Category: Energy

The Differing Drivers of EU Electricity Policy – Mike Bostan

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Countries and companies are likely to store an extra supply of gas to cover more than the normal consumption need, in order to avoid any disruption of the gas supply to consumers. However, the cost of storing this extra supply must be added to the price, making the gas more expensive. Too much focus on affordability may become a vulnerability of the gas supply. Conversely, too much emphasis on secure supply can affect price. So where is the balance? What factors drive EU policymakers to pay more attention to one policy goal?

This dissertation investigates such fundamental system imbalances in the domain of electricity and finds that differing drivers of EU electricity policy depend on its purpose. While affordability and security of supply legislation respond to expected drivers, such as electricity price or interrupted electricity, the environmental policy is an anomaly. Environmental policy is not responding to drivers such as air pollutants or GHGs reduction, but to a different set of drivers, highlighted in the paper.

Presentation

This is my book, a PhD thesis discussing the fundamental imbalances of the EU electricity system.

Link: https://doi.org/10.26481/dis.20220914mb

EU Electricity Policymakers’ (in) Sensitivity to External Factors (Article)

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Below is the abstract of an article I wrote for the International Journal of Energy Economics and Policy in autumn 2021. Link to full paper at the end of the post.

The article explores a possible reason for the consistent dominance in the EU energy space of one energy policy priority, environment, when a more balanced policy would be expected, according to the classical energy trilemma.

Stemming from a policy dynamics theoretical background, the sensitivity of EU policymakers to external factors is quantitatively tested by comparing legislative output against key relevant indicators, such as the public opinion and air pollutants emissions. The study encapsulates the last three decades, across all the three energy pillars of the energy trilemma, plus a fourth, internal energy market. The investigation converts into ordinal values data from selected indicators so as to create comparable scales.

Results show that, unlike other energy pillars, which display strong connections between external factors and legislative output, environment legislation is rather indifferent to external factors pressure. Possible explanations are incorrect policy calibration or internal factors, originating in the rational choice realm.

This research is one of the first to introduce comparative assessments in the Environmental Policy Integration discussion and employs in novel ways research methods for energy policy analysis emerged in the field of energy security policies.

DOI for full article: https://doi.org/10.32479/ijeep.11630

EU Electricity Policy (Im)balance: A Quantitative Analysis of Policy Priorities Since 1986 (ARTICLE)

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Below is the abstract of an article I wrote for the International Journal of Energy Economics and Policy in 2021. Link to full paper at the end of the post.

The European Union has produced hundreds of laws in the field of electricity policy in the last three decades, on issues ranging from nuclear disposal to renewable energy generation support. Is the EU electricity policy of the last 30 years balanced, according to the classical energy trilemma framework?

An all-inclusive, quantitative, multi-decade examination of the EU energy policy is still lacking. Besides the traditional policy perspectives, policy density and intensity, this paper proposes a novel method to measure policy outcomes: policy importance. The results show that EU energy legislation is indeed imbalanced.

Environmental concerns rank first among EU electricity policy priorities; however, since 2003, the creation of an internal market has started to challenge environment as the top priority. Furthermore, internal market policies tend to have a higher trend of adoption than environment. Security of supply is at the bottom of EU policymakers’ attention.

The EU energy policy is becoming more intricate, but not more revolutionary. Meaningful policy changes occur at a stagnating yearly rate, despite the increasing power of the EU institutions.

DOI for full article: https://doi.org/10.32479/ijeep.11461

Assessing European electricity policy goals and achievement levels (ARTICLE)

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Below is the abstract of an article I wrote for the 13th International Conference on Energy Economics and Technology in 2019. Link to full paper at the end of the post.

Our aim in this research paper is to assess the evolution of European Union’s electricity policy ambition. To find its electricity policy ambition we identify the targets and objectives of EU legislation and analyse their evolution in time, for the four main pillars of the EU electricity policy and for our selected categories.

The assessment is based on a policy density and policy intensity analysis. The empirical research resulted in about 300 pieces of binding EU legislation in the electricity sector, reuniting around 700 targets and objectives, during 30 years of collected data.

The policy density analysis covered several dimensions: stages, overall numbers, EUR-Lex placement, pillars and categories. The research found that legally-binding legislation has an upward trend from 1986 to 2018. Almost half of the EU electricity legislation classifies as environment legislation, if analysed from the pillars of energy policy viewpoint. If a more nuanced filter is used, categories, then environment and nuclear legislation make about two thirds of all EU electricity-relevant binding legislation.

