible gas supply to support growth of renewable electricity generation. But gas supply for power must not be reduced to renewables backup because gas remains the most environmental friendly fossil energy to produce flexible power. Competitive and integrated wholesale markets G2 : Are concerns about competition in gas markets and concerns that liquidity at most hubs is insufficient to achieve functioning wholesale markets sufficient to warrant some form of intervention? G3 : Should increased market integration be sought to address issues of non-competitive markets and a lack of liquidity? Are there other more effective measures to be sought in this respect? NBP and the TTF are considered to be liquid : their churn ratio is significantly above 10. Moreover, we are convinced that the liquidity from the other Western hubs will continue to increase. We are of the opinion that it is essential to have at least one hub with an important liquidity in continental Europe. One dominant hub could impose itself in Continental Europe (currently this is the TTF, but nobody can predict at this stage which hub will impose itself in a few years); the other hubs could be priced with a basis differential, as is the case in the USA (Henry Hub versus regional hubs). So we are not in favour of any kind of regulatory intervention which at the end of the day would distort the market. Enhanced competition is already effective in the most advanced markets. GDF SUEZ considers that no more regulation should be added. It would lead to an increase of the costs and finally of the energy bill for the final consumer. In order to achieve a fully harmonized European gas market the network codes validated or under development (CAM, CMP, balancing, interoperability and tariffs) have to be implemented. GDF SUEZ considers that once these network codes are in place, competition in retail sales will further develop accordingly. ACER presentations highlighted the benefits for European consumers of a totally integrated market. According to the studied scenarios and if the current situation of oversupply continues, market integration could lead to a maximum potential benefit from price effects of up to 27 billion per year for the whole EU. In order to reach a full market integration and consequently for these theoretical benefits to occur, sufficient available connecting infrastructures between markets is necessary. However GDF SUEZ considers that more detailed studies have to be made to assess these figures in terms of benefits and costs. Particularly regarding investments a detailed analysis of needed interconnections between markets should be carried out to include their costs and finally a market test should be implemented. Indeed, the study recognizes that the potential benefits of up to 30 billion euro benefit per year for the EU27 is due, in the first place, to the current situation of oversupply. Market integration is hence not the major trigger for the potential economic benefits. It

8 should only be considered as a facilitator. The study makes the assumption that the current situation of oversupply in Europe in which hub prices are lower than oil-indexed prices will continue and calculates the benefits of the integration as the difference between hub prices and oil-indexed prices without taking into account the investments cost. As long as stakeholders don t agree on the calculations and assumptions made in this study, there should be no conclusions on the potential benefits of market integration in terms of price and security of supply. However, as regards Eastern countries, there is a clear benefit of tackling the current problems relating to the lack of upstream competition and the insufficient interconnexions to Western Europe. At last, GDF SUEZ outlines that markets are already quite well integrated in Western Europe. Mergers of zones would imply a lot of costs, for questionable gains. The current experience in some already existing large entry-exit zones has shown that these large zones in fact trigger much complexity, with very specific products, needs for flow commitments Further mergers, if not physically justified, may increase these issues. A CBA study must be conducted in any case. Competitive and integrated wholesale markets G4 : Would efficient use of existing infrastructure and the building of efficient new infrastructure facilitate competition between gas producers? G5 : Can upstream competition be improved with physical infrastructure redundancy or is it an issue of market structure (oligopoly)? G6 : Should regulatory incentives be placed on TSOs to improve the efficient use of existing gas infrastructure? G7 : What are your views on the future investment climate for new gas infrastructure in Europe? What are the major challenges ahead? G8 : Should regulatory frameworks recognise externalities in order to improve investment decision making? Physical infrastructure redundancy is not a pre-requisite for enhanced competition and may generate huge costs which will lead to increases in electricity and gas bills. The efficient use of existing infrastructure should help facilitating competition between gas producers. GDF SUEZ considers that only once the network codes validated or under development are in place, the potential remaining issues will be addressed. A compensated and fully anonymous secondary market is also important for this objective but this does nt require a new gas target model. Let see the improvement linked to these codes first, before thinking of other regulations. As said previously lack of visibility and regulatory uncertainty are making it impossible for an investor to deliver its contribution to the transformation of the European energy system.

