Carrying out EU power market reform requires a holistic approach that recognises short and long-term goals. And no single instrument is sufficient to address all of them, European energy traders association (Efet) director for electricity market design Arben Kllokoqi told Argus.
In your recent response to the EU power market design consultation, you said that contracts for difference (CfDs) or capacity remuneration mechanisms have the disadvantage of distorting incentives to hedge while committing public resources. Why is it then than member states such as France or Spain are nonetheless advocating for them?
When discussing certain measures, we need to think of and assess their impact on the objectives that the electricity sector has. Certain instruments, depending on the way they are designed and their scope, will impact market's ability to deliver efficient dispatch in the short term for the most cost-efficient use of resources, incentives to hedge in the forward market and provide stability, and signals for much-needed investments in renewables and other technologies to ensure energy transition.
Price stability is not the only and ultimate goal. If all the measures aim at addressing one single issue, it is likely that either efficiency, integration or investments will be left out.
What is the critical aspect that make CfDs so appealing for new renewable technologies?
A stable regulatory framework is key to attract investments. We do not believe that mandatory instruments can substitute market-based investments.
In Efet's response, we insist on the importance of forward contracts and commercial power purchase agreements (PPAs), allowing market participants to price in risks directly in the market. In addition, the integrated short-term market is the main platform for operators of renewable capacities to mitigate the balancing risks following their more accurate weather forecasts.
CfDs, in the circumstances where the market is not able to deliver the investments needed to meet the climate targets, can only be a complementary instrument. They are not the silver bullet for all investments.
How advantageous do you see CfDs for mitigating power price fluctuations in both day-ahead and intraday markets?
First, we insist that managing price and volume risks is, and should remain, primarily the task of the market. And this is managed through forward contracts (almost 90pc of electricity trades in volume) and commercial PPAs.
Managing these risks through the market maintains incentives to continue optimising close to real time (day-ahead and intraday) as more accurate fundamental information become available. It also avoids the counterproductive effect of locking in generation or demand — and de-optimising resource dispatch — the way regulated and mandatory commitments could.
Do you advocate some sort of government involvement in the standardisation of contracts or by providing financial support schemes?
Rather than involvement on the standardisation, we call for stable regulatory framework. There are also certain barriers in some of the member states that hinder or undermine suppliers' rationale to enter into a PPA. For the standardisation part, let's keep the users of these contracts in charge and build on the work that has been done already. Our Efet/RE-Source standard PPA contract is a great example of that.
You indicated the necessity of establishing EU-wide levels for cap and floor prices in the standardisation of contracts such as CfDs. How feasible is this, given the widely diverse power mix of member states?
In Efet's response we refer to CfDs in the circumstances where the market is not able to deliver the investments needed to meet the climate targets, and public support would be needed.
So, in case two-way CfDs are made mandatory, among other things, we noted the need for a harmonised framework. This includes co-ordinated cap and floor prices, with a wide enough spread that would ensure a level playing field and would have less distorting effects on short-term dispatch. This is to avoid the type of fragmented interventions, as we have seen with the emergency measures approved this winter.
Efet recommended a €180/MWh ceiling in October last year. Where do you see such a cap being effective?
In certain electricity market circumstances, the cap is not triggered, but the inconsistent application of the caps across member states has created gaps between the markets. It also had a direct impact on liquidity. In the Romanian case, the inframarginal cap dried liquidity out of the forward market. Market participants there have not only downsized activity, they have also withdrawn from the Romanian market altogether, in large numbers. In general, liquidity on the forward market is affected by uncertainty.
In addition, we see a significant complexity in different member states in calculating the contribution for market participants. Reports that need to be filed are not clear and there are growing concerns that their application will deter market participants from continuing to hedge on certain markets and contracts.
EU emissions trading system (ETS) allowances recently surpassed €100/t CO2 equivalent, increasing its value by more than 20pc since the start of the year. Do you see a cap for emissions necessary too?
We strongly believe that the EU ETS is the most important instrument to drive decarbonisation, as one of the key objectives of the EU. The EU ETS market is created for the purpose to drive investments in low or zero-carbon technologies. Hence, it is important for the emissions market to continue to deliver strong decarbonisation signals. Price caps are unnecessary and could distort these signals.
There are ongoing discussions on the functioning of the EU ETS in the context of the revision of the EU ETS Directive — part of the Fit for 55 plan. European financial regulator Esma carried out a comprehensive assessment of the carbon market and the finding was that the carbon market functions well.
The EU ETS is the most liquid carbon market in the world, and it has demonstrated its ability to contribute to carbon emission reductions — which dropped by 43pc in the covered sectors since 2005.