The policy intensity analysis revealed that, using a categories filter, environment and internal market are dominating, with the nuclear categories far behind. It reveals that there are many pieces of legislation in the nuclear sector, but they are generally less complex, with fewer targets and objectives than other fields.

Constructing a major targets/objectives and categories matrix, we found that the largest amount of financing is towards nuclear research. Most expansion of duties for the European Commission happened for the internal electricity market category, followed by, surprisingly, security of supply. Major developments took place mainly for environmental; energy efficiency and savings; and internal energy market categories.

Quantitative demonstration that RES development is moderately driven by climate legislation.

Link: https://tu-dresden.de/bu/wirtschaft/bwl/ee2/ressourcen/dateien/enerday-2019/Paper-Bostan.pdf?lang=en

Sustainable Energy – Without the Hot Air – David J.C. MacKay

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This heated (environmental) debate is fundamentally about numbers. How much energy could each source deliver, at what economic and social cost, and with what risks? But actual numbers are rarely mentioned. In public debates, people just say “Nuclear is a money pit” or “We have a huge amount of wave and wind.” The trouble with this sort of language is that it’s not sufficient to know that something is huge: we need to know how the one “huge” compares with another “huge,” namely our huge energy consumption. To make this comparison, we need numbers, not adjectives.

The book tries to quantitatively check how a world driven by renewable energy would like. The calculations look at possibilities, how much we can produce, compared with how much we consume, in terms of kW, ignoring the costs of technologies and deployment. Only if the numbers add up is checked.

The research is divided into three parts. First part is taking different classes of consumption and production and stacks them into two columns, seeing how the numbers look like, The second part explores scenarios involving various deployments of renewable electricity technologies or carbon reduction. Finally, the third part presents the technical analysis behind the numbers presented.

The analysis focuses on the United Kingdom, investigating how much the country can produce in terms of renewable electricity and looking at different scenarios, including imports for more renewable-potent neighbours.

The investigation by David MacKey is looking at the key problems of energy sustainability, checking real energy consumption, not only electricity, but including for example transport, products we buy and agriculture.

Although feeling a bit dated sometimes, Sustainable Energy, first published in 2008, still brings insightful findings. It is one the most, if not the most comprehensive analysis of how realistic a renewable future is.

Unfortunately, David MacKey passed away in 2016, but his superb analysis remains. He was Professor of Physics at the University of Cambridge.

I recommend the first part of the book to everyone interested in energy, while the third part is really for only those really into the topic.

This is the first book I post which was read on my new e-reader.

Energy and Civilization: A History – Vaclav Smil

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Despite many differences in agronomic practices and in cultivated crops, all traditional agricultures shared the same energetic foundation. They were powered by the photosynthetic conversion of solar radiation, producing food for people, feed for animals, recycled wastes for the replenishment of soil fertility, and fuels for smelting the metals needed to make simple farm tools.

The books from Vaclav Smil are a trove of knowledge on energy evolution. This book discusses the evolution of human energy advances over time, from agriculture to weapons.

The book reads more as an academic article, with a plethora of references and sources. One sixth of the book is just references. Very dense in knowledge and explanations, it overwhelms the reader with the sheer depth of analysis.

Smil tries to use largely a single energy unit, joules, to measure everything, from the various techniques to harness animals to work to the different ways to pass water through the watermills. The purpose is to quantify the evolution of human energy efficiency over time.

The book is encyclopedic in its depth and range, truly a history. The book dryness of writing and data is broken by very informative and engaging boxes, explaining various facts and developments.

The only downside is the grammar errors found here and there sometimes.

I was impressed by the precision and correct analysis of energy sources and transformations, missed by many pundits.

Also impressive is the general neutral tone regarding various sources that the author manages to impose.

Overall, an incredible book, THE book on energy history.

Bidding Zones analysis – group project

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Below my group project on Bidding zones for the EU Electricity ‎Network Codes course.

Do you think that the changes made by the Clean Energy Package to the bidding zone review procedure will lead to different results or create more challenges?

The newly-adopted Electricity Regulation (ER), article 14.1, states that “[…] Bidding zone borders shall be based on long-term, structural congestions in the transmission network. Bidding zones shall not contain such structural congestions unless they have no impact on neighbouring bidding zones […]”. EU TSOs and NRAs are mandated by the Capacity Allocation and Congestion Management Guideline (CACM GL) and ER to assess on a regular basis the existing bidding zones (BZ) configuration, and possibly initiate its review and reconfiguration.