9 Gas investors need to have a stable regulatory framework and a fair remuneration of their assets. They also need positive signals for the long term role of gas, otherwise investments in infrastructures will be hampered. Externalities as described in the document can only be recognised on a limited basis in order to minimize undue socialization of stranded assets. Investments should be market driven in most cases. Therefore, the f factor foreseen on incremental capacity should be set high enough, so as to prevent significant stranded assets. Competitive and integrated wholesale markets G9 : Are cross-border market zones or regional trading zones practical ways to integrate market zones? G10 : Are there other ways one may envisage to enhance the liquidity of European markets? G11 : What actions could be taken to further integrate market zones, given the uncertainty regarding costs and benefits of integrating market zones? In any case, when a specific cross-border investment is envisaged, a market based test has to be implemented in order to assess ex ante the costs and benefits of each scenario, taking into account congestion costs, investments costs and benefits. If the market based test shows positive results, then TSOs need the right incentive to make the final decision to invest. As stated in question G2, integration of market zones should not be an objective in itself. Having reasonable and manageable basis between hubs, and access for all clients to easy hedging solutions could be much more efficient that seeking to integrate as many countries as possible, where physical constraints are hidden thanks to more and more complex products or local flow commitments. Flexibility of gas plants to support RES - generation G12 : Does a lack of coordination between intra-day gas and electricity markets expose gas-fired generators to significant imbalance risks? G13 : Does the level of risk exposure create sufficient concern that it could hamper efficient market operation to warrant intervention? G14 : How should coordination of intra-day / balancing gas and electricity markets be improved? G15 : What concrete possibilities for demand response in gas do you envisage? Gas fired plants need to be very flexible to accommodate with the intermittent production of renewable. The sudden changes in their gas offtakes have undoubtedly some impacts on the management of gas networks, which becomes more complex. However, we still think that this complexity is manageable by the gas TSOs.

10 Concerning the gas fired plants, the draft balancing network code foresees that they have the same balancing responsibilities as the other actors in the market. We are of the opinion that gas fired power plants don t expose themselves too much to imbalance risk : the gas balancing code leaves the ability in article 15.b. to re-nomination lead time shorter than two hours if agreed by the TSO. Anyway, gas markets and gas-fired plants are already flexible enough to cope with intermittent RES-E. Indeed, even with a two hours re-nomination cycle, the plant operator will be able to buy and/or sell gas on a market based balancing regime to avoid imbalance. However, GDF SUEZ still considers that it is essential to review the coordination of intraday/balancing gas and electricity markets.

11 Discussion paper on energy regulation : a bridge to Electricity The bridge to 2025 E1 : Although adequacy issues are not likely to disappear completely, do you agree that the current primary focus on levels of adequacy will likely be expanded to emphasise a later priority focus on flexibility? GDF SUEZ does not fully agree that the current primary focus on levels of adequacy will likely be expanded to emphasize a later priority focus on flexibility. Flexibility can be delivered by many sources, e.g. power plants, storage, demand side, not to forget the cross-border participation that also allows increasing the potential volumes in the flex market segment. By having the right value to flex (i.e. marginal pricing), market participants will compete and there is in our view no indication yet that flex will not be sufficiently available. However, because of the current lack of profitability of gas fired power plants, generation adequacy problem will rise, as a substantial share of this flex capacity will disappear from the market, unless proper policy measures (CRM) will be timely taken. The flexibility challenge E2 : Should we seek to further define, measure and develop flexibility in addition to the initiatives that are underway? If so, how could this best be done and in which market time periods? E3 : What are the market-based routes for flexible tools to participate? E4 : What measures may be required to ensure that the market receives the most appropriate signal for the value of flexibility? E5 : Do you think that other, for example institutional arrangements should be considered? Is greater TSO and DSO coordination required? If so, what should NRAs do to facilitate this? E2: We do not really believe that currently there is a lack of flex on European level, but rather a too slow development of appropriate market design tools (like cross-border intraday) for using optimally the existing flexibility. However, the situation might become critical if a substantial part of the gas fired power generation capacity will be prematurely decommissioned for economic reasons.

12 E3 : The target models are essential tools, to be designed appropriate. The settlement principles based on marginal pricing are equally important to attract all participating flex resources. E4: Balancing settlement principles based on marginal pricing are paramount to attract all flexibility resources that can participate in the balancing markets; weighted average pricing should be abandoned. E5: It is absolutely necessary that the electricity TSO and DSO coordinate. However, TSO and DSO should not become owner nor operator of flex tools, they should buy these services from the market when needed for their operations. Further, NRA should facilitate and discuss how aggregators can enter the market on a fair basis respecting the rights and obligations of other market players in particular the BRP/Supplier. NRA should also facilitate the development of flex platforms where market players (including demand, directly or via aggregators) can offer their flexibility. Finally, DSO should be required to put available decentralized flexibility to the TSOs as long this is not contravening the security of their own DSO system. Smarter Grids and smarter demand E6 : How should regulators facilitate demand side participation (including demand side response and electricity storage)? E7 : How can NRAs support, or incentivise TSOs and DSOs to invest in smart networks. What actions are needed, in particular from regulators, to promote more active distribution networks? Do we sufficiently reward avoiding dumb investments? E6: NRA should facilitate and discuss how aggregators can enter the market on a fair basis respecting the rights and obligations of other existing market players having already contracts with the customers. And as already commented under question E5, NRA should facilitate the development of flex platforms where market players (including demand, directly or via aggregators) can offer their flexibility. Encouraging Competition E8 : How should NRAs influence the competition debate, for example on support schemes, regulated tariffs, capacity remuneration mechanisms, etc? E9 : To what extent should the relationship between competition in electricity and gas markets influence regulators activities? Could regulatory action on the gas market, help solving the flexibility problem of the electricity market? E10 : How should regulators remove barriers to entry for new supply sources? E11 : What actions, identified in these papers, should regulators prioritise?

