Europe needs a “safety net” to ensure energy security - IEA

Date: April 16^th 2021

Topic: Electricity , Renewables , Energy policy , Gases

The case of Texas shows that putting all the trust in the market will not ensure energy security, and that a “safety net”, such as a capacity mechanism, is needed to ensure capacity adequacy, said Laszlo Varro, Chief Economist at the International Energy Agency (IEA).

In the US state of Texas “which is governed by the American Republican party which is more market-friendly and capitalist-friendly than most European governments,” power prices spiked at 9,000 USD/MWh during extreme weather conditions this winter, mentioned Varro.

It is in theory possible to envisage an electricity market design in which in the hours when gas turbines – the business of which is “to keep the lights on when the wind is not blowing and the sun is not shining” – are operating, electricity prices “go through the roof” and “in those hours, gas turbines make so much money that it would generate investment.”

“But you have to be very optimistic about an efficient market hypothesis to put your faith in energy security on that,” stressed Varro during Tuesday’s HUPX Group - Refinitiv workshop on the power market.

“I am very much in favour of having a safety net, a capacity mechanism or a contractual structure, which will ensure that appropriate capacity investments indeed take place,” said Varro.

“In the context of the European energy transition, we have to make sure that even capacities that have a very unusual production and cash flow profile have a viable investment model,” noted Varro.

Capacity adequacy

However, when talking about capacity mechanisms, it is important to avoid making the same mistake as the EU did with the feed-in tariffs, and their design needs to be developed carefully, stressed Gabor Szatmari, Head of Sales at the Hungarian power exchange, HUPX.

“Any capacity mechanism will have a degree of market distortion,” said Varro, noting that a capacity mechanism “should not be prescriptive for a single technology.”

“The objective is not to have a new gas turbine, hydro power plant or battery storage facility, but rather to have capacity adequacy,” he stressed.

Varro is of the opinion that the three most important “safety net” sources in the European context are “demand side solutions, stationary battery storage and gas turbines.”

While gas turbines will remain necessary, Varro advises “against having a specific investment policy on gas turbines only.”

“Regulators should aim to design a system that is competitive, transparent and which encourages innovation, especially in demand side solutions,” he added.

This article is available also in Slovene.