A BZ review was voluntary under the CACM GL (article 32.1), but became compulsory under the ER (article 14.3). Under CACM GL, the review should include scenarios that take into account “likely” infrastructure developments within the following ten years (article 33.1), while the methodology required by the ER should be based on structural congestions that were not expected to be overcome (e.g. due to grid expansion) within three years (article 14.5). The ER obliged the TSOs to present a BZ methodology by October 2019 (article 14.5), and the all TSOs proposal was submitted on 7 October 2019. It includes one annex per region presenting the alternative BZ configurations that will be compared to the status-quo during the review.

According to the ER, the relevant regulatory authorities shall take a unanimous decision on the TSOs proposal by January 2020. If unanimity is not reached, ACER shall decide on the methodology and alternative BZ configurations, by April 2020 latest. Once the methodology has been decided, the TSOs of each region have one year to submit a proposal to amend or maintain the bidding zone configuration, based on the results of the review. The proposal comes on the table of the concerned NRAs for approval. If unanimity is not reached, the European Commission has the final say on maintaining or amending the current BZ configuration.

The puzzle is whether the TSOs’ methodology proposal is able to identify structural congestions. Via art. 16(8) ER, it can be interpreted that a Member State (MS) suffers from structural congestion if it doesn’t comply with the 70% minRAM clause. If this is the case, the MS has two options: establish a (multi)national action plan or amend its BZ. There are two BZ configuration principles. Firstly, the BZ should be constructed independent of political borders, but built around structural congestions. Secondly, the size of a BZ should be a fine balance between structural congestions and market liquidity and competitiveness.

The main opportunities and challenges arising from the changes introduced by the CEP are summarized below:

Opportunities:

  • The 70% minRAM clause of article 16(8) offers an opportunity for a willing TSO and a MS to change the configuration of a BZ.
  • Splitting BZs may be politically sensitive at the national level, so putting ACER and the European Commission in charge of final decisions may break local interests and put the interest of the EU market as a whole ahead of national interests.
  • A process for amending BZ is now relatively clearly defined, allowing MS the possibility to create and follow action plans. The clarification was important, as the first BZ review was not successful. Action plans offer MS more time, but multiple opportunities have been built into the procedure to revert from an action plan to deciding on a BZ reconfiguration.

Challenges:

  • At the center of the BZ review process lies the identification of a structural congestion. Thus, this should be the first step of the process. However, TSOs must already propose alternative BZ configurations, even if no methodology has been developed to identify structural congestions. In this context, it is not surprising that in the annex many TSOs argue that they don’t propose a BZ alternative because their country doesn’t suffer from structural congestion (see table in annex at the end of this paper). In this context, the whole process already stops at the first step.
  • The attempt to define structural congestion based on the 70% minRAM clause has also severe limitations. Differences in interpretation can be observed (not only across MS but also different stakeholders) and it is in the NRAs’ responsibility to check for compliance. Consequently, it doesn’t appear as an appropriate tool to pressure MS suffering from structural congestion to amend their BZ.
  • Additionally, it solely gives arguments for splits and not for mergers of BZs which could be beneficial from a market liquidity and competitiveness perspective. This is obvious from reading the annexes of the all TSOs proposal, where almost only arguments against or in favor of splits are listed.
  • As stated above, if the NRAs don’t come to an agreement concerning which BZ configurations should be evaluated, ACER will take the final decision. In relation with the complexity of the situation, in particular in the central EU region, questions can be raised concerning the competences, e.g. in simulation, needed for taking such decision. Any decision not well argued or missing consistency could be raised in court.

Conclusions

The BZ reconfiguration is a necessary step towards solving several present and future congestions, in addition to requesting TSOs to offer more capacity to the market. The ER, part of the Clean Energy Package, was a natural opportunity to develop such a plan. A rather clear and agreed methodology, follow-up steps and backup solutions are all foreseen in the ER.

However, there are a number of drawbacks, such as the bias towards splitting BZ in the BZ reconfiguration, instead of merging them as well. The procedure for identifying structural congestions is possibly flawed, as TSOs must propose alternative BZ configurations in parallel with developing a methodology that must be approved by regulators. In addition, connecting BZ configurations to the 70% clause with all of its limitations (diverse interpretations, in/sufficient data availability, etc.) and action plans does not contribute to its implementation, but it is watering down the process. Furthermore, leaving European institutions as ultimate decision-makers, might look as a solution but it remains to be seen if it will be fit for purpose due to the dominantly political nature of the process.