13 E8: ACER expresses in this section some doubts about the need and justification for CRMs. GDF SUEZ understands the concerns, however, we would like to reiterate that well designed and implemented CRM will be one of the market design elements allowing to evolve from the current market system that is driven by variable costs ( /MWh) to a future system where the remuneration component for the fixed costs will be much more important ( /MW driver). E9: It is indeed important that no undue barriers exist to provide flex in the gas market, as this might reduce opportunities for gas plants to participate in the power flex market. Indeed, if gas plants would be forced out of the flex market, it would harm the liquidity on the power flex market, and by definition make power flex more expensive and hence jeopardize security of supply. E10: New and additional flex supply sources are welcome in the system, subject they compete on a fair and level playing field basis. It is e.g. important that energy delivered by a BRP/Supplier but deviated due to an intervention of an aggregator from a customer to the balancing market is still paid for. Putting correct and fair market based rules in place for this use of the flexibility of the customer is key to avoid a negative impact for and hence opposition of the BRP/Supplier, and thus to eliminate such entry barriers. E11: It is of the utmost important that RES support schemes become much more market based, and require balancing responsibility borne by the RES producers. In particular, when support for RES might be still needed in the future, GDF SUEZ believes the support scheme should be progressively based on market based tenders setting the level of support either as a fixed premium (Fixed Feed In Premium, /MWh) or as an investment support ( /MW). Regulators need to think through together with the market actors how the whole cost structure, both for grids and for wholesale products, can evolve from the current /MWh based structure towards a mixed structure with a /MW component. Market based implementation of RES support schemes more based on /MW (investment aid instead of output related support) and CRM also based on /MW are essential in this transition.

14 Discussion paper on energy regulation : a bridge to Consumers and Distribution Networks Future challenges C1. Do you think that further European level measures should be taken to enhance the operation of retail markets to the benefit of consumers? C2. Can you suggest ways in which we could enhance the voice of consumers in the development of Europe s energy market? C1 : Regarding the retail market and distribution GDF SUEZ considers that no more regulation should be added. It will lead to an increase of the costs and finally of the bill for the final consumer. Market-based demand response and smart grid solutions should be developed more pro-actively, since they are a key elements for the smoother integration of renewable energy and cost reflective prices. As for electricity a general framework is needed to determine the role of aggregators in the power market. Currently there is only a fragmented regulation available to set out their role. It is important that aggregators should have a fair entrance in the market to offer their products and services to customers and to DSOs/TSOs. However, like already mentioned in our answer to question E10, it is also important that this should be achieved on a fair way without harming the commercial interests of BRP/Suppliers and without creating situations where the responsible BRP/Supplier would take opposite actions of these of the aggregator. It is also important to realize that some of the products proposed by aggregators will give the customers a discount, but at the same time some other costs for the BRP/supplier might increase (e.g. the aggregator could during a certain time period curtail the customer for offering the energy elsewhere, however the customer might use the same (or another) amount of energy at another moment, creating additional issues like need to produce energy when not anticipated with his BRP/Supplier). The customer should be aware of this, and have been informed both duly by the aggregator and by the BRP/supplier of these consequences of his flexibility service contract with the aggregator. ACER/CEER analysis is quite encouraging the role of prosumers, which we subscribe, however, at the same time a level playing field has to be created between locally generated energy by the prosumers themselves and via the grid (centrally) generated supplied

15 energy: Authorities and Regulators should review grid tariffs and introduce a /MW component also on distribution level, in order to make the grid tariffs cost-reflective also for prosumers. Moreover, consumption provided by local generation (prosumers) should be subject to the same taxes and levies as energy taken off from the grid, in order to avoid market and competition distortion. As for gas, regulations and procedures which have been implemented to introduce competition in the gas market seem fully operational to us. The independence of gas DSOs from their historical supplier is now in accordance with current regulations. For instance, this point is acknowledged by the French regulator (CRE). This gas DSO independency allows for a non-discriminatory access of all network users to the DSO network. We thus believe that the efficiency of retail markets would not be improved by any changes in regulations that would involve gas DSOs. The Future Regulation of Distribution Networks C3 : What are the main questions that you consider the proposed CEER review should address with regard to the future role of DSOs and also to ensure that the regulation of distribution networks remains fit for purpose in 2025? Concerning electricity GDF SUEZ view is that DSOs should play the role of neutral market facilitator (refer to our input to question E5). DSOs (and TSOs) should set up the (flexibility) platforms allowing for offering services from aggregators both to the balancing and spot (intraday) markets. DSOs should be allowed to prohibit actions of aggregators on customers when these actions should endanger the grid, see also our input to question E6.