PROMO: Energy MBA in Bucharest

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The MBA in Energy at the Academy of Economic Studies (ASE) in Bucharest starts the registrations for prospective candidates between 23-25 July 2018.

Organized by the Faculty of Business Administration in Foreign Languages (FABIZ), the Energy Master is the best in Romania and is done in collaboration with representatives of the energy business environment (OMV Petrom, Siemens, CEZ, Electrica, Transgaz etc.).

Join the new challenges and be a part of the Energy Business!

The programme is open to all bachelor degree graduates, but candidates need one year experience in energy. Of course, a good command of English is required, as it is taught in English.

It is a flexible MBA, held during weekends, for 4 semesters. The courses range from “EU Policy in Energy” to “Energy Trading”. The professors and experts’ team is excellent, including one of Romania’s best energy professionals, Corina Popescu.

Please find below the brochure of the programme.

Brosura_MBA-Energie_6.2018

More information also at the following link: mba-energie.ase.ro.

How the electricity system works

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The electricity market – a very peculiar market

Economic interactions regarding electricity are designed as a market, like any other commodity. Therefore electricity prices follow demand and supply rules. However, they have some very specific characteristics, at consumer level.

Firstly, demand is relatively inelastic in the short-term, particularly for small consumers, less so for large ones. Secondly, there is limited customer storage options. While there is the option of batteries for small consumers, the storage capability is small (Tesla Powerwalls, for example, have a storage of 7kWh and a power of 2kWh; while average daily household consumption in the UK is about 11kWh). This limits significantly consumers’ response to price fluctuations. Thirdly, consumers have limited if any, substitutes for electricity. They can invest in long term demand-response measures (for example, investing in more energy-efficient appliances), but the basic need for the product remains. Fourthly, the entire society is based on electricity as energy carrier. The use of electricity cannot be avoided by consumers. Because of very inflexible demand and limited storage options, the supply has to match and follow the demand at all times. Various ways to organize the electricity market were used, reflecting competing public policies, for example non-for-profit utilities or regulated monopolies. Electricity markets have retail and wholesale markets. Retail markets involve the sale of electricity to end consumers, while wholesale markets involve the selling of electricity to distributors by electric utilities.

How wholesale electricity markets work

The wholesale market is where the commodity, electricity, is traded (bought and sold) by the electricity producers, the electricity suppliers (who subsequently sell it to end consumers) and brokers or traders. Trading can be via direct agreement – directly between producer and supplier, via broker – brokered mutual agreement, or on electricity stock exchanges.

On electricity stock exchanges (also called power exchanges), like any other stock exchanges, transactions may be either financial (speculating for a better price) or may lead to a physical supply. Products can be spot (purchased for delivery on the same day or following day) or forward products (purchased for delivery sometime in the future). This is very similar to any stock exchange, with the exception that the market did not evolve yet to derivative products.

A particularity of the power exchange is that the commodity follows consumption patterns, so the products can also be base (the minimum consumption of electricity) or peak (supply from 8 morning until 20 from Monday to Friday). Finally, spot products can be day-ahead, weekend or hourly-reference products (half an hour, an hour or blocks of several hours). Therefore, a product sold on the exchange can be, for example, base spot or forward weekend. Key is the day-ahead spot price because it is the reference price for the spot trade.

The power of the regulating authority, usually the Transmission System Operator, on power exchanges is significant, because it has the ultimate responsibility to keep the system in balance. Because the electricity system has to be in balance at all times, the grid manager can take balancing actions, procuring more electricity, stopping someone to supply or asking large consumers to limit usage.

The merit order

A model often used by traders and brokers on electricity markets to describe the electricity generators, their production and costs is the merit order. This ranks power generators (mostly power stations and wind farms) by increasingly short-run marginal costs of production and capacity. Power generators with costs below the demand curve (also known as electricity load) will produce, while those above load will wait for a peak. The last power generator “called” to fill the needed load “sets” the price.

While the model has its limits, such as ignoring energy storage and ramp rates, it still shows that electricity produced by the plants with the lowest cost is dispatched first, minimizing the cost for consumers. The difference between the dispatched power plant cost and the load price is called infra-marginal rent.

For peaking units, the costs are covered by scarcity rents, created when load is very high (peaking). Spread is called the difference between electricity prices and the production cost of the plant (mainly involving fuel costs). Clean spread is the difference between electricity prices and the production cost of the plant, including taxes (such as the CO2 price or the carbon floor in the UK). The main competition is between coal and gas, called clean dark spread and clean spark spread, respectively.

How electricity wholesale markets work in EU28

In 2015, there were several bidding zones, but the purpose of the European policymakers is to make an European Energy Market, with one central market. A bidding zone is the largest geographical area where bidders can exchange energy without constraint . The bidding zones are CWE (France, Belgium, Netherlands, Germany, Austria, Luxembourg), NordPoolSpot (Sweden, Denmark, Finland, Estonia, Latvia, Lithuania and Norway), Apennine (Italy), Iberia (Spain and Portugal), CEE, also known as PXE (Poland, Czech Republic, Slovakia, Hungary, Slovenia, Romania), and Greece. Other couplings were constructed between countries, but they do not significantly affect price differentials.

Some of those bidding areas are now further integrated to form an even larger European power exchange, limited only by the level of interconnection between systems. National power markets still exist, such Romania’s OPCOM, Portugal’s OMIP or Spain’s OMEL, which creates some overlap.

Those bidding zones or power exchanges, including national power exchanges, work as a genuine exchange, trading electricity like any other commodity. NordpoolSpot, the leading European power market, for example offers day-ahead and intraday spot contracts for Nordic, Baltic and UK’s N2EX markets and intra-day spot contracts for the German market. The European Energy Exchange (EEX) and EPEX Spot, a joint venture between Germany’s EEX and France’s PowerNext, offer day-ahead and intraday spot contracts for Germany, Austria, France and day-ahead spot contracts for Switzerland. In addition, EEX has also future contracts, varying from day to year futures, for about all Western countries.

Regulation of the Power Sector – Ignacio Pérez-Arriaga (ed.)

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Grids limit the operation of the electricity system in many ways. The most typical limitation is congestion, which occurs when the maximum current that can be handled by a line or other facility is reached, thus determining the amount of electric power that can flow through the element in question. The underlying cause for the limitation may be thermal, and therefore dependent upon the physical characteristics of the facility. It may also be related to the characteristics of system operation as a whole; for instance, provisions to guarantee security in the system’s dynamic response to disturbances or to stability-related problems that usually increase with line length.

Another typical grid constraint is the need to maintain voltages within certain limits at all nodes, which may call for connecting generating units near the node experiencing problems. The maximum allowable short-circuit power established may also limit grid configuration. Generally speaking,
the main effect of grid constraints is to condition system operation and in so doing to cause deviations from economically optimum operation. The most common constraints in distribution grids are related to voltage and maximum line capacity.

“Regulation of the Power Sector” is a comprehensive technical book on the electricity sector, aimed at specialists and advanced students. It encompasses several scholarly fields, including law, economics, regulation, physics and political science.

It is divided into 14 chapters, as follows: I. Technology and Operation of Electric Power Systems; II. Power System Economics; III. Electricity Regulation: Principles and Institutions; IV. Monopoly Regulation; V. Electricity Distribution; VI. Electricity Transmission; VII. Electricity Generation and Wholesale Markets; VIII. Electricity Tariffs; IX. Electricity Retailing; X. Regional Markets; XI. Environmental Regulation; XII. Security of Generation Supply in Electricity Markets; XIII. Electricity and Gas; XIV. Challenges in Power Sector Regulation.

The first electromagnetic generator, invented by Michael Faraday in 1831.

The authors cover pretty much everything in terms of background in energy regulation, with a focus, but not exclusive, to European regulation and market design. The book reads as a manual and goes into detail in explaining why some regulatory decisions were taken. However, it does not push a message or contributes to the scholarly debate, it is more a stocktaking exercise.

The book makes the basis for the Regulation of the Power Sector course at the Florence School of Regulation, a 6-months intensive training for professionals in the area.

The authors are mostly academics and former regulators with plenty of practical examples. What is impressive is that they managed to have a very balanced approach in a highly divisive area.

The volume is not an easy read, some diagrams and formulas taking some time to digest, even for specialists. This is because the book encompasses a very wide range of fields, from formulas taken from the field physics to economic calculations.

For energy professionals, I commend the book, as a very comprehensive summary of energy regulation, theories and basics of the power system. It refreshes knowledge and fills some gaps, in a balanced way.